Supervision takes the first step in stablecoin minting and redemption needs to be transparent

If crypto assets are the engine, then stablecoins are like its pistons. In the past seven years, stablecoins have developed into the main pillar of the entire crypto ecosystem. It is more like a tool for introducing new funds, managing and increasing liquidity, and pricing crypto assets.

According to Coingecko’s data, the total market value of the stablecoin market currently reaches 150 billion U.S. dollars. Among them, the two major US dollar stable currencies, USDT and USDC, still occupy the main market share. The circulating supply of USDT exceeds 73.4 billion U.S. dollars, and the circulating supply of USDC exceeds 37.2 billion U.S. dollars. Looking back at history, when Bitcoin reached a price of US$20,000 at the end of 2017, USDT only had a market value of US$1 billion, and now it is an important stablecoin with more than US$70 billion.

Recently, Sherrod Brown, Chairman of the Banking, Housing and Urban Affairs Committee of the US Senate, has sent letters of inquiry to major stablecoin issuers and exchanges, including Coinbase, Gemini, Circle, Tether, Paxos, TrustToken, Binance USD, etc. , Calling on stablecoin issuers to disclose the issuance process of stablecoins before December 3, providing basic information about the purchase, exchange, and minting of stablecoins, as well as the number of tokens in circulation and how often users convert them into U.S. dollars.

Ronw Hammond, Director of Government Relations at the Blockchain Association, believes that this move is likely to be a sign of a hearing by the Senate Banking Committee.

Jeremy Allaire, CEO of USDC publisher Circle, is one of the few people who publicly responded to the letter. He expressed his willingness to cooperate with Brown and clarified his doubts: “I look forward to working with you to ensure that consumers are properly protected.”

Stablecoins are facing the strongest regulatory wave

This inquiry letter was issued after the “Stablecoin Report” issued by the President’s Financial Markets Working Group earlier this month. Brown said publicly after sending the letter: “The “Stablecoin Report” emphasizes the rapid growth of stablecoins for families and the economy. Risks. We must work hard to ensure that any new financial technology complies with all laws and regulations that protect investors, consumers and the market, and ensure that they compete with traditional financial institutions in a fair environment. I look forward to working with financial regulators To promote innovation in the financial system.”

In the United States, the voice calling for regulation of stablecoins has been going on for several months. In July, the chairman of the US Securities and Exchange Commission Gensler suggested that stablecoins can be regulated as securities. Treasury Secretary Janet Yellen expressed concerns about stablecoins and urged legislators to “act quickly” and develop a framework of rules to manage encryption. industry. In September, Gensler told the Senate Banking Committee that many encrypted assets, including stablecoins, should be securities. According to Bloomberg’s report, Gensler has been the SEC’s dominant force behind its call for stablecoin regulation.

In the “Stablecoin Report”, the President’s Financial Markets Working Group, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) believe that stablecoin issuers should become “deposited institutions” and comply with relevant capital and liquidity standards Requirements, and incorporated into the regulatory agency system like banks. Secondly, operators of encrypted custodial wallets should also actively supervise entities that play an important role in the operation of stablecoins. In addition, the affiliation between stablecoin issuers and commercial entities should be restricted, and competition and interoperability between different stablecoins should be encouraged.

How to understand the “deposited institution”? Think of it this way. If stablecoins are widely accepted by the mainstream and are used in large amounts for household or business payments, and if the crypto market declines, there may be a large amount of funds that need to be redeemed into legal tender, or even congestion, similar to a bank run. This may force issuers to sell assets cheaply, which in turn may put pressure on the financial system. Therefore, the legislative branch should enact laws that only banks insured by the Federal Deposit Insurance Corporation (FDIC) have the right to issue stablecoins, and the FDIC should ensure that stablecoin issuers provide sufficient reserves to meet user withdrawal requests.

Although the “Stablecoin Report” does not have a legally mandatory attribute, in terms of the supervision of stablecoins, the “Report” pointed out that within the scope of the enforcement of the United States Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), stablecoins need Comply with federal securities laws, commodity exchange laws, and other related regulations.

The global anti-money laundering and counter-terrorism financing (AML/CTF) standard setter-Financial Action Task Force (FATF) released the “Updated Guidelines” on crypto assets and crypto asset service providers (VASP) at the end of October for guidance How do countries implement their own encryption regulations. In the “Updated Guidelines”, FATF believes that countries should take corresponding measures to manage the ML/TF (money laundering and terrorist financing) risks of stablecoins, especially those of larger scale stablecoins.

In early October, the Bank for International Settlements (BIS) Committee and the International Organization of Securities Commissions (IOSCO) issued a joint report, stating that national regulators should strengthen their review of the risks that stablecoins may pose to the financial system, and propose to each country’s regulations and regulations Recommendations: To determine whether a stablecoin is compliant, several factors can be considered, such as governance, risk management, and liquidity of fund settlement.

According to Jason Wincuinas, senior editor of The Economist:

“The regulation of the crypto market should have taken place long ago. As more and more institutions are attracted to decentralized finance (DeFi) and other native digital projects, the fate of these projects is intertwined with the fate of broader economic entities. Together. While stablecoins are the backbone of the crypto market, unclear regulation may destabilize stablecoins. Regulators should also value each stablecoin based on its value.” 

Stablecoins need to be transparent

Sherrod Brown, chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs mentioned at the beginning of this article, hopes that stablecoin issuers will provide all kinds of information as soon as possible and make the issuance of stablecoins as transparent as possible. This indicates that regulators may have taken the first place. step.

In a public letter sent to Circle, Brown expressed concerns about the lack of transparency of stablecoins and questioned their minting and redemption process.

According to the USDT survey report published by the research company Protos this month, the company spent several months cataloging and investigating every Tether-related USDT transaction from 2014 to October 31, 2021. , Across the eight blockchains it currently exists: Omni (Bitcoin), Liquid (Bitcoin), Ethereum, TRON, Bitcoin Cash, EOS, Solana and Algorand.

The survey results show that Tether has issued a total of 108.9 billion USD of USDT (does not represent the market value, some USDT has been recovered), provided 89.2% of the USDT issued to the “market maker”, and the trading fund and other companies received 8.5% , While individual investors accounted for only 2.3%. Among them, Alameda Research (parent company of FTX) and Cumberland Global (subsidiary of global financial trading giant DRW) are USDT’s largest market makers. These two companies have received at least US$60.3 billion in USDT, accounting for market makers. 55% provided. In addition, funds/companies such as Three Arrow Capital and Delchain are also the dominant force of USDT.

However, the Tether company is still opaque to the issuance process of stablecoins. No one knows exactly how Tether works or which companies’ commercial paper constitutes the reserve assets supporting USDT. Tether lent its USDT in the form of over-collateralized loans (BTC/ETH), but it has never officially disclosed how these operations work.

In fact, Tether has been trying its best to confuse the services it provides to the crypto industry in the past. Some rumors claim that Tether will issue a large amount of USDT at a discount. However, in the research, Protos did not find any clear evidence of USDT purchase discounts.

In summary, as far as Tether’s USDT is concerned, the clarity at the time of issuance has not been achieved. Perhaps this is why Brown wants stablecoin issuers to provide information as soon as possible.

Stablecoin duo caters to regulation

With the imminent regulation of stablecoins in various countries, the attitude of the stablecoin duo USDT and USDC is still very clear, that is, actively embracing regulation, but they have adopted completely different approaches.

After the release of the “Stablecoin Report” by the President’s Financial Markets Working Group, USDC issuer Circle took the lead in responding, announcing support for the proposal in the report, and believing that this move will promote the development of the crypto ecosystem, so Circle is upgrading USDC to adapt to banks , Payments and the fundamentals of capital markets. For example, with regard to the “deposited institution” proposed in the “Stablecoin Report”, although Circle has not yet applied to become a national chartered bank, if policy makers stipulate that only FDIC-insured banks can issue stablecoins, then the company will be the first Time to choose FDIC insurance to prepare for USDC.

In an interview with the media, Jeremy Allaire, CEO of Circle, said: “We support the “Stablecoin Report.” We believe this represents a significant progress in the development of the crypto industry. We hope this is a The process of working closely with regulatory agencies.”

At the same time, Tether is also determined to abandon the past, face the future, and support supervision. Tether received a $41 million fine from the Commodity Futures Trading Commission (CFTC) earlier this year. Recently, in order to comply with FATF’s encryption travel regulations, Tether has been testing new platforms Notabene and Shyft (creating a distributed, smart contract compliance system for encryption service providers).

Little thinking

Before policymakers work hard to understand stablecoins and introduce a clear regulatory framework, it is the last word for various stablecoin issuers to lead by example and set an example.

Finally, a quote from Saule Omarova, director of the U.S. Office of Currency Audit and a professor at Cornell University Law School, said: “Appropriately increase the supervision of encrypted assets and stablecoins. This [crypto revolution] will Benefit our already dysfunctional financial system”.

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