US and EU on Different Trajectories to Regulate Stablecoins
As the stablecoin market continues to grow, policymakers are voicing concerns regarding the adverse impacts that could be felt by legacy finance. Some officials even perceive stablecoins as a threat to the banking system and suggest undercutting the need for them by setting up CBDCs.
What’s interesting to note is that while the US appears to be taking a more hawkish approach with its approach, the European Central Bank (ECB) has already started developing its own digital euro – showing a difference of approach and attitude.US Treasury Discusses Stablecoin Regulation
A recent report by Reuters claims that the US Treasury Department is in talks with a number of industry participants to explore the risks and benefits posed by stablecoins. The report adds that US financial regulators are working to figure out potential regulations.
Treasury spokesman John Rizzo said:
“As this work continues, the Treasury Department is meeting with a broad range of stakeholders, including consumer advocates, members of Congress and market participants.”
On July 20, Treasury Secretary Janet Yellen said that stablecoins should be “quickly” regulated. While Yellen did not hint at how the looming regulations might look, a number of officials proceeded to take quite a hostile stance.
For one, Federal Reserve Chair, Jerome Powell, said that the US could issue a CBDC which would undercut the need for digital assets. He stated:
“In particular, you wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency – I think that’s one of the stronger arguments in its favor.”
More recently, Senator Warren said that another possible solution to the stablecoin dilemma is to ban banks from holding reserves that back private stablecoins. Nevertheless, it is worth mentioning that it has not been formally revealed which direction appeals more to officials.
Meanwhile, Veteran Policymaker Urges EU to Act Fast, or Fall Behind
In Europe, a former member of the European Central Bank’s executive board has urged policymakers to act fast and regulate the crypto industry. Benoît Coeuré, a senior official at the Bank for International Settlements, said both stablecoins and DeFi pose a threat to banks.
“[Central banks] have a job to do — delivering price stability and financial stability — and they must retain their ability to do it. [They] have to act while the current system is still in place — and to act now.”
Coeuré, who is also leading research on CBDCs for the BIS, said that banks would lose their key role as the dominant financial system if regulators don’t act fast.
“Central bank digital currencies will take years to be rolled out, while stablecoins and crypto assets are already here. This makes it even more urgent to start.”
On July 14, the European Central Bank (ECB) announced the launch of the “investigation phase” for the digital euro. The ECB aims to finish this initial phase by 2023. However, considering that stablecoins are already available, many regulators doubt the digital euro would be able to undercut the need for stablecoins.
The Problem With Stablecoins: Why Regulators are Concerned
Stablecoins are digital assets that have their value pegged to real-world assets. In the speculative industry of digital assets, stablecoins are the safe zone. They are also known as the backbone of the crypto ecosystem, and a crucial bridge to mainstream crypto adoption.
However, there are a number of issues with this promising new form of private money. For one, some of these alleged “stablecoins” are not really 100% stable.
A stablecoin is only completely “stable” if it is entirely backed by cash reserves. However, the issuers of stablecoins also use other assets, short-term deposits, commercial papers, and cash to back their stablecoins. This is mainly because they want to meet the increasing demand for more supply quickly.
This is quite a serious issue, and the main reason behind all the scrutiny around USDT, the biggest stablecoin by market capitalization. A 2019 filing by Stuart Hoegner, general counsel at Tether, claimed that around 74% of Tethers were backed by “cash and cash equivalents”, with the rest in a “less liquid form”.
However, a file shared by Paolo Ardoino, Chief Technical Officer at Tether on March 31, 2021, revealed that only 2.9% of Tether is backed by cash reserves. As per the filing, Commercial Paper and Fiduciary Deposits back over 70% of Tethers, which creates a high risk of instability if many people decide to withdraw their stablecoins all at once.
Lee Reiners, a former supervisor at the Federal Reserve Bank of New York, said:
“These things [stablecoins] are effectively treated by users as bank deposits. But unlike actual deposits, they are not insured by F.D.I.C., and if account holders begin to have concerns that they cannot get money out, they might try and trigger a bank run.”
What do you think stablecoin regulations would look like? Let us know in the comments below.