Will US regulators shake stablecoins into high-tech banks?

Will US regulators shake stablecoins into high-tech banks?

Since 2019, regulators around the globe have been seriously considering the risks associated with stablecoins. However, recent concerns have increased in the United States.

In November, the United States President’s Working Group on Financial Markets (or PWG) issued a key report raising questions about “stablecoin crashes” and “payment system risk.” The U.S Senate then held hearings on stablecoin issues in December.

This raises the question: Will stablecoin regulation be coming to the U.S.A in 2022? Will it be a “broad stroke” federal law or more fragmented Treasury Department regulation, if so? What effect might this have on stablecoin issuers other than banks and the crypto industry as a whole? It could lead to a convergence in which stablecoin issuers are more like high-tech banking institutions.

Douglas Landy, White & Case partner, stated that it is “almost certain” that stablecoins will be subject to federal regulation in 2022. Rohan Grey is an assistant professor at Willamette University College of Law. “Yes, stablecoin regulation will be coming. It’s going to a double push,” said Rohan Grey, an assistant professor at Willamette University College of Law. This will include a growing impetus to comprehensive federal legislation and pressure on Treasury and other federal agencies to become more active.

Others disagree. Salman Banaei (head of policy at Chainalysis), stated that he believes legislation will not be passed before 2023. The regulatory cloud that hangs over stablecoin markets will therefore remain for some time.

Banaei believes that the 2022 hearings and draft bills he will see should “lay the foundation for what could become a productive 2023.”

The temperature is rising

Many agree that there is increasing regulatory pressure. This is not only in the U.S. Facebook’s 2019 Libra (now Diem), announcement that it would develop its own global currency was the catalyst. It was a wake-up call to policymakers, Grey explained.

Banaei explained to Cointelegraph that today there are three major factors that are driving stablecoin regulation forward. Banaei said that the first factor is collateralization or the concern.

Some stablecoins present a misleading picture in their disclosures of the assets that underpin them. As a result, holders of digital assets could be surprised to find a severely devalued stake.

Banaei said that the second concern is that stablecoins are “fueling speculation in what’s perceived as a dangerous, unregulated ecosystem,” such as DeFi apps that have not been subject to legislation like other digital assets. The third concern is that stablecoins may become legitimate competitors to standard payments networks. They could benefit from regulatory arbitrage and provide “broadly scaleable payments solutions that could undermine banks service providers.”

Second, Hilary Allen, an American University law professor, stated to the Senate that today’s stablecoins are not being used to pay for real-world goods or services as some believe. Instead, their primary purpose is to “support the DeFi ecosystem […], a shadow banking system that has fragilities that could […] disrupt the real economy.”

Grey said: “The industry grew, stablecoins became more important, and stablecoins’ positive spin got tarnished.” While serious questions were raised about Tether’s (USDT), reserve assets, there was also confusion as to the true reserves. Later, compliant, but well-intentioned, issuers proved to be misleading. Circle, for example, claimed its USD Coin (USDC) was backed 1:1 by cashlike assets. However, it later emerged that 40% of its holdings were in U.S Treasurys, certificates, deposits, corporate bonds, and municipal debt, as pointed out by the New York Times.

Grey said that the public hype surrounding crypto assets and nonfungible tokens has increased by three months. These things pushed regulators even further.

Regulation by FSOC

Jai Massari (partner at Davis Polk & Wardwell LLP) stated that 2022 was probably too soon for federal stablecoin regulation or legislation. It’s a midterm year in the U.S. but she said that “we’ll see many proposals, which are essential to form a baseline for stablecoin regulation.”

The Financial Stability Oversight Council (FSOC) might take action on stablecoins in 2022 if there is no federal legislation. The 10 members of the multi-agency council include OCC, Federal Reserve, Federal Reserve, and SEC heads. Non-bank stablecoin issues might be expected to be subjected to liquidity requirements, customer safety requirements, and asset reserve rules — at minimum, Landy explained to Cointelegraph. They are also regulated “like money markets funds.”

Banaei for his part considered an intervention by the FSOC in stablecoin market markets “possible but not likely,” although he said Treasury could be actively monitoring stablecoin market in the next year.

What about deposit insurance for stablecoins?

Stablecoin issuers might need to be insured depository institution, which is something Grey suggested in his report.

Massari believes that imposing restrictions on issuers does not make sense or is desirable. On Dec. 14, Massari testified before Senate’s Committee on Banking, Housing and Urban Affairs. She stated that a true stablecoin is a type of “narrow bank” or a financial concept dating back to the 1930s. Stablecoins are safer than traditional banks because they don’t engage in maturity or liquidity transformation. This means that they do not use short-term deposits for long-term loans or investments. Cointelegraph was told later by her:

“The strength of traditional banks is their ability to take deposit funding, and not only invest in short-term liquid assets. They can also use the funding to obtain 30-year mortgages, credit card loans, or invest in corporate debt. This is risky.

This is why traditional commercial banks must purchase FDIC (i.e. deposit) insurance through premium assessment on domestic deposits. She contends that stablecoins could avoid “run” risk by limiting their reserve assets to cash or genuine cash equivalents like bank deposits or short-term U.S. securities.

It’s clear that financial authorities in the United States are still concerned about a stablecoin crash. This was mentioned in the PWG report, and in December’s FSOC annual report 2021:

“If stablecoin issuesrs refuse to honor a request for redemption of a stablecoin or if users lose faith in the ability to honor such requests, runs could occur on the arrangement that could cause harm to users and to the wider financial system.”

Landy stated, “We can’t allow a run on deposits.” Banks are already under regulation and do not have any issues with liquidity, capital requirements, or reserves. All of that has been taken care of. However, this is still not true for stablecoins.

Banaei stated that there are both positives and negatives to requiring stablecoin issuers to be insured depository institution (IDI) status. He also said: “For instance, an IDI could issue FDIC protected stablecoin wallets. Fintech innovators would be forced to work with IDIs. This would make IDIs and regulators the true gatekeepers of innovation in stablecoins.

Grey believes that a deposit insurance requirement will soon be required. “The [Biden] Administration seems like it is adopting this view,” and it’s gaining momentum overseas: Japan, Bank of England and Bank of England appear to be moving in the same direction. He told Cointelegraph that those authorities realize that it’s not about credit risk. There are also operational risks. He explained to Cointelegraph that stablecoins are like computer code and could be hampered by bugs. Regulators do not want consumers to suffer.

What’s next?

Grey sees convergences in the stablecoin ecosystem for the future. He suggests that central bank digital currencies (or CBDCs), which are close to being rolled out, will be structured in a two-tier structure and that the retail tier will look similar to a stablecoin. This is one convergence.

Second, Circle and other stablecoin issuers will be granted federal bank licenses. They will eventually become hi-tech banks. Differences between legacy banks as well as fintechs will diminish. Landy also agreed that stablecoin regulation similar to banks would likely force non-banks into becoming banks or partners with banks.

A semantic convergence is the third possibility. Traditional banks may adopt some of cryptoverse’s language as legacy banks and crypto businesses become closer. They might not speak of deposits anymore, but stablecoin stakes, instead.

Landy is less certain about this point. Landy is more skeptical about this point. Why? Stablecoins’ name implies something that stablecoins do not. Regulators view these fiat-pegged digital currencies as anything but stable. Consumers could be misled by calling them that.

DeFi, algorithmic stabilitycoins, and other issues

Other issues need to be resolved. Massari said that there was still a lot to be done to address the issue of stablecoins being used in DeFi. However, Massari stated that banning stablecoins will not stop DeFi. And then there’s the issue of algorithmic stabilitycoins, which are stablecoins without fiat currencies or commodities backing them. Instead, they rely on complicated algorithms to maintain their prices steady. What can regulators do about them?

Grey believes algorithmic stablecoins pose a greater risk than fiat-backed ones. However, the government did not address this issue in its PWG report. Perhaps because algorithmic stabilitycoins are still not widely held.

Is there not a risk that too much regulation is being applied to this emerging technology, causing regulators to be too strict?

Banaei stated that “I believe there is a danger of overregulation,” especially since China appears to be close to launching its CBDC. “The digital Yuan has potential to become a globally scalable payment network that could take substantial market share over networks that are under the control of U.S. policymakers.”

The U.S. and other aligned regulators need to be cautious about how they proceed with stablecoins. They should not make it impossible for innovators to invent due to an overemphasis of competing priorities.

2021's Most Anticipated Growth & Wealth-Building Opportunity

Join Thousands of Early Adopters Just Like You Who Want to Grow Capital and Truly Understand Cryptocurrency Together

Amy Jimenez

Amy Jimenez– Services My name is Amy Jimenez, and I am the main writer behind the" allthetopnews.com" for the ground-breaking and most fragile bits of knowledge into the most recent news in the services sector. I began my voyage of work as an autonomous investment advisor. I had around 4 years of involvement in this field. I am a free soul so; my energy for investigating the world has taken me to the countries over the globe and allowed me to report for a part of the best news affiliations. At present, I am a full-time manager as experienced in the account and began to utilize my capacities.

2021's Most Anticipated Growth & Wealth-Building Opportunity

Join Thousands of Early Adopters Just Like You Who Want to Grow Capital and Truly Understand Cryptocurrency Together

Close Bitnami banner
Bitnami