Bad times for stablecoins

Once again, our prediction comes true: financial regulators have rapidly increased the pressure on stablecoins. More so than cryptocurrencies in general, they view them as the main competitor to fiat money today.

On September 20, speaking to a Washington Post columnist (https://www.washingtonpost.com/washington-post-live/2021/09/21/path-forward-cryptocurrency-with-gary-gensler-us-securities-exchange- commission-chair /), chair of the US Securities and Exchange Commission (SEC) Gary Gensler talked in extremely negative terms about stablecoins. He promised to do everything possible to regulate this area of financial relations to the fullest extent.

According to the SEC chair, stablecoins “may have features of investment contracts”. He then noted: “Stablecoins are now almost like poker chips in a casino. We have a lot of casinos here in the Wild West, and the poker chips at the gaming tables are these stablecoins.”

Gensler also – and not for the first time – expressed confidence that most projects in the cryptocurrency market are actually issuing securities under the guise of tokens, thereby falling into the scope of SEC regulation. And the ones that are, for some reason, of no interest to the SEC will undoubtedly draw the attention of the Commodity Futures Trading Commission (CFTC), he said.

In reality, as usual, the issue comes down to power – here, we didn’t get anything new from Gensler. He once again stated that the tasks of his department include protecting investors and ensuring the stability of the financial system, which are impossible without the regulation of cryptocurrency platforms and their compliance with applicable laws. That is why the SEC promises to further tighten the screws on the cryptocurrency market. For this purpose, he will demand even greater powers for the SEC and CFTC from Congress. The SEC chairman believes that the current laws are not quite suitable for regulating modern financial instruments such as cryptocurrencies.

All this may sound like a broken record, but there were many related events taking place at the same time.

On September 17, we learned that the US Department of the Treasury was developing recommendations for stablecoin issuers, which would require guaranteeing clients the ability to withdraw money from digital stablecoins. The Treasury is currently studying the mechanism of processing transactions involving stablecoins and how they might be affected by market conditions. The US authorities may introduce even stricter rules for stablecoins if the Financial Stability Oversight Council identifies the economic threats they pose.

The attack on stablecoins is happening in Asia as well. Several Japanese officials have repeatedly declared that stablecoins as a type of fiat-tied cryptocurrency could harm the country’s financial ecosystem. Therefore, they say, there needs to be an active effort to regulate digital assets and put stablecoins under strict control. The Japanese Financial Services Agency (FSA) has recently even created a subdivision on digital currency regulation.

It probably comes as no surprise at this point that the People’s Bank of China has also expressed its concerns over the negative effect that stablecoins can have on the world’s financial system. The Deputy Governor of the bank, Fan Yifei, described stablecoins as “instruments of speculation” that could threaten global economic and public security. “The so-called stablecoins of some commercial organizations, especially global stablecoins, can present risks and challenges to the international monetary system, payment and settlement systems, etc.”, – he claimed.

Paul Krugman, the Nobel laureate in Economics, predicted the crisis of stablecoins in mid-September. In his mind, digital stablecoins are the modern version of free banking, when private banking organizations issue their own bills backed by real money. The economist remarked that this system was prone to crisis and foretold the same fate for stablecoins.

Okay, Krugman is a known crypto skeptic. But back in the middle of summer, US Federal Reserve chair Jerome Powell, speaking before the House of Representatives, called for the rules for working with bank deposits and mutual funds to be extended to stablecoins. According to Powell, stablecoins – unlike “traditional” cryptocurrencies – can become part of the “payment sphere”, but to do it, they would need a regulatory framework that does not yet exist in the United States.

It doesn’t take much analytical skill to see why governments are so concerned with controlling stablecoins: due to their convenience and versatility, they have become a real competitor to fiat money.

The numbers speak for themselves: market capitalization of the ten largest stablecoins in January was estimated at $ 30 billion, but over the past nine months, it has quadrupled, having exceeded $ 120 billion by September.

It was the same Powell who only a few months ago stated that “One of the strongest arguments in favor of a state digital currency is that you wouldn’t need stablecoins or cryptocurrencies if you had digital dollars.”

To sum up, it’s all about competition. And also – a kind of “jealousy” the advocates of public finance have for their freer and more practical alternatives.