With the rapid rise of cryptocurrencies such as Bitcoin and Ethereum, stablecoins — cryptocurrencies that aim to maintain a stable value relative to another asset or pool of assets — have come under increasing heat from global regulators concerned about their risks to financial stability.
The total market value of stablecoins currently stands at over US$130 billion — more than the GDP of the North African country of Morocco — with Tether (USDT) leading with a US$70 billion market value, followed by USD Coin (USDC) at US$33 billion, according to CoinGecko data.
Stablecoins have been used to facilitate crypto trading and also serve as a fiat on-ramp pathway for crypto users seeking access to decentralized finance (DeFi). However, central banks and regulators have criticized these digital cash alternatives for posing a risk to the stability of the financial system. U.S. Securities and Exchange Commission chairman Gary Gensler recently likened them to poker chips and called them potential securities.
See related article: What are stablecoins, and why are some governments so afraid of them?
In its latest Global Financial Stability report released this month, the International Monetary Fund (IMF) called on policymakers to implement global standards for crypto assets, including stablecoins.
The IMF warned that “challenges posed by the crypto ecosystem include operational and financial integrity risks from crypto asset providers, investor protection risks for crypto assets and DeFi, and inadequate reserves and disclosure for some stablecoins.” Tether, the most widely held and traded stablecoin, has faced mounting scrutiny over the lack of transparency over its reserves. Circle, the issuer of the USD Coin, disclosed in a recent regulatory filing that it is under investigation by the SEC in the United States.
“As the role of stablecoins grows, regulations should correspond to the risks they pose and the economic functions they perform,” the IMF wrote. “Emerging markets faced with cryptoization risks should strengthen macroeconomic policies and consider the benefits of issuing central bank digital currencies.”
The Financial Stability Board (FSB) — an international body that monitors and makes recommendations about the global financial system — also this month said that countries’ implementation of its recommendations for “global stablecoin” regulations was “still at an early stage” and international coordination was critical to overcoming regulatory arbitrage.
With growing global oversight over stablecoins, crypto industry leaders told Forkast.News how they see global stablecoin regulations evolving and why regulations can pave the way for greater crypto adoption.
See related article: A look at how global stablecoin regulations are evolving
Cynthia Wu, founding partner and head of sales and business Development at Matrixport, Singapore-based digital asset financial services platform
Given the size of the stablecoin market cap of over US$130 billion and the critical role it plays as the underlying infrastructure and source of liquidity for the entire crypto market, it is a very positive sign to me that regulators are now considering including it in the banking regulations.
This is significant for two reasons. Being regulated as such, it will help eliminate fraud and instill the highest degree of trust in a financial market, ultimately paving the way for faster and larger institutional and retail adoption. Also, it will be the only way stablecoin could get FDIC deposit insurance, which again is a strong propeller of wider adoption and use cases. How stablecoins get regulated is going to have further repercussions on the other related activities and parties in the crypto industry, and everyone in the space must pay close attention and contribute to striking the balance between trust and innovation — creating a win-win situation for all.
Julian Hosp, co-founder and CEO of Cake DeFi
The concern surrounding the governance of stablecoins should come as no surprise — after all, we saw it several years ago when social media giant Facebook announced that it would be introducing Libra (now Diem), a virtual currency pegged to a basket of assets across its product offerings. Regulators were up in arms — what would it mean for a corporation to be peddling a currency of its own across a geographically-blind network of digital services?
In line with this, the International Organization of Securities Commissions and the Bank of International Settlements are looking to lay out plans to establish oversight of stablecoins. Though stablecoins come in different permutations, each with varying degrees of stability, it’s likely that regulators will cast a closer eye on those that are most likely to see mass utility — namely, fiat-backed stablecoins. Like Diem, these stablecoins have a value collateralized by an underlying fiat currency, such as the U.S. dollar. Commodity-backed stablecoins, such as those pegged to a fixed amount of gold, for example, are another popular alternative. Both serve to mitigate the volatility seen across popular cryptocurrencies that make them likely to be impractical for commercial activities.
To be clear, while this may pose a challenge to the DeFi ecosystem in which stablecoins play a significant role. Here, stablecoins allow investors to generate yield on their crypto holdings while offsetting the adverse effects of potential market volatility. For newcomers to the space as well as long-term investors, stablecoins play a critical role in the DeFi ecosystem.
DeFi aside, the presence of regulation in the stablecoin ecosystem is but a sign of the sector’s maturity. No longer content in allowing firms to operate in a legal grey zone, a framework that can encourage consumer protections while recognizing the innovation and significant benefits that stablecoins can bring in the long term is ultimately a positive development for the space.
In fact, regulators are paying attention to “systemically important” stablecoins which are determined by their nature and underlying risk profile which can impact their stability. It is these currencies that have the potential to reap significant benefits for those who need it the most — be it migrant workers looking to facilitate remittances and cross-border transactions without being burned by prohibitive fees taken by middlemen services or small businesses around the world hoping to globalize their businesses.
Ultimately, the introduction of a regulatory framework is but a sign that regulators are beginning to notice that the digital commercial landscape is evolving and that stablecoins have the potential to radically overhaul the future of global finance and pave the way for greater financial inclusion.
See related article: How stablecoins can help investors weather crypto storms
Michael Conn, CEO and chairman of Zilliqa Capital
Stablecoins are garnering increasing attention and scrutiny from global regulators given the size of the market and the possibility of significant market impact if there were to be a meaningful collapse of Tether, or any other core stablecoin in the market.
This has led to global regulators looking to treat stablecoins and the companies behind them as true financial instruments, or even like banks in some cases. This should lead to stablecoins ideally having little/no credit or liquidity risk in case of default. Furthermore, questions have arisen around the potential scenario where customers would be exposed if stablecoins broke their peg. In this case, regulators are discussing a regulatory framework for stablecoins which would include details on whether holders had legal claims on the issuer or underlying assets in case of this quasi-default.
All of this attention means that stablecoins should, post-regulation, be theoretically more “trustable” since they would be covered by governmental regulations and vis-à-vis that, would theoretically receive de facto backstopping by the regulators, especially if bank-like treatment is adopted, as is being proposed in the United States.
Ultimately, a clearer framework around stablecoins could ultimately lead to greater adoption globally, and especially by institutional clients.
See related article: How open DeFi markets in Southeast Asia can drive financial inclusion
Robert Whitaker, chief operating officer of Huobi Nevada, parent company of Nevada-chartered retail trust company Huobi Trust
The [U.S. Securities and Exchange Commission] sending subpoenas to Circle clearly indicates the SEC is conducting an investigation into Circle related to securities. I would imagine it is related to the same issue Coinbase was warned by the SEC over. We can expect the SEC to continue investigations around the stablecoin and DeFi markets in the foreseeable future. When regulation for DeFi platforms comes into place, it will certainly bring with it centralization. The only way to keep this from happening is to have embedded supervision built into stablecoins. The Central Bank Digital Currency (CBDC) is an example.
This could also be seen as centralization as the surveillance aspect of the token itself would be reporting on user activities. I don’t see a way that total decentralization as we know it in the DeFi space can co-exist within the monetary policy of any FATF participating nation. The benefit of regulation is a safe and secure environment for investors. This will drive more mainstream adoption of the DeFi space. The average person has no idea what DeFi is.
See related article: Stablecoins promise much, but can they deliver?