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Urgent need for regulatory clarity for stablecoins

5 min reading

There are three arguments surrounding stablecoin says former U.S Ambassador of China.

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Recently, the heads of six cryptocurrency companies testified before Congress about the possibilities and promises of digital currencies, and also answered questions from lawmakers about the risks associated with their use. Stablecoins have been the focus of much discussion as this fast-growing crypto asset is at the center of the cryptocurrency regulation debate.

Tether, the largest stablecoin issuer, agreed to pay $41 million to the Commodity Futures Trading Commission in October for misrepresenting the dollar reserves behind its digital token, providing striking evidence that regulators and politicians must come together and quickly agree to this rapidly evolving regulation. markets before impacting the rest of the financial world. Stablecoins, a type of digital currency backed by traditional fiat currencies, are quickly becoming the cornerstone of the crypto economy. Recently, the total supply of stablecoins pegged to the US dollar surpassed $113 billion, making it one of the fastest growing asset classes in history.

As ambassador to China in 2016, I heard a lot about blockchain and cryptocurrencies. Through meetings with world leaders, I will learn about the role they can play in creating a decentralized financial system, empowering people, driving innovation and financial inclusion. When I left government service in 2017, I was pleasantly surprised by stablecoins, because they were designed for price stability and value retention. Stablecoins have also caught the attention of regulators and politicians around the world, including Gary Gensler, Chair of the US Securities and Exchange Commission (SEC), US Treasury Secretary Janet Yellen, and Jerome Powell, Chair of the US Federal Reserve. The three made themselves heard.

Yellen urged politicians to "act quickly" to create a US regulatory framework. Powell called for tighter regulations and speculated that central bank digital currencies (CBDCs) could be a viable alternative to stablecoins. The regulatory stance on stablecoins focuses on three main points of debate. Each of their results will forever shape the future of the stablecoin:

•    Should stablecoins be treated as securities?

It has long been debated whether stablecoins – and cryptocurrencies – should be treated as securities. However, there is no single litmus test to determine whether an asset class is a security, just as there is no single type of stablecoin. Gensler recently hinted that some stablecoins "could be securities and investment firms," but declined to be more definitive. As the debate over the classification of stable steels continues, the asset class – along with consumers around the world – will surely benefit from greater regulatory clarity.

•    Are stablecoins really 100% backed by fiat currencies?

Asset-backed stablecoins are digital currencies issued against traditional fiat currencies held 1:1. In theory, a US dollar-backed coin should equal one US dollar. However, as we saw in the case of Tether, this is not always the case. In fact, many popular stablecoins are backed by a similar combination of cash and securities, which are unsecured short-term debt issued by companies to meet their financial obligations.

This is misleading for potential investors who can expect to be able to redeem their stablecoins for safe currencies at any time. And given the commercial use of paper, there is a possible risk of infection. Greater regulatory clarity is needed to ensure stablecoin proposals remain transparent and compliant.

•    Can stablecoins be used to evade political targets?

Some regulators believe that cryptocurrencies can be used to circumvent investor protection mechanisms and public policy initiatives. From what I have seen in the industry, stablecoin transactions are quite visible these days thanks to blockchain analysis. In a recent case, hackers stole nearly $600 million from a decentralized financial platform (DeFi) and then returned it, thanks in part to stablecoin issuers freezing some of the stolen funds — something that isn't easy to do with traditional fiat settlements is currency.

Many of the largest cryptocurrency platforms often use strong anti-money laundering and tax compliance initiatives to identify users of their platforms, in addition to implementing the Mandatory Customer Knowledge Protocol (KYC). Many of these initiatives consist of proactive efforts by industry leaders to stay abreast of the changing regulatory landscape and prevent consumers from abusing the platform for malicious purposes.

Wake up call for investors

While there are many reputable stablecoins out there, not all live up to their name. Meanwhile, investors need to do careful research when choosing a stablecoin. There are several characteristics to look for in a reliable release, including whether it is 

1.    regulated by one of the major global regulators, particularly for AML & KYC

2.    subject to periodic third-party audits

3.    Insured

4.    currency backed

5.    physique.

What now?

Many regulators recognize the potential of digital currencies like stablecoins to become an integral part of our daily lives, facilitating transactions, purchases, and more. There is currently an unprecedented opportunity for stablecoin providers to work with policymakers to shape the regulatory landscape of the future.

The next stage of the crypto industry's growth, I believe, will not be driven by rapid overnight innovation and trends, but by responsible and mature industry players meeting with politicians and regulators to provide consumers with compatible and secure products and services.

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