Major Stablecoin Debacle. Part 2

    23 May 2022

    This past week will surely go down in the history of cryptocurrencies as the point that marked a major shift in attitudes towards stablecoins. On the one hand, it became clear that algorithmic stablecoins did not live up to expectations. On the other, authorities all across the world got a reason to regulate this segment of crypto business into oblivion.

    I cannot predict how the fate of stablecoins in general and algorithmic stablecoins in particular as an asset class will unfold. A safe bet, though, would be that in the next six months, financial regulators in the world’s most developed countries will do a purge of stable cryptocoin issuers. Proving my point, in the wake of the UST rate decoupling from the dollar, the US Treasury Secretary has already called for the passage of a stablecoin law.

    Secretary Janet Yellen pushed for regulation of this specific crypto market segment during her annual speech before the Senate Banking Committee, at the exact time the algorithmic stablecoin Terra UST was struggling to maintain its US dollar peg.

    New products and technologies may present opportunities to promote innovation and increase efficiencies, Yellen claimed. However, digital assets may pose risks to the financial system, and increased and coordinated regulatory attention is necessary”.

    While answering questions from Senators Pat Toomey and Catherine Cortez Masto, Yellen said it would be “highly appropriate” to have stablecoin regulation by the end of 2022 due to “many risks” associated with cryptocurrencies.

    “We really need a consistent federal framework,” Yellen remarked. “I really look forward to working with members of Congress to devise legislation that would accomplish that.”

    Unsurprisingly, the Treasury Secretary took advantage of the growing concerns about the reliability of certain stable tokens. “A stablecoin known as TerraUSD experienced an attack and declined in value,” she noted. “I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks.” Her statement demonstrated unanimity among the US financial authorities, essentially repeating the May 9 US Federal Reserve report that read: “The stablecoin sector continued to grow rapidly and remains exposed to liquidity risks.”

    Now, according to Yellen, the US Treasury plans to publish its own report on cryptocurrencies and stablecoins, as well as to develop relevant legislation for those assets by the end of 2022.

    It should be mentioned here that the issuers of stablecoins are to some extent shielded by the US Constitution, which includes protections for businesses against regulatory crackdowns. If the issuing company does not mislead customers and faithfully pays taxes, it can be very difficult to restrict its operations – especially considering we are talking about a fairly large business, even by US standards. Keep in mind that the total value of stablecoins has increased dramatically over the past year and amounted to about $180 billion in March, with the three largest stablecoins – Tether, USD Coin (USDC) and Binance USD accounting for more than 80% of the total market value.

    That might be why Janet Yellen is so engaged in promoting her department’s project to launch the digital dollar. She believes the token issued by the Federal Reserve will be an excellent alternative to increasingly popular stablecoins.

    In Europe, with its rich history of state intervention in business affairs, the situation is noticeably worse: the European Commission (EC, the EU executive body) advocates a ban on top stablecoins. Or, to be more precise, the EC is considering severely limiting the use of stablecoins as an alternative to fiat money.

    EC officials seem to share the opinion of EU finance ministers, who have called for tough measures and demand that the issuance of the stablecoin be stopped if the number of daily transactions exceeds one million. It is supposed to apply to stablecoins issued in the amount of at least 200 million euros. However, the bill is still marked as “unofficial”, which means that it does not reflect the final position of the Commission, instead being one of several documents created to influence the debate.

    “Thresholds for monitoring and limiting ABTs [asset-backed tokens], widely used as a means of payment, can be further discussed at the political level,” the paper says. The European Commission prefers introducing additional measures with specific numerical limits, as opposed to leaving it to the regulators’ discretion.

    The European Parliament, on the other hand, favors a more lenient approach, which involves major stablecoins being reclassified and subjected to oversight by the European Banking Authority. They also believe that measures must be put in place to ensure that crypto assets are well-managed, offered lawfully to investors, and have proper reserves, especially when they reach a significant enough scale. They also prefer widely used stablecoins backed by an asset basket to those pegged to a single fiat currency such as the euro.

    Considering all of the above, you can’t help but get a little conspiratorial. This whole nightmare in the stablecoin market, who benefited from it? One may get the impression that someone from traditional finance wanted to create an atmosphere of distrust towards all cryptocurrencies and particularly stablecoins, as the most immediate competitors to fiat.

    If you browse long enough through the cryptocurrency media, you can find many suggestions of who the UST attacker is, with potential culprits including such giants of conventional finance as the investment company BlackRock and the American transnational hedge fund Citadel LLC. It is still hard to tell how much truth there is to those, but the possibility is certainly worth considering. It is hardly a reach to presume that some financial giants are now clearing the ground for launching their stablecoins, backed by their own investment assets.

    Overall, the crisis around UST plays right into opponents of crypto’s hands. Nothing needs to be banned or forcibly regulated; there is no need for anti-stablecoin propaganda. Hearing a story like this, people themselves will ask regulators to “insure” their funds. All that is left for the latter is to stand up to “defend investors’ interests”.

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