The term “stable coin” may sound pleasant-wouldn’t it be great to have something stable in an unstable crypto world? ——But for critics, they are simply a time bomb. Whether this is true or not, efforts to regulate stablecoins are gaining momentum.Given the history of financial regulation from Washington and Brussels, and Financial Action Task Force Guidelines on Encryption In the past few years, it is safe to say that the rest of the world will follow suit.

In other words, it is not easy to regulate stablecoins, because these stablecoins come in various shapes and sizes, which makes a one-size-fits-all solution a problem. The top three stablecoins by market capitalization-Tether (USDT), U.S. dollar (USDC) And Binance USD (BUSD) — both are pegged to the U.S. dollar. According to their respective developers, they are backed by reserves of U.S. dollars and various other financial instruments to keep their value at $1 at all times.

Tether Have found myself Legal review of the feasibility and source of its reserves, prompting the other two projects Reveal their respective backing assetsAs far as USDC is concerned, its disclosure reveals a large amount of “commercial paper” in its respective reserves—not necessarily high-quality or highly liquid. For many people, this revelation leads to the conclusion that the company behaves like a bank, not a payment business.

Other more obscure stablecoins use a lot of alternative methods. They can be linked to commodities such as gold or oil, just like Venezuela’s controversial petro currency. More exotic choices include coins related to carbon credits, such as UPCO2, crypto-asset-backed coins such as Dai, and possibly the rarest stablecoins, such as Terra (UST), which have no collateral at all, but rely on algorithms. Keep their prices stable.

Of course, some people may say that regulation will only slow down innovation, so the government Should stay away from encrypted channels, But this argument lacks historical background.Earlier, at the Wildcat Bank eraPrivate currencies issued by rogue banks often allow people to buy with worthless bills, so the U.S. dollar is regarded as the only national currency in the United States.The same logic applies to the money market fund crisis in 2008, when the federal authorities put New rules are in place to protect Routine Joe from large investors withdrawing large amounts of funds from these investors.

As a society, we have determined time and time again that consumers need to be protected from fraud or the misjudgment of people who simply escrow, transfer value, or provide similar services. We have implemented rules and regulations to manage who can issue and redeem currencies that we think, and we have written scripts for those who deal with money. If it is not handled properly, it may generate shock waves in the entire economy. Why shouldn’t we do the same for the stablecoin market with a total market value of more than $133 billion? It doesn’t make sense to hang the sword of Damocles in crypto banking over the heads of investors and traders. So where do we start?

One-to-one approach

The best way to start regulating stablecoins is to formulate rules and protocols to ensure that they live up to expectations. Christine Lagarde, President of the European Central Bank, said in a recent interview that Stable coins must be backed by 1:1 fiat currencyAnd added that the project behind any stablecoin issuance should:

“[…] Subject to inspection, supervision and supervision in order to truly ensure that consumers and users of these devices will not make final false statements. ”

The European Union’s Electronic Money Institutions (EMI) have a long history of issuing and redeeming digital euros. These institutions use real euros held by banks or, in some cases, central banks, to support their digital euros. This can set an example for regulators in other jurisdictions, who seem to be moving in the same direction.

Here we can painting Similar to the capital requirements of banks or payment companies (such as EMI) to ensure that stablecoin users can trade their coins into legal tender at any given moment through the company that mints these coins. For reference, one of the main ways banks make money is to lend money deposited by others. This process requires supervision, just to ensure that the bank has enough deposits to pay customers who may want to withdraw funds, but not necessarily that the ratio of each active deposit is 1:1.

For stablecoin issuers, selling their coins in fiat currency may be technically similar to receiving deposits, but the question is how to deal with the money next? If it lends, then it is engaged in banking activities. If it processes the transaction, then it is processing the payment activity. If it invests funds in high-yield assets, then technically speaking, it itself transmits orders to a broker or works as a broker. Similarly, in terms of context, we, as a society, delegate the governance of these activities to regulators.

related: Stable currency under review: USDT supports “commercial paper” tether

Appropriately, for stablecoins, regulators must first establish transparency standards for issuers, and issuers must determine the financial activities they engage in, just as banks and payment companies do. Money market funds may be a good benchmark. It is reasonable to expect that every stablecoin issuer will publish a report on its holdings, including the entities that issue specific securities and their numbers under appropriate circumstances. Without this, stablecoin users simply cannot ensure that their assets have actual value.

For stablecoins linked to more exotic assets, the basic rules must be the same: they must be able to prove that the assets behind any assets they claim are there. But this is where we dive into a very deep rabbit hole. For example, commodity-backed stablecoins are legally commodity-based investment contracts that need to be supervised, not “currency” in any sense. Algorithmic stablecoins are more difficult to integrate into the regulated world.

Outer edge

Algorithmic stablecoin It is not as large as the collateralized legal currency. According to data from CoinMarketCap, TerraUSD is pegged to the U.S. dollar, but technically lacks basic collateral, it is the fifth largest stablecoin, and DAI, backed by ETH, is the fourth largest stablecoin.Tether Make It accounts for about half of the total market value of stablecoins.

From a regulatory perspective, stablecoins supported by algorithms and encryption are not currently connected to the traditional financial system as closely as those that hold traditional financial instruments in their reserves. Such coins are usually fully inserted into the larger crypto ecosystem or its network. That is to say, given the scale and activities of these organizations-realizing value transfer, which does not always comply with the laws of the jurisdiction in nature-they are just as worthy of the regulators as other stablecoins.

As an open and immutable ledger, the blockchain is open to auditing. Therefore, under normal circumstances, smart contracts that support such projects are provided. Assuming that the identity can be attached to the wallet, transparency is not necessarily an issue. However, at least the underlying problem is to stimulate the imagination of entities used to handle traditional finance, while at the same time encouraging crypto projects to find solutions that comply with the regulations governing our society.

In theory, regulators can establish a standard along the way, incorporating automatic reporting and auditing into the code that powers the token. In practice, doing such things avoids the issue of a larger regulatory framework for cryptocurrencies. Multiple regulatory agencies are also developing this script, but there is still a long way to go before it is completed.

related: With mass adoption approaching, stablecoins have brought new difficulties for regulators

Given the obvious focus on fiat mortgage giants such as Tether, the first task is to classify them according to activity (payment, banking, investment) and apply the necessary licensing requirements accordingly. Algorithmic stablecoins are likely to be placed on the fringe of regulation until the power to decide whether they are commodities or even be completely banned-both of which will force them to choose between adapting to regulations or being marginalized.

Regardless of the situation, it is clear that stablecoins are facing a rude awakening from regulators around the world, and this is a matter of course. With the soaring market value, stablecoins have now become one of the key pillars of the crypto ecosystem. By accepting supervision, the crypto community will simply ensure that this behemoth has no mud feet.

This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision.

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