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The U.S. Regulating Stablecoins is a Good Thing

Raymond’s take: It is good news that U.S. authorities are focused on regulating and auditing stablecoins

It is good news that U.S. authorities are focused on regulating and auditing stablecoins because that will make the industry safer, help customers feel confident in holding onto their assets, and most importantly, alleviate systemic economic and financial risks.

It came to light that the U.S. Securities and Exchange Commission (SEC) is investigating Circle, the main backer of the USDC stablecoin.

CoinDesk’s Danny Nelson broke the story by studying the filings Circle made for a potential IPO in New York. According to his findings, the U.S. regulator started its investigation into Circle last summer but the scope of its scrutiny isn’t yet known to the public.  

Circle disclosed that it has divested itself all but of its “corporate bonds, long-dated paper, yankee certificates of deposit and Treasury notes,” according to CoinDesk Columnist J.P. Koning. This is part of Circle’s long-term plan to have every USDC stablecoin completely backed by U.S. dollars.

Regulation of stablecoins could be key in creating healthy and sustainable cryptocurrency markets as it is now a $130 billion industry and is set to grow over the years as the adoption of cryptocurrencies accelerates. Observers have rightly pointed out that stablecoins could pose a systemic risk to the economy and financial system if they are not properly regulated and accountable for their actions and claims. SEC’s Chairman Gary Gensler has compared the value of stablecoins to casino chips and has said they can “undermine traditional banking systems” if they are not properly regulated under the traditional banking system. 

U.S. lawmakers, including cryptocurrency advocate Sen. Cynthia Lummis (R-Wyo) has said that there should be regular audits of stablecoins to ensure that they are fully backed by the assets they claim to support them. CoinDesk also recently reported that The Federal Deposit Corp is deciding whether certain stablecoins may be eligible for its deposit insurance, which would protect up to a quarter million dollars for token holders if something went wrong. This is a great way to bring peace of mind to stablecoin holders as they will know that their assets are insured and safe in case the unexpected happens. 

To me, it  appears that U.S. regulators are slowly yet surely integrating stablecoins and its issuers into its traditional banking system, making stablecoin issuers almost like banks. This arrangement seems favourable for all parties involved: The stablecoin industry can thrive by having transparent rules and regulations, customers can know that their digital assets are secure, and the regulators mitigate the chances of systemic economic risk, which is their main job. 

I believe that establishing clear regulations for the growing stablecoin industry is important as they are a central part of the cryptocurrency industry, enabling investors to seamlessly transfer value between different cryptocurrencies without having to return to cash. In addition, payment settlements are virtually instant.

It is risky that stablecoins are not yet regulated in any meaningful way. While some stablecoin issuers have state licenses, the requirements are minimal. There are still no laws that require stablecoin issuers to protect reserves or even maintain liquidity. Timothy G. Massad, an American lawyer and government official who served as the chairman of the Commodity Futures Trading Commission (CFTC) under President Barack Obama, wrote about how a sudden spike in demand for repayment could cause a stablecoin to “break the buck” in the same way the Reserve Primary Fund did in September 2008, which triggered a crash of money market mutual funds that was stopped when the Treasury ordered a guarantee of money market mutual fund liabilities. That is why it's so important that regulators help ensure that stablecoin issuers have 100% reserves and become licensed in some manner. 

We don’t know all the specifics on what the regulations will look like in real life, but whatever regulations come out for the stablecoin industry will at least clarify the requirements for the emerging sector and make it easier for the issuers to grow and stay in line with the laws. 

If Circle is regulated like a bank, it will be much safer for everyone involved in the cryptocurrency industry and could lead the decentralised finance sector into a new and exciting era.

This article has been prepared by Cabital Fintech (LT) UAB  (the “Company”) and is general background information about some of the Company’s activities at the date of this presentation.

This article does not contain all the information that is or may be material to you and should not be considered as advice or a recommendation to you in respect of the holding, purchasing or selling of digital assets and does not take into account your particular objectives, financial situation or needs. This article has been made to you solely for information purposes. This presentation may be amended and supplemented as the Company sees fit, may not be relied upon for the purpose of entering into any transaction and should not be construed as, nor be relied on in connection with, any offer or invitation to purchase or subscribe for, underwrite or otherwise acquire, hold or dispose of any digital assets, and shall not be regarded as a recommendation in relation to any such transaction whatsoever. The contents of this presentation should not be considered to be legal, tax, investment or other advice, and you  should consult with your own counsel and advisers as to all legal, tax, regulatory, financial and related matters concerning an investment in or a disposal of such digital assets and as to their suitability for you.

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Raymond Hsu

CEO of Cabital

Raymond’s 10 years of experience holding leadership positions in fintech companies and banks inspired him to democratise digital currency financial solutions with Cabital.