Reshaping the image of currencies: Regulate stablecoins and don’t kill them

As US regulators suddenly realize the reality of stablecoins, the beginning of the northern hemisphere summer of 2021 may end.

The pendulum that went from neglecting to focusing the laser may now have swung too far. The risk now is that regulators are acting too fast and may adopt blunt, all-encompassing solutions to complex problems that require nuance.

At the end of last month, Eric Rosengren, President of the Federal Reserve Bank of Boston , elaborated on the risks he believes these stablecoins pose to the financial system. Following Rosengren’s view, Randal Quarles, the deputy director of the Federal Reserve, issued an almost completely opposite position. He delivered a surprisingly forward-looking speech, calling on the United States to encourage stablecoin innovation.

Then, this week, U.S. Treasury Secretary Janet Yellen convened a meeting of the President’s Financial Markets Working Group to discuss the regulation of stablecoins. It includes senior officials from the Treasury Department, the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

These talks did not bring much results, but one participant, the chairman of the US Securities and Exchange Commission Gary Gensler, said that some stablecoins whose prices depend on the performance of traditional securities may be securities themselves and are therefore subject to supervision by their institutions. Gensler staff are working hard to meet Senator Elizabeth Warren (D-Mass.)’s request that the SEC develop a broader encryption regulatory framework by July 28.

Systemic risk?

It’s not just the letters from the US Senator that prompted the regulators to take action. This is also a significant increase in stablecoins.

As you will see in the newsletter chart section below, the total outstanding value of the top 10 stablecoins-including Tether’s USDT (-0.08%), Circle’s USDC (-0.1%), Binance’s BUSD and MakerDAO DAI (-0.04%)-now $108.7 billion. This is a four-fold increase from the beginning of this year and three times the $35.6 billion held by PayPal Holdings for its PayPal and Venmo customers at the end of the first quarter.

This explosive growth-and the active investigation of the leading stablecoin issuer Tether by the New York Attorney General’s Office, finally ended in a settlement requiring the company to increase transparency in the decomposing of its tokens in support of its reserves, triggering an opposition. “Systemic” concerns. risk. “

This sentence is reminiscent of the 2008 financial crisis, when investors dumped assets to make up for the rapidly evaporating mortgage investment, causing a de facto “bank run” in the financial system. What is worrying is that in a world where reserve-backed stablecoins are ubiquitous, doubts about the size, quality, and liquidity of token-backed assets may exacerbate the financial crisis. Critics say that large-scale redemptions of stablecoins may bankrupt the issuer and produce similar panic and cascading borrowing risks throughout the economy.

Mitigating such risks is the legitimate responsibility of the government. In fact, increasing confidence in this way may benefit the use of stablecoins, just like the Federal Deposit Insurance for the U.S. banking system in 1933.

Therefore, supervision should be welcomed by the industry. But what will this regulation look like? Will it encourage or restrict innovation and access? Will the right rules be applied to the right scenarios? Or will there be a general approach that does more harm than good?

Hurrying is not conducive to taking the necessary nuanced regulatory measures. Alarmist analogies such as “bank runs” are also not applicable. For various reasons, these analogies are not really applicable here.

Lessons from history

This week, Yale University School of Management economist Gary Gorton and Federal Reserve lawyer Jeffery Zhang sparked some sense of urgency. In a paper undoubtedly placed before all members of the President’s Working Group, they called on the U.S. government to expand its “public funding” control over “private funds” stablecoins, either by forcing them to be subject to federal supervision like banks, or by The central bank’s digital currency replaces them.

The author of the paper believes that “if policymakers wait ten years before taking action”, “stable currency issuers will become the money market fund of the 21st century, too large to fail. The government will have to intervene in the rescue plan when there is a financial panic. .”

To illustrate their point of view, they used the experience of the “Wildcat Bank” that was not deregulated in the United States in the 19th century. At that time, different banknotes issued by private banks were in circulation, and sometimes the prices were different relative to the par value. But the Cato Institute currency historian refuted this analogy in a convincing tweet thread. Reading this book, people will think of the past experience of “private funds”. If you get rid of the restrictions of geography and information transparency that shouldn’t exist in the digital age of the 19th century, then its potential in the 21st century will be revealed.

Selgin writes that in most cases, private banknotes are traded at face value in the state where the bank belongs, and only at the interstate line can they be discounted where they are actually cashed at the bank branch.

Selgin pointed out that a 10% federal tax is required to prevent people from using state banknotes, which means that “although they cannot pass face value anywhere”, users believe that they “do not seem to be better than their national banknotes in some respects.” .”

Selgin went on to say that, contrary to popular myths, the closure of so-called wildcat banks did not bring efficiency rewards to many poorer southern states whose post-Civil War development stalled for decades due to insufficient borrowing after the closure of state-owned banks. .

Fast forward to the more transparent and digital ubiquitous model provided by the Internet, and it is difficult to see that the discount itself is a large enough problem to offset the selectivity and innovation that stablecoins provide users. If everyone recognizes that the highly sought-after token is not equivalent to the national legal tender, but only expects to hold a token close to its value, then people will continue to use it for convenience, programming and easy access.

What kind of supervision?

This is not to say that regulation has no value. Rules that enforce greater transparency may further increase the market’s overall confidence in the financial system, thereby further narrowing the spread.

And a rigorous banking franchise model may be needed to eliminate all doubts about the face value of 100% reserved tokens, so that large compliance-restricted companies can use stablecoins and increase their use in the entire economy.

Long is the founder and CEO of Avanti Bank, which used Wyoming’s new crypto-friendly Special Purpose Depository Institution (SPDI) banking license to lobby the Federal Reserve to support its new digital dollar token, Avit.

However, stablecoins and digital dollars come in many forms. The one-size-fits-all solution is problematic.

As Gensler pointed out, some stablecoins may be securities. As pointed out by Gorton and Zhang, Tether’s terms and conditions give it options similar to stock issuers, which can choose how and when to redeem, which is different from other reserve-backed stablecoin issuers, which will The customer’s fund deposits are regarded as debts. Maybe Tether should be regulated as a money market fund, but other funds should be regulated as deposit takers. How will this difference affect the market?

What about “synthetic” stablecoins like Dai? Dai is an ERC20 token whose value is algorithmically managed by smart contracts on the Ethereum blockchain. Not mentioned in Gorton and Zhang’s paper. They have no reserve support at all. Are they breaking the law now? In the case of the system being run by a decentralized community, who is the supervised person or entity? Thousands of geographically dispersed Ethereum nodes that execute smart contracts?

People can accept Rohan Gray’s argument. He is an assistant professor at Willamette University School of Law. He drafted a bill for Representative Rashida Tlaib (D-Mich), calling for all stablecoins to require the development of the MakerDAO protocol behind Dai. The person obtains a bank license. However, although it has been difficult to implement, now the legal entity Maker Foundation they formed is closing and handing over governance to a decentralized autonomous organization, it will now become more difficult.

If regulators are serious about promoting innovation, financial access for all, and freedom to write code, then regulators must deal with these issues carefully and carefully.

As a proverb goes: “Haste is not enough, regret is too late.”

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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