The Urgent Need for Regulatory Clarity on Stablecoins

Regulatory attitudes around stablecoins center around three main points of debate, explains former U.S. Ambassador to China and U.S. Senator Max Baucus.

By Max BaucusLayer 2
AccessTimeIconJan 13, 2022 at 6:43 p.m. UTCUpdated Jan 14, 2022 at 5:03 p.m. UTC
By Max BaucusLayer 2
AccessTimeIconJan 13, 2022 at 6:43 p.m. UTCUpdated Jan 14, 2022 at 5:03 p.m. UTC

Max Baucus served as a U.S. senator from Montana (1978-2014) and ambassador to China (2014-17). He is now an adviser and government liaison at Binance.

Recently, leaders from six cryptocurrency companies testified before Congress about the opportunity and promise of digital currencies and also answered lawmakers' questions about the risks that come with their use. Stablecoins were at the center of much of the discussion as these fast-growing crypto assets are at the center of a debate around the regulation of cryptocurrency.

Tether – the largest stablecoin issuer – agreeing in October to pay the Commodity Futures Trading Commission $41 million for misrepresenting the dollar reserves behind its digital tokens provides glaring evidence that regulators and policymakers need to come together and quickly align on how to regulate this quickly expanding market before it impacts the broader financial world.

Max Baucus served as a U.S. senator from Montana (1978-2014) and ambassador to China (2014-17). He is now an adviser and government liaison at Binance.

Stablecoins, a type of digital currency whose value is backed by traditional fiat currencies, have quickly become a cornerstone of the crypto economy. Recently, the total supply of stablecoins pegged to the U.S. dollar surpassed the $113 billion mark, making it one of the fastest-growing asset classes in history.

As Ambassador to China in 2016, I would often hear about the blockchain and crypto currencies. In numerous meetings with world leaders, I would learn of the role they could play in creating a decentralized financial system, empowering communities, sparking innovation and financial inclusion.

When I left government service in 2017, stablecoins specifically caught my attention as they are intended to be stable in price and designed to hold their value over time.

Stablecoins have also caught the attention of regulators and policymakers around the world, including U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler, U.S. Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell. All three have made their voices heard.

Yellen has urged policymakers to “act quickly” to establish a U.S. regulatory framework. Powell called for stricter regulation, speculating that a central bank digital currency (CBDC) could present a suitable alternative to stablecoins.

Regulatory attitudes around stablecoins center around three main points of debate. Each of their outcomes will shape the future of stablecoins for good:

1. Should stablecoins be treated like securities?

There’s a long-standing debate around whether stablecoins – and crypto – 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. Recently, Gensler hinted that some stablecoins “may be securities and investment companies,” but stopped short of making a more decisive statement. While the debate around stablecoin classification is ongoing, the asset class – along with users from around the world – will surely benefit from greater regulatory clarity.

2. Are stablecoins truly 100% backed by fiat currencies?

Asset-backed stablecoins are digital currencies that are issued against traditional fiat currencies held on a 1:1 peg. In theory, one U.S.-dollar-backed stablecoin should be equal to one U.S. dollar. However, as we’ve seen 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 commercial paper, which is unsecured, short-term debt issued by companies to meet their financial obligations.

This is misleading to potential investors who may expect to be able to redeem their stablecoins in exchange for the backed currency at any time. And it likely represents a contagion threat given the use of commercial paper. Greater regulatory clarity is needed to ensure stablecoin offerings remain transparent and compliant.

3. Can stablecoins be used to sidestep public policy goals?

Some regulators believe that cryptocurrencies may be used to circumvent investor protection mechanisms and public policy initiatives. From what I’ve seen in the industry, stablecoin transactions are rather visible nowadays, thanks to blockchain analysis.

In one recent case, hackers stole and then subsequently returned nearly $600 million in funds from a decentralized finance (DeFi) platform, thanks in part to stablecoin issuers who froze a portion of the stolen funds – something that can’t easily be done with traditional fiat currencies.

Many of the largest crypto trading platforms often employ robust anti-money laundering and tax compliance initiatives in addition to instituting mandatory know-your-customer (KYC) protocols to identify users on their platform. Many of these initiatives consist of proactive efforts on the part of responsible industry participants to stay on top of the shifting regulatory landscape and to prevent users from abusing the platforms for nefarious purposes.

A wake-up call for investors

Though there are many reputable stablecoins on the market, not all of them live up to their name. In the meantime, investors should do careful research when selecting a stablecoin. There are a few features to look for in a trustworthy option, including whether it’s 1) regulated by one of the main global regulatory bodies, specifically for AML & KYC 2) subject to regular third-party audits 3) insured and 4) backed by a physical currency.

What’s next?

Many regulators recognize the potential for digital currencies like stablecoins to become a regular part of our day-to-day lives, powering transactions, purchases and more. Today, there’s an unprecedented opportunity for stablecoin providers to work alongside policymakers to define the regulatory landscape going forward.

In my opinion, the next stage of growth for the crypto industry will be powered not by rapid-fire innovation and overnight trends, but by responsible and mature industry players convening with policymakers and regulators to offer users compliant and safe products and services.


DISCLOSURE

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.

CoinDesk - Unknown

Max Baucus served as a U.S. senator from Montana (1978-2014) and ambassador to China (2014-17). He is now an adviser and government liaison at Binance.

Max Baucus served as a U.S. senator from Montana (1978-2014) and ambassador to China (2014-17). He is now an adviser and government liaison at Binance.

Trending

1
CoinDesk - Unknown
First Mover Asia: Bitcoin Holds Above $21K in Weekend Trading; Solana Web3 Phone Faces Long Odds

Ether stays over $1,200; prior blockchain phones have failed because the market has realized their functionalities are already available via apps that can be loaded onto any old phone.

CoinDesk - Unknown
2
CoinDesk - Unknown
Opaque Platforms and Intertwined Protocols Pose Big Risk to Crypto

Second article in a series about risks we’re thinking about during these crypto down days.

CoinDesk - Unknown
3
CoinDesk - Unknown
Putin Weaponizes Inflation

Examining a recent propaganda speech from the Russian leader.

CoinDesk - Unknown
4
CoinDesk - Unknown
Morgan Creek Is Trying to Counter FTX’s BlockFi Bailout, Leaked Call Shows

FTX’s $250 million credit facility offer – if inked as initially proposed – stood to effectively wipe out all BlockFi shareholders, including Morgan Creek Digital, the firm told its investors.

CoinDesk - Unknown