Dec 5, 2023

The Need For Stablecoin Regulations

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In our previous blog, we delved deep into the history of failed stablecoins. Notably, we uncovered some illuminating case studies of stablecoins that, despite their promise, fell short of expectations. A significant takeaway from that exploration was the paramount importance of adhering to proper regulations. As the digital currency ecosystem continues to evolve, the call for robust regulatory frameworks has never been more pronounced. Understanding the need for such regulations is pivotal for any stakeholder in the digital currency space.

At the recent All-In Summit, VC Bill Gurly discussed regulatory issues, citing Nobel laureate George Stigler's notion that industries often shape regulations for their benefit. Gurly emphasized, "Regulation is the friend of the incumbent," hinting at the idea of regulatory capture where special interests supersede public interests, causing societal net loss.

While discussing regulations at a crypto-centric event might be unpopular, promoting stricter regulatory measures could enhance the safety and efficiency of the crypto market. Such regulations won't eliminate all scams or risks, but they can integrate crypto markets better with the broader financial system, enhancing their operation and safety.

Proper regulation can foster trust, stabilize markets, and mitigate economic vulnerabilities. The 2022 FSOC report underscores the potential risks stablecoins pose to traditional finance. It points out that stablecoins bridge crypto and conventional finance, creating potential vulnerabilities, especially during runs on stablecoins. Furthermore, the opacity of stablecoin issuers about their assets complicates regulatory efforts.

Stablecoins' growth can influence short-term money markets since they often back their value with assets like cash, Treasury instruments, and commercial paper. As stablecoin issuance rises, there could be increased demand for these short-term assets, affecting their yields. BlackRock's Circle Reserve Fund, established in May 2022, exemplifies how stablecoin growth might innovate money market fund uses by creating funds to manage specific asset holdings.

The November 2021 ‘Report on Stablecoins’ by the President’s Working Group and other financial bodies highlights regulatory recommendations for stablecoins, focusing on user risks and broader payment system dangers. To prevent stablecoin runs, it suggests that issuers should be insured depository institutions, meeting regulatory standards for financial stability and customer protection. Moreover, custodial wallet providers should be federally regulated to guard against systemic risks.

The report urges Congress to empower a federal supervisor to mandate critical stablecoin entities to follow risk-management standards. Effective regulation should:

  • Define the asset and its utility.
  • Identify regulatory concerns.
  • Determine the regulating authority.

Want to read the specific stablecoin regulations in different jurisdictions across the globe? Coinchange’s Reasearch team has put together an extensive research report on Stablecoin Landscape and the Remittance Use Case, in collaboration with Circle, The Hedera Network, Myna, UnoCoin, Glo Dollar, Brale and Ethereum Enterprise Alliance.

Click the link to open the full report and to get even more insights:

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