Will the United States turn the issuer of stablecoins into high-tech banks?

Since 2019, the crypto industry segment that regulators around the world pay the most attention to is stablecoins and the related risks derived from stablecoins.

Recently, this concern has intensified, especially in the United States.

In November 2021, the US President’s Financial Markets Working Group (PWG) issued an important report that questioned the possibility of “stable currency runs” and “payment system risks”. In December, the U.S. Senate followed up and held a hearing on the risks caused by stablecoins.

At the hearing, a question was raised: Will US regulators supervise stablecoins in 2022? If the answer is yes, is it regulated through “broad” federal legislation or more detailed Treasury regulations? In addition, what impact will this regulation have on non-bank stablecoin issuers and the entire crypto industry? Will it prompt the issuers of stablecoins to become more like high-tech banks?   

Douglas Landy, partner of White & Case, said:

“We are basically certain to see the federal government regulate stablecoins in 2022.”

Rohan Grey, assistant professor at Willamette University School of Law, also expressed the same view:

“Indeed, stablecoin regulation is coming soon. This will bring a dual impetus. On the one hand, it will comprehensively promote federal legislation. On the other hand, it will force the Ministry of Finance and the relevant agencies of the federal government to become more active.”

However, there are other people who say that the pace of regulation will not go so fast. Encryption monetary analysis company Chainalysis policy , head of Salman Banaei said:

“I don’t think it is possible to legislate until at least 2023. Therefore, the regulatory cloud over the stablecoin market will remain with us for some time.”

In other words, Salman Banaei predicts that the hearings and draft bills to be held in 2022 are only “preparation for the fruitful results that may be achieved in 2023.”

Crypto assets are heating up

Most people agree that the pressure from regulation is increasing-and this is not just happening in the United States. Rohan Grey stated:

“Other countries are responding in the same way.” The fuse was the Libra project (now Diem) proposed by Facebook in 2019,  through which Facebook announced that it would develop its own global currency-this to policy makers A wake-up call was sounded-they made it clear that they cannot stand idly by, even if the encryption industry is just “a small, somewhat novel industry”, it will not bring “systematic risks.”

Salman Banaei believes that three key factors are now pushing the regulation of stablecoins forward.

The first is the issue of reserve guarantees . This issue has actually been clarified in the report of the US Financial Stability Supervisory Board. According to Salman Banaei, some stablecoin issuers will provide misleading analysis data about the holder’s assets in the announcement, which may cause these digital asset holders to suddenly realize that due to repricing and potential runs It will cause the assets held by the issuer of the stable currency to depreciate seriously.

The second problem is that stablecoins are encouraging some speculative behavior , including the development of dangerous unregulated ecosystems, such as DeFi applications that are not yet subject to regulations like other digital assets . 

The third question is “stable currency is likely to become a standard payment of legitimate contenders network” , a stable currency issuer is likely to one day be given a “widely scalable payment solutions,” which will be on tradition Payment systems and banking service providers have caused a big blow.

Regarding Salman Banaei’s second point, Hilary Allen, a law professor at the American University, told the Senate in December last year that stablecoins are not used to pay for goods and services in the real world as some people believe. The purpose is to support the DeFi ecosystem, which is actually a fragile shadow banking system that may disrupt our real economy. 

Rohan Grey added:

“As the crypto industry grows, stablecoins have become more and more important, but the compliance development of stablecoins has been hindered.” 

In fact, in the past year, the reserve assets of stablecoin industry leader Tether ( USDT ) have been pointed out as having serious problems. Later, those issuers who appeared to be compliant and well-intentioned were also found to be misleading in terms of asset reserves. For example, Circle , the main issuer of USD Coin ( USDC ),  once claimed that its stable currency is “backed by cash assets at a ratio of 1:1.” As a result, the New York Times discovered and pointed out that 40% of Circle’s anchored assets are actually The above is composed of U.S. Treasury bonds, deposits, commercial paper, corporate bonds, and municipal debt.

Rohan Grey continued:

“In the past three months, public hype has reached a new level. This includes celebrities ‘ propaganda of encrypted assets and non-fungible tokens ( NFT ). All of this has further forced regulators to keep up with the times. Advance.

Will the US Financial Stability Supervisory Board be responsible for overseeing stablecoins?

Davis Polk & Wardwell LLP partner Jai Massari said:

“For the legislation or regulation of stablecoins at the entire federal level, 2022 may be too early. On the one hand, this year is the midterm election year in the United States. I think we will see the emergence of many proposals. Such proposals are very important for the formation of early supervision of stablecoins.” 

If the US federal legislation has not yet been formed, then the US Financial Stability Supervisory Board may take action against stablecoins in 2022, and other regulatory agencies may also participate, including the US Securities and Exchange Commission, the US Commodity Futures Trading Commission, and the US Currency Supervisor Agency, Federal Deposit Insurance Corporation (FDIC), etc. In this case, non-bank stablecoin issuers may be subject to three constraints: liquidity requirements, customer protection requirements, and asset reserve rules, and they must be at least regulated like money market funds. 

Salman Banaei predicts that the U.S. Department of the Treasury will actively monitor the stablecoin market in 2022. At the same time, he also believes that the U.S. Financial Stability Supervision Commission “may intervene in the stablecoin market but may not necessarily do so.”

Can a stablecoin issuer become a “deposit institution” with deposit insurance?

For the stablecoin industry, what really allows people to see “progress” may be to make the issuer of Stablecoin become a “deposit institution” with deposit insurance, which is also recommended in the Stablecoin report of the US President’s Financial Market Working Group . At present, American lawmakers have begun to call for similar measures in some proposals. For example, Rohan Grey helped write the “2020 Stable Act” that mentioned related issues.

Jai Massari believes that imposing such restrictions on stablecoin issuers is unnecessary (nor desirable). In testimony to the U.S. Senate Banking, Housing and Urban Affairs Committee, she emphasized that “real stablecoins” are actually “narrow banks”. A form of “, which can even be traced back to the financial concept of the 1930s, Stablecoin “does not perform maturity and liquidity conversion-that is, using short-term deposits for long-term loans and investments .” Therefore, stablecoins are inherently safer than traditional banks . Added explanation:

“One of the most important capabilities of traditional banks is that they can absorb deposits, not just invest in short-term liquid assets. They can use the funds for 30-year mortgages or credit card loans and corporate debt investments. And that’s all. There are risks.”

This is why traditional commercial banks need to evaluate domestic deposits first before purchasing insurance from the Federal Deposit Insurance Corporation (such as deposit insurance). However, if stablecoins limit their reserve assets to cash or real cash equivalents, such as bank deposits and short-term US government bonds, they can be said to have avoided “operational” risks and do not require deposit insurance.

But there is no doubt that the US fiscal authorities are still worried about a potential stable currency run. The U.S. Financial Stability Supervisory Board once again mentioned in the 2021 Annual Report released in December last year:

“If the stablecoin issuer does not honor redemption requests, or if users lose confidence in the ability of the stablecoin issuer to honor such requests, a run may occur, which will cause both users and the broader financial system harm.”

Douglas Landy commented:

“The problem of deposit runs rarely occurs in the traditional financial sector, because banks have been supervised, so there are no liquidity, reserves, capital requirements and other issues, all of which have been resolved, but this is not the case with stable currencies.”

Salman Banaei said:

“I think if the stablecoin issuer must be an insured depository institution (IDI), then there are both positive and negative aspects. For example, IDI can issue stablecoin wallets protected by the Federal Deposit Insurance Corporation . On the other hand, Fintech innovators will have to cooperate with IDI so that IDI and its regulators can effectively become the gatekeepers of stablecoin and related service innovation.”

Rohan Grey believes that deposit insurance regulations will be introduced soon, adding:

“The Biden administration 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 to this view. These countries recognize that this is not only a credit risk, but also has Operational risk. Because stablecoins are actually a lot of computer code, which is quite error-prone, and there may also be technical errors. Regulators do not want consumers to be harmed.”

What will happen next?

Looking to the future, Rohan Grey believes that the stablecoin ecosystem should undergo a series of integrations. He suggested that the central bank’s digital currency (some countries have started to start) should adopt a two-tier structure, in which the “retail tier” seems to be the same Stablecoins are very similar. Secondly, he believes that some stablecoin issuers like Circle should obtain federal bank licenses. Eventually, these companies will transform into a kind of “high-tech bank”, the difference between traditional banks and financial technology companies. It will get smaller and smaller.

There is also a situation where stablecoins and traditional banks are gradually merging with each other. As traditional banks and crypto companies get closer and closer, they may adopt some technologies and solutions in the crypto industry. In the future, managers of established banks may no longer talk about deposits-but will talk about pledged stablecoins.

However, Douglas Landy does not seem to agree with Rohan Grey’s point of view. He explained:

“The regulatory community hates the term stablecoin. If stablecoins are regulated by the US government regulators, this name may be abandoned. Why? So this name implies something that stablecoins do not have. In the eyes of regulators and policymakers , These digital coins linked to fiat currencies are by no means’stable’, they think this may mislead consumers.”

DeFi, algorithmic stable currency and other issues

In fact, there are many other problems in the crypto market that need to be resolved.

Davis Polk & Wardwell LLP partner Jai Massari said:

 “In the DeFi industry, how to use stablecoins is still a big problem, although banning stablecoins will not hinder the normal development of DeFi. On the other hand, there is also the problem of algorithmic stablecoins-this kind of stablecoin is not affected by legal currencies or commodities. Support, but rely on complex algorithms to maintain price stability, so what can regulators do with them?

Rohan Grey believes that algorithmic stablecoins are “more risky” than those supported by fiat currencies. However, according to the stablecoin report made by the President’s Financial Markets Working Group, this problem is not clearly pointed out. The existence of such a “legacy problem” may be related to the fact that the current algorithmic stable currency is not widely accepted.

Overall, there are still many gaps in the regulation of the stablecoin industry. In addition, if the policy formulated by the regulator is too strict, it may affect and restrict the development of new technologies. Salman Banaei, Head of Policy Research at Chainalysis, concluded:

“I think there is a risk of over-regulation, especially considering that China is about to launch a central bank digital currency, and the digital renminbi may become a scalable global payment network, and may occupy a significant market share in the future payment network. The United States. Policymakers should consider these issues. The United States and other regulatory agencies should treat the development of stablecoins cautiously and ensure that they do not overemphasize competition priorities and wipe out the innovation space of innovators. Promoting innovation is the key to our success. , We should be careful to maintain the development of digital assets.”

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/will-the-united-states-turn-the-issuer-of-stablecoins-into-high-tech-banks/
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