Stablecoins are a widely-used digital asset that is pegged (or directly connected) to a traditional asset such as a currency like the U.S. dollar or a commodity like gold. This unique type of cryptocurrency, with a $130 billion market value, is used by investors to buy and sell other digital assets, or as a secure place to hold wealth. That’s because they are seen as much more “stable” than their crypto cousins.
Cryptocurrencies like Bitcoin or Ethereum do not carry a promise for future value. Their price is determined purely by market forces based on supply and demand. The price of a stablecoin, on the other hand is pegged to a real asset of value, so it then carries with it a promise of value – identical to the asset it is pegged to. For example, USDC’s value, is always supposed to be $1.
Stablecoins are essentially a bridge between cryptocurrencies that do not appear as a traded pair. They are also used for cash transactions between crypto businesses, and as a way to hold on to cryptocurrencies without the same risk of volatility. These versatile assets also play a significant role in many DeFi transactions.
In other words, stablecoins are to the crypto world as real money became to the old-world style of bartering. They are the grease that smooths the machine’s operations.
Can a Stablecoin’s Promise of Value be Trusted?
There are multiple types of stablecoins. For example, tether (USDT) is run by Tether Limited, which is controlled by the Hong Kong exchange Bitfinex. USD Coin (USDC) is run by a consortium started by the payment company Circle, while the coin Binance USD (BUSD) is controlled by the exchange Binance.
But, with all of these various players in the stablecoin market (large and lucrative ones at that), who is making sure that the issuer of each stablecoin is doing what they need to do to support that promise of stability? Right now – no one does, so there is no way to know for sure what these companies are actually holding and whether it is enough to guarantee the stability of the coin.
For this reason, more and more regulators are taking notice and voicing concerns.
The Watchdogs are Starting to Watch
According to the President’s Working Group on Financial Markets, which includes several top economic advisors to President Joe Biden, stablecoins could “support faster, more efficient, and more inclusive payments options. Moreover, the transition to broader use of stablecoins as a means of payment could occur rapidly due to network effects or relationships between stablecoins and existing user bases or platforms.”
This positive outlook on ongoing uses and future benefits is absolutely true, but only if stablecoins are regulated.
The working group is composed of Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell, Securities and Exchange Commission Chair Gary Gensler and Acting Commodity Futures Trading Commission Chair Rostin Behnam. Each of these individuals could designate a representative to participate in the group.
While this group understands the need for stablecoins in a growing crypto ecosystem, they also made it crystal clear that these assets would need to be regulated. In fact, in a report released on Monday, Nov.1. the President’s Working Group on Financial Markets urged lawmakers to subject stablecoin issuers to the same strict federal oversight as banks. They also added that Congress should also require custodial wallet providers to be regulated by a federal agency and limit stablecoin issuers’ interactions with non-financial companies such as tech or telecom providers.
And then they dropped the mic: If Congress fails to pass such laws, the regulatory agencies have the authority to take their own measures.
What Happens Now?
Per the report from the President’s Working Group on Financial Markets, it is preferred if Congress is the one to take action. Unfortunately, we all know the challenges with that course of action. Therefore, it’s very likely that U.S. regulators will take the bull by the horns and begin making decisions about stablecoin oversight.
But which regulators will step up? Given the SEC Chairman Gary Gensler’s track record and statements made regarding stablecoins and DeFi over the last few months, my bet is on the SEC. Gensler and the SEC’s regulatory decision-making regarding the stablecoin with definitely impact the crypto market and the entire DeFi ecosystem, but how and how much greatly depends on the approach taken.
If we’ve learned anything about Gary Gensler over the past few months, it’s that we know he has a deep understanding of the crypto ecosystem and we can assume that he’ll take a reasonable approach to regulatory oversight – even if we can’t predict how the market will react. My hope is that this regulatory action will provide the clarity the industry is craving.