Since 2019, regulators around the world have been seriously considering the risks associated with stablecoins, but recently, concerns have increased, especially in the United States.

In November, the U.S. President’s Financial Markets Working Group (PWG) released an important report, improve Regarding the possible “stable currency operation” and “payment system risk” issues. The US Senate followed up in December and held a hearing on the risk of stablecoins.

It raises a question: Will stablecoin regulation enter the United States in 2022? If so, is it “broad” federal legislation or more fragmented Treasury regulation? What impact might it have on non-bank stablecoin issuers and the entire crypto industry? Can it stimulate a convergence that makes stablecoin issuers more like high-tech banks?

White & Case partner Douglas Landy told Cointelegraph that we “almost certainly” will see federal regulation of stablecoins in 2022. Rohan Grey, assistant professor at Willamette University School of Law, agreed. “Yes, stablecoin regulation is coming. This will be a dual push.” ??It is characterized by an increasing drive for comprehensive federal legislation, but it also forces the Ministry of Finance and related federal agencies to become more active.

However, others said it was not so fast. “I don’t think it is possible to legislate until at least 2023,” Salman Banaei, policy director of cryptocurrency intelligence company Chainalysis, told Cointelegraph. Therefore, “the regulatory cloud over the stablecoin market will stay with us for some time.”

In other words, Banaei expects that the hearings and draft bill to be held in 2022 should “lay the foundation for possible fruitful results in 2023.”

Temperature is rising

Most people agree that regulatory pressure is increasing—not just in the United States. “Other countries are responding to the same potential forces,” Gray told Cointelegraph. The initial catalyst was the announcement of Facebook’s Libra (now Diem) in 2019 that it aimed to develop its own global currency-which sounded a wake-up call for policy makers-making it clear that “they can’t stand idly by”, even if the crypto industry is (then) “A small, a bit weird industry” does not bring “systematic risks,” Gray explained.

Today, there are three main factors driving stablecoin regulation forward, Banaei told Cointelegraph. The first one is mortgage or worry, which is also stated in the PWG report. According to Banaei:

“Some stablecoins provide misleading pictures of the assets supporting them in their disclosures. This may cause the holders of these digital assets to wake up to find that the value of the shares has been severely depreciated due to repricing and possible runs.”

The second concern is that stablecoins “are fueling speculation about unregulated ecosystems that are considered dangerous, such as DeFi applications that are not yet subject to legislation like other digital assets,” Banaei continued. At the same time, the third concern is that “stable coins may become legitimate competitors to standard payment networks”, benefiting from regulatory arbitrage, so they may one day provide “widely scalable payment solutions that may disrupt traditional payments and banking services.” Provider.”

For Barney’s second point, Hilary Allen, a law professor at American University, Tell The Senate stated in December that today’s stablecoins are not used to pay for real-world goods and services as some people believe, but their main purpose is to “support the DeFi ecosystem.” […] A fragile shadow banking system […] Disrupt our real economy. “

Gray added: “The industry has become bigger, stablecoins have become more important, and the positive development of stablecoins has been tarnished.” Raised serious questions In the past year, about the industry leader Tether’s (USDT) Reserve assets, but later, more compliant and seemingly well-meaning issuers proved to be misleading in terms of reserves. Circle is the main issuer of USD Coin (USDC), for example, once claimed that its stablecoin was “backed by cash-like assets at a ratio of 1:1”, but later discovered that “40% of its assets are actually U.S. Treasury bonds, certificates of deposit, commercial paper, corporate bonds, and municipal debt.” As the New York Times Point out.

In the past three months, a kind of “public hype has entered a new level,” Gray continued, including celebrities who promote crypto assets and non-fungible tokens (NFTs). All these have promoted the further development of regulatory agencies.

FSOC supervision?

“For comprehensive federal stablecoin legislation or regulation, 2022 may be too early,” Davis Polk & Wardwell LLP partner Jai Massari told Cointelegraph. On the one hand, this is the midterm election year in the United States, but “I think we will see a lot of proposals that are important for forming a baseline for stablecoin regulation,” she told Cointelegraph.

Without federal legislation, the Financial Stability Oversight Board or FSOC may take action against stablecoins in 2022. The 10 members of the multi-agency committee include the heads of the SEC, CFTC, OCC, Federal Reserve, and FDIC. In this case, non-bank stablecoin issuers may want to be bound by liquidity requirements, customer protection requirements, and asset reserve rules — at least, Randy told Cointelegraph, and regulated “like money market funds”.

As far as Banaei is concerned, he believes that FSOC’s intervention in the stablecoin market is “possible but unlikely”, although he may see the Ministry of Finance actively monitor the stablecoin market in the coming year.

Will stablecoins have deposit insurance?

A stronger step may require stablecoin issuers to become insured depository institutions, Recommended content in the PWG report It also made recommendations in some legislative proposals, such as the Stability Act of 2020 that Gray helped write.

Massari believes that imposing such restrictions on issuers is unnecessary or desirable.When she testify On December 14, before the Senate Committee on Banking, Housing and Urban Affairs, she emphasized that “true stablecoin” is a form of “narrow banking” or a financial concept that dates back to the 1930s. Stablecoins “do not perform maturity and liquidity conversion-that is, use short-term deposits for long-term loans and investments.” This makes them inherently safer than traditional banks. As she later told Cointelegraph:

“superpower [traditional] The characteristic of banks is that they can accept deposit funds instead of just investing in short-term liquid assets. They can use the funds for a 30-year mortgage or credit card loan or corporate debt investment. And that is risky. ”

This is why traditional commercial banks need to purchase FDIC (deposit) insurance through premium assessment of their domestic deposits. However, if stablecoins restrict their reserve assets to cash and real cash equivalents, such as bank deposits and short-term US government securities, they can be said to avoid “operational” risks and do not require deposit insurance, she believes.

However, there is no doubt that the fear of stable currency runs still exists in the minds of US financial authorities.It is marked in the PWG report and FSOC 2021 annual report Report In December:

“If the stablecoin issuer does not honor the request to redeem the stablecoin, or if the user loses confidence in the stablecoin issuer’s ability to honor such request, a run may occur, which may cause damage to users and the wider financial system. harm.”

“We can’t run on deposits,” Randy commented. Banks are already under supervision, and there are no liquidity, reserves, capital requirements and other issues. All these have been resolved. However, this is still not the case with stablecoins.

Banaei said: “I think that if the stablecoin issuer must be an insured depository institution (IDI), I think there are positive and negative sides. For example, IDI can issue FDIC-protected stablecoin wallets. On the other hand, financial Technological innovators will be forced to cooperate with IDI, so that IDI and its regulators can effectively become the gatekeepers of stablecoin and related service innovation.”

Gray believes that deposit insurance requirements will be introduced soon. “This [Biden] The government seems to be adopting this view,” and it is getting more and more attention overseas: Japan and the Bank of England seem to be inclined in this direction. He told Cointelegraph that these authorities admit that “this is not just a credit risk.” There are also operational risks. He told Cointelegraph that stablecoins are a lot of computer code, which is error-prone and technology may fail. Regulators do not want consumers to be harmed.

What will happen next?

Looking to the future, Gray foresaw a series of integrations in the stablecoin ecosystem. He suggested that central bank digital currencies or CBDCs, many of which seem to be launched soon, will adopt a two-tier structure and the retail layer will look like stablecoins. This is a kind of convergence.

Secondly, some stablecoin issuers like Circle Obtain a Federal Bank License It will look like a high-tech bank in the end; the difference between traditional banks and fintech companies will shrink. Landy also agrees that bank-like stablecoin regulation may “force non-bank institutions to become banks or cooperate with banks”.

The third possible fusion is semantic fusion. As the distance between traditional banks and encryption companies gets closer, traditional banks may adopt some language in the encryption field. They may stop talking about deposits—for example, but about stablecoin bets.

Randy was even more skeptical on this point. “The term’stablecoin’ is very popular in the regulatory community,” he told Cointelegraph that if stablecoins are regulated by the U.S. government, he may be abandoned. why? The name implies something that stablecoins do not have. In the eyes of regulators, these digital coins linked to legal currency are by no means “stable.” Calling them this might mislead consumers.

DeFi, algorithmic stable currency and other issues

Other issues also need to be resolved. “How to use stablecoins in DeFi is still a big problem,” Massari said, although “banning stablecoins will not stop DeFi.” Moreover, there is also the problem of algorithmic stablecoins-stablecoins are not affected by legal tender or fiat currencies. Commodity support instead relies on complex algorithms to maintain price stability. What did the regulator do to them?

In Gray’s view, algorithmic stablecoins are “riskier” than legal currency-backed stablecoins, but the government failed to address this topic in its PWG report, probably because algorithmic stablecoins are still not widely held.

In general, is there a danger of over-regulation here—worrying that regulators might have done too much to control this evolving new technology?

“I think there is a risk of over-regulation,” Banaei said, especially considering that China seems to be about to launch its CBDC, “and the digital renminbi may become a globally scalable payment network that may occupy a significant share of the future payment network. Market share. Within the reach of U.S. policymakers.”