After the fall of Terras UST, bookings and concerns about stablecoins grew again. As a result, many stablecoin providers are facing stricter regulations for the industry. After all, both America and the European Union follow developments in this sector with great interest.
stablecoins It has been around since 2014, when Tether (USDT) has been created. Mostly pegged to the US dollar, tokens have powered cryptocurrency markets and, more recently, decentralized financial systems (DeFi) Comfortable. In addition, stablecoin issuers have attempted to improve the inefficiency of the (cross-border) cash payment system (Libra/Diem). Stablecoins have attracted the attention of regulators since 2019. The consequences of this commitment include intense pressure for development. CBDCsthe creation of the Global Stablecoins (GSC) class and related regulations.
In this chapter, we define stablecoins and propose a classification and listing of the main use cases. After that we go to it Libra Project and highlighting how it acted as a wake-up call for regulators – with feedback that ultimately led to the failure of the project. We mention the regulatory initiatives by national and international regulators that followed this event. Finally, we predict the future of stablecoins and their regulation.
What are stablecoins?
In general, stablecoins are digital units of value. Stablecoins are characterized by the fact that a number of arrangements are made to peg their price to the price of a standard (for example, full collateral through a standard such as fiat currency). We distinguish between three different types of stablecoins.
- Off-chain stablecoins: These include USDT, USDC, and BUSD. These stablecoins are issued through a central facility in exchange for assets such as fiat deposits, securities, or crypto assets. These assets act as collateral for the stablecoins and guarantee their repayment. Full paper fund support and disclosure instills confidence in the currency’s stability.
- On-chain stablecoins: These include DAI and MIM. These stablecoins are issued against crypto assets on the blockchain through decentralized protocols. Cryptocurrencies act as collateral and guarantee the payment of stablecoins. The type and amount of crypto assets used as collateral creates confidence in the stability of the currency.
- Arithmetic stablecoins: one belonging to this category was for example VAT in Terra. These stablecoins are based on a number of Smart contractsWho manage the deployment of stablecoins to defend the bond. Arithmetic stablecoins are generally neither guaranteed nor redeemable. The confidence of its users in the stability of the peg agreement creates confidence in the stability of the currency.
uses of stablecoins
The use cases for stablecoins are varied. Some use cases are well established, others not yet fully explored. The most important and oldest use case for stablecoins is facilitating cryptocurrency trading. Only a small portion of crypto assets can be traded for fiat currency. The vast majority are traded against stablecoins. Tether is the oldest stablecoin and was launched in 2014. It faced some tough regulatory challenges, but seems to have weathered them. The second more important but relatively new use case for stablecoins has to do with DeFi. Stable currencies make it possible to provide all the financial services offered in the DeFi environment (payments, lending, wealth management, trading, and derivatives). UST has been a leading stablecoin in the DeFi world.
A potentially game-changing use case for stablecoins lies in the traditional world of slow, expensive, opaque, and non-inclusive (cross-border) payments. These were the restrictions from G20 It showed very clearly who made their solution a priority in 2020. Libra was an attempt to improve on these shortcomings.
Libra serves as an organizational wake-up call
Facebook’s Libra stablecoin should improve the shortcomings of the current cross-border payments system. Regulators’ reactions led to the acceptance of the stablecoin concept, but also to the demise of the Libra project. Facebook launched the Libra project on June 18, 2019 as a permissioned token on the blockchain. The token was issued by the Libra Association, was backed by a basket of fiat currencies and served as an international payment tool for (registered) Facebook users.
The announcement came as a surprise to the major international regulatory policy bodies and national regulators. They conclude that the token could disrupt the structure of the international payments system and the effectiveness of monetary policy if Libra thrives given the nearly three billion Facebook users worldwide. It can also challenge financial stability, consumer and investor protection, data protection, anti-money laundering, and counter-terrorism financing (AML/CFT) efforts.
The organizers responded immediately with an open mind, but not with open doors. The chain reaction culminated in a statement issued by the Seven Working Group on October 14, 2019. Accordingly, Libra should only continue once it has been proven safe and reliable. The Business Interoperability Specification Statement (BIS 3.0) acknowledged the issues with international payments that Libra was intended to address. I made an urgent appeal to central banks around the world to develop CBDCs. He also urged the Financial Stability Board (FSB) to develop guidelines for issuing a special class of stablecoin (GSC). These reactions eventually made it impossible for Libra to continue. In January 2022, Libra, then in Diem has been renamed It was finally abandoned.
The European Union and Switzerland dared to take the first steps
Two European countries stand out as having established or initiating the process of establishing a regulatory framework for stable currencies. Notably, algorithmic stablecoins are either excluded or not considered because such mechanisms are too risky. In addition, there are no laws and regulations applicable to such installations, except for anti-money laundering requirements.
The Swiss Financial Market Supervisory Authority (FINMA) announced on September 11, 2019 Opinion Known for Libra (the Libra Association was founded in Switzerland). To run a GSC, Libra will need one Payment system license, which are complemented by prudential requirements within the framework of internationally agreed regulatory coordination. For non-GSCs, FINMA has issued an addendum to its guidelines for initial coin offerings. It states that specific regulatory requirements will vary from case to case. These depend on the underlying commitment to “fixed currencies” (such as currencies, commodities, real estate, or securities) and on the legal rights of their holders. Anti-money laundering regulation, securities trading, banking, money management and financial infrastructure will all be a potential concern. Thus, Switzerland provides a clear regulatory framework for stable currencies.
In the European Union, the digital finance package published by the European Commission on September 24, 2020 included proposals for stablecoins and a GSC. The issuance of stablecoins is subject to the approval of the issuer by the competent authority of the respective member state. A white paper detailing the governance arrangements, approach to reserves and custody, investment policy, and the nature and enforceability of currency holder rights will be mandatory. GSC is subject to the European Banking Authority’s supervisory powers and additional obligations relating to custody and liquidity management. Computational stablecoins are exempt from this proposed law. The legislation is expected to be completed and implemented in 2024.
Regulation in the United States and the United Kingdom
On January 7, 2021, the United Kingdom became the third country in Europe to deal with stablecoins. At that point, the government issued an advisory paper proposing an admissions system for stablecoins. The proposal included the inclusion in the acceptance system of stablecoins that can be reliably used for retail or wholesale transactions. In addition, a stable correlation of assets such as currency, multiple currencies or gold should be included in the scope of the regulation. The regulatory requirements extend to the organization, operation, and management of the stablecoin protocol. Global stablecoins will be subject to additional requirements, taking advantage of existing regulation of crypto assets and extending it to stablecoins as much as possible. Algorithmic stablecoins have been exempted from the proposed acceptance rule.
On November 2, 2021, the US Treasury released a report on stablecoins. They understand that with good design and proper regulation, stablecoins can support faster, more efficient, and more comprehensive/cheaper payment options. The report takes a closer look at the risks posed by stablecoins and makes recommendations on how to mitigate these risks. The risks relate to market and financial integrity, investor protection and illegal use. The report recommends that the US Congress legislate to bring stablecoins and their arrangements under a unified and comprehensive federal regulatory framework. Arithmetic stablecoins are exempt from this recommendation. Released March 9, 2022 White House Executive Order To ensure the responsible development of digital assets. It directs the relevant authorities to address the risks posed by stablecoins for illicit financing. It also aims to further support the G20 roadmap to achieve well-regulated stable currency agreements for cross-border payments.
Going forward, regulators initially cared more about the fiat use case of stablecoins (see Libra and reaction) than the cryptocurrency market use case. However, as the cryptocurrency markets grow, the impact on investors and the potential impact on traditional finance has caught the attention of regulators. Tether came under regulatory pressure in late 2017, began disclosing its reserves in 2021, and settled a class action lawsuit in the US District Court for the Southern District of New York on September 29, 2021.
Regulatory reactions to the long-range terrarium issue. Algorithmic stablecoins are being marginalized and frustrated. Fiat-backed stablecoins will increasingly be subject to bank-like compliance requirements. The use cases for stablecoins are strong, both for cryptocurrency markets and for fiat-based payment systems, and they are not going away. BIS offers an interesting perspective by proposing public-private collaboration around CBDCs. Special initiatives are specifically designed and developed. Their purpose must be to fully comply with financial regulations and regulatory expectations so that they have better business prospects than other non-compliant initiatives.