Embracing or banning stablecoin regulation is a difficult question

Source: Securities Times

Reporter: Wang Junhui

Tuchong Creative/Photo provided by Wu Hebi/Drawing

Editor's note: With the widespread promotion of digital RMB, the imagination of digital currency is moving closer to reality. Central bank digital currency, private sector digital currency, and global stable currency are competing. How can they serve social and economic development better on different tracks? How can they serve policy goals and meet financial regulatory requirements? Starting today, Securities Times will launch the "Digital Currency Observation" column to discuss the issue of digital currency.

As a form of cryptocurrency, stablecoins have unique functions and values ​​in the digital currency market due to their characteristics of anchoring to legal tender and stable value. In recent years, with the development of the cryptocurrency market, the issuance of stablecoins has also accelerated. The total market value of mainstream stablecoins such as USDT and USDC pegged to the US dollar has exceeded US$100 billion. Companies such as Facebook and VISA plan to launch related stablecoins, which has aroused concerns from regulators.

On July 19, several regulatory agencies in the United States jointly discussed the issue of stablecoin regulation. The white paper recently released by the People's Bank of China also pointed out the risks of stablecoins. The Group of Twenty (G20) Finance Ministers and Central Bank Governors Meeting has also discussed the development and regulation of stablecoins many times. At present, there is still no mature plan for the regulation of stablecoins. Embrace or ban? Assets or currencies? These basic issues are still controversial.

What is a stablecoin?

The so-called stablecoin refers to an asset that is anchored to legal currencies such as the US dollar or other stable values. Currently, there are many types of stablecoins, including fiat-collateralized stablecoins, such as the most famous stablecoins USDT, USDC, BUSD, etc., digital asset-collateralized stablecoins, algorithmic uncollateralized/partially collateralized stablecoins, etc.

Take USDT as an example. It is a token launched by Tether and pegged to the US dollar. 1 USDT = 1 US dollar. Users can use USDT to exchange with the US dollar at a 1:1 ratio at any time. There are also stablecoins pegged to other currencies, such as BitCNY, which is pegged to the RMB at a 1:1 ratio.

Stablecoins are mainly used in the field of cryptocurrency and are a bridge between the real world and the crypto world. Cryptocurrency prices fluctuate greatly, and stablecoins serve as a value scale. In the process of market decline, they also have a hedging function.

With the development of the cryptocurrency market in recent years, the issuance of stablecoins has also accelerated. The rapid growth of the market value of US dollar stablecoins in the past year has caused concern among US regulators. At present, the total market value of mainstream stablecoins such as USDT and USDC pegged to the US dollar has exceeded 100 billion US dollars. Earlier this year, Visa said it would begin supporting the use of USDC, a stablecoin backed by the US dollar, for payments on its network. In 2019, Facebook's proposed Libra is also a stablecoin.

Such a huge issuance scale, but in a regulatory vacuum, insufficient reserves, and unlimited issuance are the stains that have long been questioned by stablecoins. Although Tether, the issuer of USDT, has long claimed that it has sufficient reserves to redeem USDT circulating in the market, it is actually difficult for the outside world to verify its authenticity, and it is often involved in vicious issuance scandals. Therefore, the market also calls for effective regulatory intervention to ensure the safety of holders and is conducive to the healthy development of stablecoins.

Hu Jie, professor of practice at the Shanghai Advanced Institute of Finance and former senior economist at the Federal Reserve, told the Securities Times reporter that stablecoins issued on global public chains have certain uses and advantages, and are simple and practical. First, the issuance process is very simple; second, because it is relatively convenient to open an account on the public chain, the use of legal tender can be expanded to places that have not been covered before; in addition, stablecoins are of certain significance to the healthy development of blockchain. Assets circulated on the blockchain, represented by tokens, are valued in legal tender, but if legal tender is not expressed as tokens, it will bring many technical problems. Stablecoins are a kind of legal tender tokenization, and this form should be allowed to exist.

"The term 'issuing coins' in the blockchain field is rather general. In fact, what is issued is a token, which may represent equity, bonds or other rights and interests, and is not necessarily related to currency," Hu Jie explained.

Stablecoins raise red flags

From the initial doubts about USDT's underlying assets to the hearings on Libra, global regulators have always been reserved and skeptical about stablecoins.

On July 19, U.S. Treasury Secretary Janet Yellen convened the Presidential Working Group on Financial Markets (PWG), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation to discuss stablecoins. At the meeting, participants discussed the rapid growth of stablecoins, their potential use as a means of payment, and potential risks to end users, the financial system, and national security. Yellen emphasized at the meeting that regulators must act quickly to ensure that the United States has an appropriate regulatory framework.

The white paper recently released by the People's Bank of China mentioned that cryptocurrencies such as Bitcoin, especially global stablecoins, are developing rapidly. Cryptocurrencies are mostly used for speculation, which poses a potential risk to financial security and social stability, and have become a payment tool for illegal economic activities such as money laundering. Some commercial institutions plan to launch global stablecoins, which will bring many risks and challenges to the international monetary system, payment and settlement system, monetary policy, and cross-border capital flow management.

The G20 Finance Ministers and Central Bank Governors Meeting has also discussed the development and regulation of stablecoins on many occasions. At the G20 Finance Ministers and Central Bank Governors Meeting held in early July, all parties agreed to implement the G20 roadmap for improving the cross-border payment system, look forward to discussing issues related to central bank digital currencies, and emphasize that global stablecoins must comply with relevant legal and regulatory requirements. The G20 previously announced a roadmap to complete the setting of international standards by December 2021. Countries need to establish standards by July 2022 and then re-evaluate after one year.

What is the impact of stablecoins?

Regarding the impact of stablecoins, Chen Yulu, deputy governor of the central bank, once said that global stablecoins would impact a country's monetary sovereignty. Stablecoins have a huge potential user base and may be systemically important in individual jurisdictions, replacing existing currencies nationwide or even globally. Stablecoins pose a greater threat to weaker currencies. The international use of stablecoins that are anchored or mainly anchored to the US dollar may further enhance the dominant position of the US dollar in the international monetary system and curb the development of a multipolar international monetary system, including the internationalization of the RMB.

Yin Zhentao, director of the Financial Technology Research Office of the Institute of Finance of the Chinese Academy of Social Sciences, told a Securities Times reporter that compared with other virtual currencies such as Bitcoin, the price of stablecoins is more stable; because they are anchored to legal currency, the price has a certain guarantee, but this is only a superficial phenomenon. The essence of this type of stablecoin issued by the private sector is unchanged, and its operating mechanism is relatively unstable, and it is subject to more shocks and external interference.

Yin Zhentao said that the issuance of a currency is very important to be transmitted to the financial market through the multiplier effect of the financial system and monetary policy. However, the so-called stablecoin is not issued by the central bank and cannot enter the real economy through the financial system, and cannot produce effects such as inflation. But if it is accepted by financial institutions, or more real economies begin to accept it, it may have an impact because it circulates in the financial structure.

"Although this form of digital currency is anchored to a country's currency, it is built outside the traditional financial system and is currently small in scale, so it has not yet had an impact on the financial market and various terminals. But this is based on the premise that its scope of use is very small. If left unchecked, risks will definitely arise, but this risk is not entirely aimed at the financial system. At present, the more important risk is the risk to investors and users." Yin Zhentao said.

Pan Chao, former head of the China region of the stablecoin Maker Foundation, told a Securities Times reporter that from the perspective of cross-border capital flows, there is no impact on strong currencies such as the US dollar. Generally, the currencies that are affected are those of some small countries whose currencies are unstable themselves. If a large amount of stablecoins flow in, they may be forced to dollarize.

How to regulate stablecoins

There is still no mature solution for the regulation of stablecoins. Embrace or ban? Assets or currencies? These basic questions are still controversial.

On June 10, the Basel Committee (BCBS) released a consultation document entitled "Prudent Treatment of Exposures to Crypto-Assets", which incorporated the exposure of banking financial institutions to crypto-assets into the regulatory framework of the Basel Accord and proposed that the capital treatment of stablecoins be consistent with assets such as stocks and bonds.

Hu Jie said that the anonymity of stablecoins may bring problems in anti-money laundering, anti-terrorism, and anti-tax evasion, but this is not unsolvable. Cash is anonymous, with an amount of 8.5 trillion yuan, accounting for 3.7% of the 230 trillion broad money. The regulatory ability of stablecoins is far greater than that of cash. According to relevant sources, the KYC (customer identification) of stablecoins is improving rapidly. This includes two aspects: First, if an individual opens an account through an institution, the relevant country will encourage the service agency to provide the user's KYC information. On the other hand, for stablecoin users who have not done KYC, the comprehensive application of various technical means can increase user recognition to more than 95%.

Hu Jie believes that there is currently no complete regulatory plan for stablecoins, but stablecoins should be embraced. This is also a new form of cross-border payment. It is even possible to consider expressing part of the offshore RMB in stablecoins, which will not only help the internationalization of the RMB, but also help ensure the security of China's international payment system.

Pan Chao believes that stablecoins pegged to the US dollar are essentially equivalent to an offshore US dollar market. By using blockchain technology, they can be freely circulated and cannot be tampered with. However, the current public chain infrastructure does not have an account system designed around supervision.

Pan Chao analyzed that stablecoins are, to some extent, a form of credit expansion. The Basel Committee recently proposed multi-dimensional supervision such as minimum capital requirements based on the category of reserve assets. The focus of regulatory discussions now is on the risk exposure of stablecoin asset reserves. Previous discussions may have focused on anti-money laundering, black production and other fields. Judging from the Fed’s recent statement, it is more concerned with financial stability.

Regarding the regulation of stablecoins, Pan Chao suggested that accelerating the promotion of the digital RMB can make related transactions more traceable and safer.