Understanding the US regulatory attitude towards stablecoins in one article

Related Reading

Important Milestone: US Regulators Issue Stablecoin Guidance

Major U.S. regulators gather to discuss stablecoins next week

Yesterday (July 19), the Federal Reserve's ongoing research on central bank digital currencies (CBDCs) has expanded its scope to include stablecoins and explore whether they can be effectively regulated. Earlier news said that Yellen will convene the President's Financial Markets Working Group to discuss stablecoins from the 19th. The working group convened different regulatory agencies to evaluate the potential benefits and risks of stablecoins.

Discussions about stablecoins have heated up recently, with Federal Reserve Chairman Powell calling for stricter regulation of assets such as USDT. On July 15, Powell said that it has not yet been decided whether central bank digital currencies will do more good than harm. A more direct approach is to properly regulate stablecoins. The Fed hopes that Congress will support central bank digital currencies. "Our responsibility is to explore technical and policy issues and make informed recommendations on central bank digital currencies. Keep an open mind on the issue of central bank digital currencies."

Since the birth of Tether in 2015, stablecoins have come into everyone's attention. The real large-scale and widespread use of stablecoins began when the three major exchanges supported USDT in 2017. Tether claims that each USDT is backed by 1 US dollar, and each USDT can be redeemed through the Tether platform. Since then, more stablecoins such as GUSD, PAX, TUSD, and USDC, which are 1:1 exchangeable for US dollars, have appeared in the market one after another. Among them, GUSD and PAX are the first batch of stablecoins recognized by the government announced by the New York State Department of Financial Services in September 2018. However, USDT still has a monopoly position in the market due to its first move.

The US’s stance on stablecoins

The United States' attitude towards stablecoins has always been in a delicate state. In general, it is not opposed to them, and even supports their development. On the one hand, out of confidence in their own monetary system, most members of Congress believe that regulated stablecoins can serve as a new payment tool; on the other hand, to some extent, stablecoins can also help the US dollar penetrate into other countries and regions.

In the first half of last year, South America was hit hard by the new coronavirus. Due to the Trump administration's control over Venezuela's import and export markets, many anti-epidemic materials could not be delivered to medical staff. At that time, Airtm, a popular digital currency payment platform, emerged. This is a P2P digital currency service platform headquartered in Mexico. AirUSD is a token pegged to the US dollar on the platform. As long as the USDC received from the aid is transferred to the Airtm wallet, AirUSD will be generated and distributed to the medical staff's account. The received AirUSD can be traded freely without going through local banks in Venezuela. Today, Caracas, the capital of Venezuela, has formed a market economy based on the US dollar, and many merchants quote in US dollars.

Last September, the Office of the Comptroller of the Currency (OCC) of the U.S. Treasury Department stated in an explanatory letter that U.S. federally chartered banks and federal savings associations are allowed to hold reserves for stablecoin issuers, and provided banks with guidance on how to handle Tether, Gemini Dollar, USD Coin and other tokens pegged to fiat currencies. Kristin Smith, executive director of the Blockchain Association, believes that this move is an important step towards the widespread adoption of the "digital dollar" without the need for CBDC.

In January this year, the OCC announced on its official website that it would allow U.S. banks to use public blockchains and U.S. dollar stablecoins as settlement infrastructure in the U.S. financial system. This means that decentralized, unlicensed, open source, and Internet-based public blockchains can become the foundation of the U.S. financial system and the global economy, marking a new beginning for stablecoins and the entire cryptocurrency industry.

The stablecoin landscape is quietly changing

According to DAppTotal's stablecoin special data, by the end of 2017, USDT issuance had increased to 1 billion; after the "3.12" market crash, some people needed to withdraw funds for risk aversion, while others wanted to enter the market to buy at the bottom. The demand for deposits and withdrawals stimulated the issuance of USDT, and within a month, USDT issuance quickly rose to 7 billion; on January 1 this year, USDT's total market value was approximately US$21.11 billion, and as of April 12, its market value was approximately US$44.699 billion, which means that USDT has increased by 23.888 billion in three months, and its issuance has exceeded the total issuance in the previous seven years.

Since June, the issuance of USDT has remained unchanged at 64.25 billion, and as of today, there has been no additional issuance for 50 days. According to analysts and market participants, USDT has encountered two challenges: one is due to China's crackdown on cryptocurrencies and increasing regulatory pressure from around the world, and the other is that its more compliant competitor USDC is grabbing market share.

As early as 2019, the United States had "struck hard" against USDT. Due to the opacity of USDT, it has been widely used in financial crimes such as money laundering, and Tether officials have no effective third-party audit to prove that USDT is always 1:1 anchored to the US dollar. The arbitrary issuance of USDT has hidden huge risks in the market. In April 2019, New York Attorney General Letitia James announced that iFinex (Tether's parent company) and Tether were prohibited from conducting virtual currency activities that harm investors. This sanction temporarily dampened the market value and morale of USDT, but Tether did not escape. It issued an announcement on its official website stating that the New York State prosecutors were "maliciously writing content" and had no law enforcement power. They were only temporarily sealed and protected, and were working hard to take measures to remedy these funds. At the same time, Tether also admitted that only about 74% of USDT is currently supported by cash and short-term bonds. It said that USDT had modified its terms of service from "1:1 pegged to the US dollar" to "75% US dollar anchoring and 25% iFinex stock-secured loans" in March 2019.

Compared with USDT, the US authorities have a completely different attitude towards "obedient" stablecoins. GUSD and PAX are the first batch of stablecoins recognized by the government announced by the New York State Department of Financial Services in September 2018. Circle, the issuer of USDC, is the stablecoin issuer with the most compliance licenses. It has obtained the New York State BitLicense license and payment licenses in the UK and the EU. It was established in 2018 and is regularly audited and disclosed by Grant Thornton LLP, a top five accounting service company, to meet the requirements of regulators.

In the bull market in the first half of this year, the pattern of stablecoins seems to have changed. In the field of DeFi, USDC has surpassed USDT. In early July, Aave founder Stani Kulechov shared a picture on Twitter and said: "60% of DAI (crypto-native stablecoin) is supported by USDC"; Messari analyst Ryan Watkins listed data and said: "USDC is rapidly becoming the dominant stablecoin on Ethereum, and more than 50% of USDC (about 12.5 billion US dollars) supply has entered smart contracts." At the end of May, Circle said that it had completed a large-scale round of financing, raising $440 million, and then announced its listing plan. USDC may not be a qualified "decentralized" token, but it is obviously a good US dollar stablecoin.

CBDC vs. Stablecoins

From the perspective of "centralized supervision", no matter how well stablecoins perform, they are still "risky" tokens compared to CBDCs. In the context of countries developing central bank digital currencies (CBDCs), "threat theories" have also been heard in parliament, believing that other countries' digital RMB has challenged the dominant position of the US dollar in payments. How to find a new way out? This is a question that the Federal Reserve is exploring.

The conference starting on July 19 will be a turning point for whether the digital dollar will move towards CBDC or stablecoin. We have already obtained the following information:

According to Reuters, on June 28, Randal Quarles, Vice Chairman of Supervision of the Federal Reserve, said that any proposal to create a U.S. CBDC must clear a "high threshold" and he needs to be convinced that the potential benefits will outweigh the risks. "Before we get confused by new things, I think we need to conduct a careful critical analysis of the promise of CBDC." Quarles believes that the U.S. dollar is already "highly digital" and some of these problems can be better solved by other solutions, such as improving the use of low-cost bank accounts. We don't need to be afraid of stablecoins. The Federal Reserve has always supported responsible private sector innovation; Thomas Barkin, president of the Federal Bank of Richmond, has expressed similar doubts, "We already have a digital currency in this country called the U.S. dollar." They may not all be advocates of stablecoins, but to some extent they represent the view that it is not necessary to launch a CBDC.

Federal Reserve Governor Lael Brainard is an advocate of CBDC, asserting that leading CBDC projects could have "significant implications" for the global financial system. CBDC could provide the utility and benefits associated with existing dollar stablecoins without undermining government control over monetary policy. She said: "Unlike central bank fiat currencies, stablecoins do not have legal tender status, but there is a risk that widespread use of private currencies for consumer payments could fragment parts of the U.S. payment system, burdening households and businesses and raising costs."

Federal Reserve Chairman Jerome Powell appears to be more neutral. The Fed will release a research white paper on CBDC in September this year. Currently, the Federal Reserve's Boston branch is conducting research with MIT on technologies that can be used for digital currency. Powell still made it clear that the central bank will not be able to launch a digital currency without congressional action.

Previously, Powell said in a video speech in May: "The Fed's focus is to ensure a safe and efficient payment system that can bring broad benefits to American families and businesses while embracing innovation. 'Stablecoins' pegged to the US dollar or another fiat currency have become a new way of payment. While using new technologies, they have the potential to improve payment efficiency, speed up settlement processes, and reduce end-user costs." However, it was also mentioned: "Although the value of stablecoins may be pegged to the US dollar, they may not have the same protections as traditional payment methods (such as physical currency or deposits in bank accounts). Therefore, as the use of stablecoins increases, we must also pay attention to the appropriate regulatory and supervisory framework, including paying attention to private sector payment innovators, which are currently not covered by traditional regulatory arrangements applicable to banks, investment firms and other financial intermediaries."

Recently, Powell's attitude towards stablecoins may be more negative. On July 15, in his testimony at the Senate meeting, Powell stated: "Cryptocurrency has failed as a means of payment. Stablecoins are growing very fast and require 'proper regulation'."

There are also huge differences within the Federal Reserve over the choice between CBDC and US dollar stablecoins. Regardless of the outcome of this game, stablecoins have been legally embedded in the US financial system, and at most they will just embrace more local supervision. Discussions about this meeting will continue in the next few months, and Odaily Planet Daily will also keep an eye on and follow up.

Original article by Rilak. For reprint/content cooperation/coverage, please contact [email protected]; any illegal reprint will be prosecuted.