Ending the wild growth of stablecoins: Regulation is strengthened globally

As regulators around the world continue to assess risks and develop guidelines for the cryptocurrency industry, stablecoins have become a top priority.

Since the last bull market, stablecoins have developed rapidly as the crypto market value has soared. According to a survey on digital assets conducted by Deloitte among 2,000 senior executives of retail institutions in various industries across the United States, more than 85% of the executives surveyed said they attached great importance to "accepting cryptocurrency payments." Nearly 75% of the respondents said they plan to accept cryptocurrency or stablecoin payments in the next two years. More than 50% of the large retailers surveyed (with revenue of $500 million or more) have invested more than $1 million in "accepting digital asset payments" services. Among retailers that have already accepted digital asset payments, 93% said they have witnessed positive feedback from this move.

（Stablecoin Market Cap Ranking）

However, with the collapse of Terra, the world has paid more attention to the risk effects of stablecoins and started to discuss relevant rules and bills. At the same time, high inflation coupled with a potential global economic recession may promote the adoption of stablecoins pegged to the US dollar in emerging or developing markets, thereby accelerating the dollarization of these economies. The International Monetary Fund (IMF) also acknowledged that economic turmoil may lead to further dollarization of economies, especially the "digital version" of the US dollar, such as USDT or USDC, which are easily available worldwide.

IMF experts pointed out in a recent report that currencies issued by central banks of some economies, especially those that are considered less convenient to use or have volatile values, may be replaced by dollar stablecoins issued by multinational corporations or global banks or central bank digital currencies issued by major economies. Even volatile cryptocurrencies such as Bitcoin may be more popular than local currencies during economic turmoil. Against this background, the regulation of the stablecoin market is on the agenda.

United States: Stablecoin law may be introduced by the end of the year

In June this year, Fed Chairman Powell said that the time has come to regulate stablecoins and digital financial markets, and it is important to complete this as soon as possible. If there is a digital dollar, it needs to be issued by the Federal Reserve. The Federal Reserve should participate in the supervision of anything involving payment. We do not want privately issued stablecoins to become digital dollars. I don’t know if we need a digital dollar now.

In addition, Congress needs to clarify who has authority over cryptocurrencies and stablecoins, and the Federal Reserve is responsible for regulating and supervising banks, and the Federal Reserve should have a say in how banks regulated by the Federal Reserve handle crypto assets on their balance sheets. Powell also said that stablecoins are an emerging market and that the appropriate regulatory plans they need have not yet emerged. Stablecoins sound a lot like money market funds.

The U.S. federal government is working with Congress on stablecoin legislation that could become law by the end of the year, a U.S. government official said. The President's Working Group on Financial Markets met to discuss the recent stablecoin market and future legislation, which will be proposed by the House Financial Services Committee, and the way stablecoins are issued is another detail discussed by the participants, the official said. The official also said that regulators believe that legislation needs bipartisan support, and although they have not discussed legislation in the Senate, Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) has hinted that there may be a stablecoin law by the end of 2022.

Russia: Private stablecoins "carry higher risks" Believe in digital ruble

In July, local media reported that an unnamed representative of the Russian Central Bank refuted the statement made by Ivan Chebeskov, director of the financial policy department of the Russian Ministry of Finance, about the Russian stablecoin.

At the time, Chebeskov said the Ministry of Finance supports the creation of stablecoins pegged to assets such as "the ruble, gold, oil or grain." He called it "the right path to develop new technologies" and urged private companies to experiment with such financial instruments if necessary.

A spokesperson for the Russian Central Bank said that private stablecoins "carry a higher risk" because the underlying asset pool does not belong to the issuer. They also believe that the issuer cannot guarantee redemption at face value and the price of stablecoins is not truly stable. The representative pointed out that the ruble is still the only legal payment method in the country and said that they believe in the digital ruble because it combines all the advantages of digital payments and the reliability of the national currency.

ECB: Urgently strengthen supervision of stablecoins

The ECB said that stablecoins must be urgently regulated before they pose a risk to financial stability. In a macroprudential bulletin released by the ECB, it said that the financial stability risks posed by stablecoins are still limited in the euro area, but this may change in the future if the growth trend continues at its current pace. Since some stablecoins already play a key role in providing liquidity to the cryptocurrency market, if major stablecoins collapse, there could be significant spillover effects. The ECB warned that if the links between digital assets and the traditional financial system continue to expand, a domino effect will occur.

European Commission: Considering restrictions on stablecoin issuance

The European Commission is considering strict restrictions on the ability of stablecoins to replace the widespread use of fiat currencies, according to a document. EU finance ministers have proposed tough measures aimed at preventing stablecoins from replacing the euro and would halt their issuance if daily trading volume exceeds 1 million or the transaction value exceeds 200 million euros. The document is marked as "non-paper document", meaning it does not reflect the official position of the Commission. EU lawmakers and governments are trying to finalize a landmark cryptocurrency law, the Regulation of Markets in Crypto-Assets (MiCA), with the Commission set to hold closed-door negotiations at a later stage.

EU and US exchange policy insights on stablecoins

The EU and the US exchanged crypto policy insights on stablecoins and other issues at a joint financial forum held in Brussels in July. Participants discussed the EU's new Regulated Markets in Crypto-Assets (MiCA) agreement finalized in late June. The US also shared policy updates on the country's work around stablecoins and other digital assets. Participants "reviewed discussions on the development of potential central bank digital currencies." EU participants included representatives from the European Commission and the European Banking Authority, among others. Officials and staff from the US side came from agencies such as the US Treasury Department and the Board of Governors of the Federal Reserve, the US Commodity Futures Trading Commission, and the US Securities and Exchange Commission.

UK: Financial bill including stablecoin rules submitted

British Chancellor of the Exchequer Nadhim Zahawi said that the UK financial regulator will have to improve the global competitiveness of the country's financial industry, even though the government has shelved a plan to strengthen government oversight of its work. Zahawi confirmed that the long-awaited Financial Services and Markets Bill will be submitted to Parliament to "take advantage of Brexit and transform the UK financial services industry." It is reported that the bill combats financial fraud, ensures that vulnerable groups and rural areas have access to cash, and introduces rules for using stablecoins (a type of crypto asset) for payments.

Earlier, CNBC pointed out that the British government is ready to take further action on stablecoins after the collapse of UST. The government has made it clear that some stablecoins are not suitable for payment purposes because they share common characteristics with unbacked crypto assets. The government is planning to include stablecoins in the scope of electronic payment regulation, which means that issuers like Tether and Circle may be regulated by the UK Financial Conduct Authority (FCA).

South Korea: Developing regulatory plans for stablecoins and DeFi

At an emergency meeting of the ruling party and government in South Korea regarding the collapse of Luna and Terra USD (UST), the country's Financial Services Commission said it would develop a regulatory plan for stablecoins and DeFi. In addition, the Financial Services Commission of South Korea said that the system of laws for the issuance and circulation of virtual assets will be divided into securities and non-securities to establish a regulatory system based on the economic substance of virtual assets. In order to ensure that security coins can be issued in accordance with the capital market legal regulatory system and provide protection for investors, market conditions will be created and a regulatory system will be established, using the financial regulatory sandbox if necessary. In the case of non-security tokens, it was decided to prepare regulatory systems such as issuance, listing and prevention of unfair trade through the discussion of pending bills in the National Assembly. In addition, the agency plans to develop protective measures such as the introduction of an insurance system against hackers and system errors, and the recovery of profits from unfair trade.

In addition, the Bank of Korea released a financial stability report titled "Recent Trends and Risk Factors in the Crypto Asset Market," saying that investor losses related to crypto assets may expand, and crypto assets have plummeted 40% this year. The report specifically pointed out that crypto asset risks may be transferred to financial markets due to the decline in trust in stablecoins caused by the Luna-Terra incident. The Bank of Korea is worried that the high price volatility of crypto assets may expand investor losses. In South Korea, investors are likely to suffer additional losses because so-called "altcoins" have a high proportion of investments in other crypto assets, which are more volatile than Bitcoin or Ethereum. The Bank of Korea stressed the need to continuously monitor the impact of crypto assets on financial stability by expanding the scope of use of crypto assets and expanding contact points with financial markets, and to establish a regulatory system as soon as possible to protect investors.

G20: Strict supervision of various crypto assets such as stablecoins

According to the official website of the People's Bank of China, from July 15 to 16, 2022, Indonesia, the rotating chair of the Group of Twenty (G20), hosted the third G20 Finance Ministers and Central Bank Governors Meeting this year in Bali in a combination of online and offline methods. Yi Gang, Governor of the People's Bank of China, attended the meeting and delivered a speech via video link, accompanied by Deputy Governor Chen Yulu. All parties supported the continued implementation of the G20 Cross-Border Payments Roadmap, agreed to strengthen cross-border coordination, and strictly regulate various types of crypto assets such as stablecoins. Yi Gang said that the People's Bank of China will continue to take the lead in formulating a transitional financial policy framework and work with all parties to promote the implementation of the G20 Sustainable Finance Roadmap and play an important role in supporting carbon peak and carbon neutrality.

Japan: Stablecoins must be pegged to the yen or other fiat currencies

The Japanese parliament has passed a bill clarifying the legal status of stablecoins, defining them as essentially digital currencies. Under the new law, stablecoins must be pegged to the yen or other fiat currencies and guarantee holders the right to redeem them at par. With this, Japan has become one of the first major economies to introduce a legal framework around stablecoins. This legal definition actually means that stablecoins can only be issued by licensed banks, registered transfer agents and trust companies, focusing on investor protection. The bill does not cover stablecoins issued by overseas issuers such as Tether or algorithmic stablecoins. It is reported that no crypto exchanges in Japan have launched stablecoins. The new legal framework will take effect within a year. The Financial Services Agency of Japan said it will introduce regulations to manage stablecoin issuers in the coming months.

Brazil: Private banks in the country will be allowed to issue their own stablecoins

According to a statement by Roberto Campos Neto, president of the Central Bank of Brazil, the Brazilian Central Bank Digital Currency (CBDC) will be more like a wholesale asset than a retail-focused public token. Campos Neto said that the country's private banks will be allowed to issue their own stablecoins on the basis of their own deposits, and will develop a technology for this, which they will have to invest in because they can earn returns from it. And once they develop this technology, the protocol for issuing stablecoins on deposits will be basically the same as the monetization of various other digital assets. In addition, Campos Neto explained that the digital physical will have a very unique focus, with the goal of monetizing assets and using them as collateral without compromising the credit function of private banks.

The direction of stablecoin regulation

Zhou Maohua, a macro researcher at the Financial Markets Department of Everbright Bank, believes that in the future, my country will have to speed up the process of filling regulatory gaps, introduce targeted regulatory measures for stablecoin risks, further reduce the space for virtual currency speculation, illegal financial activities and related illegal and criminal activities, and better protect the property safety of the people. Due to differences in regulatory policies on virtual currencies among countries, virtual currencies can easily become a channel for illegal cross-border transfer of assets. Next, regulators in various countries should strive to formulate global common rules, strengthen cross-border supervision, and prevent virtual currencies from becoming a tool for money laundering, fraud, and illegal fundraising.

Varun Paul, former head of fintech at the Bank of England and director of CBDC and market infrastructure at Fireblocks, said that CBDC will become the core of the broader stablecoin ecosystem in the future, with other crypto assets used for other transactions and central bank digital currency networks, which will support the value of stablecoins in the future ecosystem, for example. According to the Bank for International Settlements, more than half of central banks are now developing CBDCs or conducting specific experiments. Paul said that many central banks are realizing the importance of having "a central trusted form of digital currency" in addition to private stablecoins.

CFTC Commissioner Caroline Pham said that due to the unclear jurisdiction of different federal regulators over cryptocurrencies, US regulators have failed to protect individual investors. Open discussions between different regulators are key to resolving uncertainty. With the revision of the stablecoin regulatory framework, Pham said that regulators and central banks will need to play a greater role in the future of stablecoins and cryptocurrencies, and educating the public is also key. She also believes that regulators need to evaluate the technical potential that stablecoins may have.