{"id":363541,"date":"2021-11-07T12:11:00","date_gmt":"2021-11-07T09:11:00","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/regulators-are-coming-for-stablecoins-but-what-should-they-start-with\/"},"modified":"2021-11-07T12:11:00","modified_gmt":"2021-11-07T09:11:00","slug":"regulators-are-coming-for-stablecoins-but-what-should-they-start-with","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/regulators-are-coming-for-stablecoins-but-what-should-they-start-with\/","title":{"rendered":"# Regulators are coming for stablecoins, but what should they start with?"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a25da6719bc8\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a25da6719bc8\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/regulators-are-coming-for-stablecoins-but-what-should-they-start-with\/#The_one_for_one_approach\" >The one for one approach<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/regulators-are-coming-for-stablecoins-but-what-should-they-start-with\/#The_outer_rim\" >The outer rim<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong># Regulators are coming for stablecoins, but what should they start with? <\/strong>&#8221;<\/p>\n<div class=\"post-content\" data-v-128018ef>The word \u201cstablecoin\u201d may have a pleasant ring to it \u2014 isn\u2019t it nice to have something stable in the volatile cryptoverse? \u2014 but for critics, they are nothing short of a ticking time bomb. Whether that\u2019s true or not, the push for regulating stablecoins is gaining momentum. The United States and the European Union are getting closer to formalizing their playbooks, and given the history of financial regulation emanating from Washington and Brussels, as well as the Financial Action Task Force\u2019s guidelines on crypto over the past few years, it\u2019s safe to say that the rest of the world will be following suit.<\/p>\n<p>That said, regulating stablecoins is no easy task, as such coins come in all shapes and sizes, which makes a one-size-fits-all solution a problem. The top three stablecoins by market cap \u2014 Tether (USDT), USDCoin (USDC) and Binance USD (BUSD) \u2014 are all pegged against the U.S. dollar. According to their respective developers, they are backed by reserves of greenbacks and other various financial instruments to keep their value at $1 at all times. <\/p>\n<p>Tether has already found itself under legal scrutiny over the viability and sources of its reserve, prompting the other two projects to reveal their respective supporting assets. USDC\u2019s disclosure, for its part, shed light on a substantial amount of \u201ccommercial paper\u201d \u2014 not necessarily high-quality or highly liquid \u2014 in its respective reserve. For many, the revelation led to the conclusion that the company is acting like a bank, not a payment business.<\/p>\n<p><iframe loading=\"lazy\" title=\"Stablecoins: How the most stable cryptos could collapse the entire market\" width=\"640\" height=\"360\" src=\"https:\/\/www.youtube.com\/embed\/W14xZHWG85Q?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>Other, more obscure stablecoins utilize a plethora of alternative <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>roaches. They can be pegged to commodities, such as gold or oil, as with Venezuela\u2019s controversial Petro. More exotic options include coins linked with carbon credits, like UPCO2, coins backed by crypto-assets, like Dai, and, perhaps rarest of all, stablecoins like Terra (UST) that have no collateral at all and instead rely on algorithms to keep their prices stable.<\/p>\n<p>Of course, some might say that regulation will only slow down innovation, so governments should stay out of the crypto lane, but this argument is missing historical context. Way earlier, in the wildcat banking <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.businessinsider.com\/history-of-the-free-bank-era-2013-2\">era<\/a>, private currencies issued by rogue banks would often leave people buying in with worthless papers, so the greenback was enshrined as the only national currency of the United States. The same logic applies to the 2008 money market fund crisis when the federal authorities <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.cnbc.com\/2016\/10\/14\/your-money-market-fund-has-changed.html\">put<\/a> new rules in place to protect the Regular Joe from big-time investors pulling in large sums from those.<\/p>\n<p>Time and time again, we, as a society, determined that consumers need protection from scams or simply bad judgment by those who custody, transfer value or provide similar services. We implemented rules and regulations to govern who can issue and redeem what we consider money, we wrote the playbook for those handling money in amounts that can send shockwaves across the economy if mishandled. Why shouldn\u2019t we do the same with stablecoins, a market with a total cap of over $133 billion? There is simply no point in keeping the Damocles sword of a crypto bank run hanging over the heads of investors and traders. So where do we start?<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_one_for_one_approach\"><\/span>The one for one approach<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The best way to begin regulating stablecoins is to set up the rules and protocols that ensure they live up to their claims. Christine Lagarde, the European Central Bank chief, said in a recent interview that stablecoins must be backed with fiat 1:1, adding that projects behind issuing any stablecoins should:<\/p>\n<blockquote><p>\u201c[&#8230;] be checked, supervised, regulated so that consumers and users of those devices can actually be guaranteed against eventual misrepresentation.\u201d <\/p><\/blockquote>\n<p>The EU has a long history of Electronic Money Institutions (EMIs), which can issue and redeem digital euros, and those institutions back their digital euros with real euros held in a bank, or in some cases, the central bank. This could set the example for regulators in other jurisdictions, who seem to be heading in the same direction.<\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/s3.cointelegraph.com\/uploads\/2021-11\/82c81aed-7fe5-4446-ad3b-ad134473a3d0.png\"><\/figure>\n<p>Here, we could <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.economist.com\/leaders\/2021\/08\/07\/why-regulators-should-treat-stablecoins-like-banks\">draw<\/a> a parallel with capital requirements for banks or payment companies, like EMIs, to ensure that stablecoin users can trade their coins for fiat at any given moment via the company that minted those. For reference, one of the key ways banks make money is by lending the money deposited by others. The process needs regulation simply to make sure the bank has enough in its stash to pay off clients who may want to withdraw their money, but not necessarily a 1:1 ratio for every active deposit.<\/p>\n<p>For a stablecoin issuer, selling its coins for fiat may be technically akin to taking in a deposit, but the question is what does it do with the money next? If it lends, then it is engaging in banking activities. If it processes a transaction, then it\u2019s handling payment activities. If it puts the money into high-yield assets, then it is technically transmitting orders to a brokerage or working as a broker, itself. Again, for context, we, as a society, granted governance of these activities to regulators. <\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>Stablecoins under scrutiny: USDT stands by \u2018commercial paper\u2019 tether<\/em><\/strong><\/p>\n<p>Appropriately, with stablecoins, regulators must first establish the transparency standards for the issuers, who must identify the financial activities they are engaged in, much the same way banks and payment companies do. Money market funds could be a good benchmark here. It is only reasonable to expect every stablecoin issuer to issue reports on their holdings, including, whenever appropriate, entities that issued specific securities and the amounts thereof. Without this, there is simply no way for stablecoin users to be sure that their assets hold the actual value.<\/p>\n<p>For stablecoins pegged against more exotic assets, the fundamental rule must be the same: They must be able to prove that whatever assets they claim are behind the coin are there. But that\u2019s where we jump right into a deep, deep rabbit hole. A commodity-backed stablecoin, for example, is, de-jure, a commodity-based investment contract, and needs to be regulated as such, not as \u201cmoney\u201d in any sense. And algorithmic stablecoins have an even harder time fitting into the regulated world. <\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_outer_rim\"><\/span>The outer rim<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Algorithmic stablecoins are not as massive as ones collateralized with fiat. TerraUSD, pegged to the U.S. dollar, but technically lacking underlying collateral, is the fifth-biggest stablecoin, and ETH-backed DAI is the fourth-largest stablecoin, according to CoinMarketCap. Tether <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.statista.com\/statistics\/1255835\/stablecoin-market-capitalization\/\">makes<\/a> for about half of the total market cap for stablecoins.<\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/s3.cointelegraph.com\/uploads\/2021-11\/bd466c4a-fe0c-4fcb-9865-fe191994df30.png\"><\/figure>\n<p>From a regulatory standpoint, algorithmic and crypto-backed stablecoins are not currently as closely intertwined with the traditional financial system as those that hold conventional financial instruments in their reserve. Such coins are usually fully plugged into the larger crypto ecosystem or their networks. That said, given the size and activities of these organizations \u2014 effectuating the transfer of value, in essence, not always in line with jurisdictional laws\u2014they are as worthy of regulators\u2019 crosshairs as other stablecoins.<\/p>\n<p>As an open and immutable ledger, blockchain is open for auditing, and so, more often than not, are the smart contracts powering such projects. Assuming identity can be attached to wallets, transparency is not necessarily an issue. What is an issue, though, at least potentially, is firing up the imagination of entities used to dealing with traditional finance and simultaneously encouraging crypto projects to find solutions for complying with the regulations that govern our society.<\/p>\n<p>In theory, regulators could go all the way to establishing a standard for incorporating automated reports and audits into the code powering the coins. In practice, doing something like that begs the question of a larger regulatory framework for cryptocurrencies as such. Multiple regulators are working on this playbook too, but there is still a way to go before it is completed.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>Stablecoins present new dilemmas for regulators as mass adoption looms<\/em><\/strong><\/p>\n<p>Given the apparent focus on the fiat-collateralized giants like Tether, the first order of business will be to categorize them according to activities (payment, banking, investment) and apply the requisite licensing requirements accordingly. The algorithmic stablecoins will most likely be put into regulatory limbo until the powers that be determine whether they are commodities or not, or even get outright banned\u2014either of which will force them into a choice between adapting to regulations or being marginalized.<\/p>\n<p>Whichever way things go, it is clear that stablecoins are in for a rude awakening from regulators across the world, and rightfully so. With their market cap soaring, stablecoins are now one of the key pillars for the crypto ecosystem as such. By embracing regulation, the crypto community will simply make sure that this colossus does not have feet of clay. <\/p>\n<p class=\"post-content__disclaimer\"><em>This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.<\/em><\/p>\n<p class=\"post-content__disclaimer\"><em>The views, thoughts and opinions expressed here are the author\u2019s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.<\/em><\/p>\n<div>\n<div style=\"background: rgb(239, 239, 239); border: 1px solid rgb(204, 204, 204); padding: 10px;\"><strong>Bob Reid<\/strong> is the CEO and co-founder of Everest, a fintech company that leverages blockchain technologies for a more secure and inclusive multi-currency account, digital\/biometric identity, payment platform and e-money platform. As a licensed and registered financial institution, Everest supplies end-to-end financial solutions, facilitating eKYC\/AML, digital identity and regulatory compliance associated with money movement. He was an advisor to Kai Labs, the <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/general\/\" data-internallinksmanager029f6b8e52c=\"3\" title=\"General\" target=\"_blank\" rel=\"noopener\">general<\/a> manager of Licensing at Bittorrent and vice president of Strategy and Business Development at Neulion and DivX.<\/div>\n<\/div>\n<p><template data-name=\"subscription_form\" data-type=\"law_decoded\"><\/template><\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. 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Whether that\u2019s true or not, the push&#8230;<\/p>\n","protected":false},"author":1,"featured_media":363542,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.cointelegraph.com\/images\/1200_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMTEvNjM3MzFlODUtZDIzYy00ZWJiLWIyMjYtNGY2OWM3MDcyZmNlLmpwZw==.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[74894,74863,75493,74355,72705,70934,67874],"class_list":["post-363541","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-blockchain","tag-cryptocurrencies","tag-stablecoin","tag-adoption","tag-european-union","tag-regulation","tag-united-states"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/363541","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=363541"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/363541\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/363542"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=363541"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=363541"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=363541"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}