Stablecoins are crypto assets that have a fixed value relative to fiat money. They can be used for many purposes. You can use them to withdraw crypto investments, send and receive stable money overseas, or to pay everyday consumer transactions, without worrying about fluctuation. According to the Bank for International Settlements (BIS), the global stablecoin supply is estimated at approximately $150 billion.
However, central banks around the world, who are the issuers traditional fiat money, don’t seem to be big supporters of stablecoins. There are concerns that stable blockchain assets could pose a threat to the financial system due to a sharp rise in supply and a lack of regulations. Fiat money stablecoins such as Circle (USDC), and Tether (USDT) may need banking licenses to continue operating. Regulators have so far not taken aim at algorithmic stablecoins. These are governed automatically by the expansion and contraction of monetary supply.
Cointelegraph spoke exclusively with Sam Kazemian, co-founder of Frax stablecoin protocol. He discussed the regulatory outlook in the sector and algorithmic stabilitycoins in depth.
Cointelegraph: There are many algorithmic stabilizecoins, like Terra USD and Ampleforth. What makes Frax unique in your opinion?
Sam Kazemian, Frax is unique because our protocol contracts supply and expands in different places across multiple blockchain protocols. This system targets the exchange rates for the Frax stablecoin in the open market. It is like a central bank. It never states that it can issue a currency. Instead, it says, “hey, you can redeem it for this amount in gold or you can redeem it at the bank for something dollar-pegged.” They no longer say that. So, a central bank targets their currency at the exchange rate of the open market.
A central bank will fix their currency to gold if it isn’t already. They will then compare the gold price against their currency. They’ll buy back some currency if it’s less than they want. They’ll print more currency if the opposite side is lower than they want. This is the approach taken by Frax. This is how we came up with our algorithmic stablecoin thesis. It’s been a success. Even during the May major market crash, we have never broken our peg.
Statistics on the market capitalization of stablecoin Source: U.S. Treasury Stablecoin report
CT: Do your see a crackdown in the stablecoin sector? What is Frax doing in order to comply with stablecoin regulations?
SK: This has two parts. It’s not clear if it would be considered a crackdown but I see regulation for at least fiat coins. These traditional financial assets have traditional financial assets backing them, such as cash equivalents or actual cash in depository account accounts. This may not affect truly decentralized stablecoins, however. Frax is compliant and will continue to comply with all requirements, just because it exists and is fully decentralized.
Your second question is very interesting. I believe the current stablecoin regulation that they are proposing is somewhat reactionary. People are currently saying that stablecoin issuesrs such as Circle and Tether should have banking licenses. This is the current conversation. This doesn’t make any sense when you consider that even traditional financial spaces allow for a lot more experimentation. Money market funds, for example, don’t need a banking charter. It is not a bank. It is not FDIC [Federal Deposit Insurance Corporation] protected. Either they don’t know this or they aren’t aware.
Money market funds must have cash equivalents and be disclosed. They aren’t regulated in the same way they are for stablecoins. Frax, a fully decentralized one, does not have any claims on real-world assets and doesn’t advertise any redeemability. Frax’s protocol targets the open market exchange. That is its whole purpose. I believe I am open to the idea that regulation will be handled by itself.