In our previous blog post, we underscored the significance of stablecoins in the global financial ecosystem and emphasized the pressing need for regulatory clarity. The rapid rise of stablecoin usage and the potential risks associated with their adoption have captured the attention of regulators worldwide. Today, we will delve deeper into the intricacies of stablecoin regulations as they unfold across key financial hubs, including the US, EU, Japan, Singapore, Hong Kong, and Dubai. We’ll navigate through the evolving regulatory landscape and shed light on the steps various jurisdictions are taking to ensure stablecoin stability and security.
In the US, the regulatory landscape for stablecoins has been complex. In early 2023, there was a debate over whether stablecoins like BUSD, USDT, and USDC were securities or commodities, with the SEC and CFTC each claiming jurisdiction. Additionally, uncertainty surrounds which regulatory body, either the Federal Reserve or individual states, would oversee stablecoin issuance, and there is no agreement on the type of assets that should back stablecoins.
House Republican Patrick McHenry proposed a bill to create a regulatory framework for stablecoins. Key provisions of the bill include:
Issuance Criteria: Only certain entities can issue payment stablecoins.
Regulations: Federal nonbank issuers face bank-like regulations, including requirements around capital, liquidity, and risk management.
Authority Distribution: State regulators have the primary authority over state stablecoin issuers, with the Federal Reserve Board stepping in during emergencies.
Securities and Interest: The bill specifies that payment stablecoins aren't securities and allows for interest on such stablecoins without contravening securities laws.
Blockchain Types: Uncertainty exists about whether stablecoins on public blockchains like Ethereum would be supported.
Federal Reserve Access: Nonbank issuers can't access the Federal Reserve's payment systems or discount window.
Reserve Requirements: Stablecoins must be 100% backed by specific reserve assets. Monthly publications detailing stablecoin reserves are required, with CEO and CFO certifications.
Redemption: Issuers should enable prompt redemption and disclose their redemption policies.
Insolvency: Stablecoin holder claims aren't prioritized above other claims if the issuer becomes insolvent.
Interoperability: There's an emphasis on ensuring compatibility and interoperability standards for stablecoin issuers.
Algorithmic Stablecoin Moratorium: A two-year halt on the issuance of algorithmic stablecoins after the bill becomes law.
However, the bill faces opposition, particularly from Democrat Maxine Waters, who is concerned about commercial companies issuing their currency and the clarity of assets backing stablecoins.
Senator Cynthia Lummis from Wyoming has proposed the Lummis-Gillibrand Responsible Financial Innovation Act (RFIA) to regulate crypto assets, including stablecoins. Key points from the bill include:
The CFTC will oversee commercially fungible crypto assets that aren't classified as securities.
Trading facilities dealing in crypto assets or payment stablecoins need to register with the CFTC, unless they are decentralized protocols.
Only depository institutions (like insured banks, credit unions) or their subsidiaries can issue payment stablecoins.
Depository institutions must get approval from federal banking agencies or state bank supervisors to issue stablecoins.
Approval for issuing stablecoins can be denied based on safety concerns, lack of resources or expertise, or inadequate policies.
Issuers must inform customers that stablecoins aren't U.S. government-guaranteed or insured by the FDIC.
If an issuer becomes insolvent, valid stablecoin claims take priority over other claims concerning required assets.
Payment stablecoins cannot be reused or rehypothecated, except to ensure liquidity for redemptions.
The term ‘Stablecoins’ or ‘Payment Stablecoins’ is not allowed for algorithmically stabilized crypto assets.
The MiCA framework regulates stablecoins in the EU.
It classifies two regulated token types: Asset-Referenced Tokens (ARTs) and E-Money Tokens (EMTs): ARTs are backed by multiple assets, while EMTs reference a single fiat currency.
Asset-Reference Tokens (ART)
ARTs derive their value from a mixture of assets in reserves.
Issuers of ARTs with values greater than EUR 100,000,000 must report specific data quarterly to authorities, including the number of holders, value of the ART issued, and transaction details.
ARTs with an estimated average of more than 1 million transactions daily and daily values exceeding 200 million Euros must halt issuance and devise a control plan within 40 workdays.
E-Money Tokens (EMT)
Only the creator of an EMT can offer or trade it, and they must be certified as either a credit or e-money institution.
EMTs are digital representations of a Member State's official currency.
Prior to offering or trading EMTs, issuers must notify authorities 40 working days in advance.
EMT holders can redeem their tokens for real money from the issuer at face value, without any fees.
Issuers must describe redemption processes in their official documents (white papers).
The MiCA framework is a pioneering initiative to regulate crypto-assets in the EU. Implementation will be phased over the coming 12 months. The full MiCA framework on Stablecoins is available online; search for 'e-money token' to read it.
The Monetary Authority of Singapore (MAS) released a consultation paper in October 2022 on stablecoin policy, with feedback expected by Summer. StraitsX, regulated by MAS, has issued XSGD, a Singapore Dollar stablecoin, since 2020 and played a major role in Project Orchid, set to release its second version in 2023.
The Financial Services Agency (FSA) established a framework in June 2022, operational by June 2023, that permits only banks and trusts to issue stablecoins, likely in collaboration with crypto exchanges.
Stablecoins pegged to the HKD and AED present opportunities for stability equivalent to the USD, but without depending on US banking systems. This reduces risks from disruptions in the US banking sector.
Founded in February 2022, it's the first global independent virtual asset regulator. In Dubai, most virtual asset activities require VARA's consent. VARA demands proprietary traders to register when their portfolio reaches USD 250 million within 30 days. The authority also demands Virtual Asset Service Providers (VASPs) to maintain reserve assets equal to client liabilities and adhere to financial reporting standards. Notably, the UAE Central Bank oversees central bank digital currencies and has jurisdiction over fiat-backed stablecoins, and stablecoins cannot be pegged to the UAE Dirham.
So what is the ideal stablecoin regulation? For starters, any regulation that is clear is a good regulation. Although an unclear regulation in fact fosters creative thinking and innovation in the early stages of a new technology, once there is a product market fit, any more lack of clarity causes confusion and halts progress. Regulations have become the most important thing for the broad adoption of Stablecoins by businesses, banks and other institutions. In the US, although the FED has not proven their interest in participating in the stablecoin regulations, FED Chair Jerome Powell in his Congressional testimony emphasized the necessity of robust oversight by central banks in the formulation of stablecoin regulations by the House Financial Services Committee. He said, “We do see payment stablecoins as a form of money, and in all advanced economies, the ultimate source of credibility in money is the central bank. We believe it would be appropriate to have quite a robust federal role."
Read more about stablecoins and their remittance use case in our latest research report Stablecoin Landscape and the Remittance Use Case co-authored by The Hedera Network, Myna, UnoCoin, Glo Dollar, Brale and Ethereum Enterprise Alliance.
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