Stablecoin Regulation is Coming （Part Ⅱ）: Responses and Opportunities

[TL; DR]
1. The Basel Committee on Banking Supervision proposed to bring the crypto asset exposures of banking financial institutions under the Basel Agreement’s regulatory framework. It also suggested that crypto assets be treated in the same way as stocks and bonds.
2. Federal Reserve Chairman Jerome Powell once indicated that stablecoins should come under new rules similar to bank deposits and money market mutual funds, and the issue of stablecoins should be subject to the principle of risk limitation.
3. U.S. President’s Working Group on Financial Markets (PWG) released a report bac38ending that “stablecoin issuers need to be insured depository institutions", treating stablecoin issuers as banks at the same level.
4. Several US banks plan to launch their own stablecoin USDF to solve "consumer protection and regulatory issues of non-bank issued stablecoins", according to the announcement released on the 12th.
5. The stablecoin hearing focused on the security and legitimacy of stablecoins.


Governments and major institutions of different countries are gradually reaching a consensus on stablecoin regulation.

A consultation paper “Prudential Treatment of Crypto Asset Exposures” issued by the Basel Committee on Banking Supervision (BCBS) in June 2021 argues that the continued growth and innovation of crypto assets and related services may pose greater risks to the global financial stability and the banking system. It proposed that the crypto asset exposures of banking financial institutions come under the regulatory framework of the Basel Agreement and that stablecoins be treated in the same way as assets such as stocks and bonds. However, stablecoins are considered more of a kind of security by the U.S. Securities and Exchange Commission (SEC) in the U.S.

Previously, Federal Reserve Chairman Jerome Powell said that stablecoins should come under new rules similar to bank deposits and money market mutual funds, and the issue of stablecoins should be subject to the principle of risk limitation. The U.S. President’s Working Group on Financial Markets (PWG) released a report on stablecoins in November 2021, proposing that stablecoins may lead to runs on banks and bring risks to the payment system. The U.S. Treasury Department advocated Congress to pass legislation that would prohibit entities other than banks from issuing stablecoins in the same month. In December, the U.S. Senate continued to follow up on stablecoin issues. The Committee on Banking, Housing, and Urban Affairs conducted a hearing entitled “Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?”. It is expected that major regulators, including the Federal Reserve, will jointly clarify the rules and regulations related to cryptocurrencies in 2022.


The Biden Administration Stablecoin Report
The President’s Working Group (PWG) on Financial Markets released a new report on stablecoins in November, in which the PWG called on Congress to enact legislation to ensure that stablecoins are subject to "consistent and comprehensive" regulation, and the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) may involve in the future regulatory arrangements and operations of stablecoins. As we mentioned in the last article, stablecoins should be considered "shadow banking" because they are often not backed by 100% cash. The PWG suggested that “stablecoin issuers need to be insured depository institutions,” which means treating stablecoin issuers as banks at the same level. Therefore, they should accept relevant scrutiny and fulfill legal obligations. Moreover, the PWG also called for other stablecoin-related entities, including custodial wallet providers, to be regulated accordingly to reduce the operational risks of stablecoin systems. Finally, the PWG also called for restrictions on associations between stablecoin issuers and other commercial entities to reduce “systemic risk and concentration of economic power.”

In response to the Biden administration report, several U.S. banks plan to launch their own stablecoins USDF to address “consumer protection and regulatory issues of non-bank-issued stablecoins”, according to an announcement released on the 12th. Participants include New York Community Bank, FirstBank, and Sterling National Bank. Banks may become new challengers to the stablecoin industry.


Keynotes of the Stablecoin Hearing
The U.S. Senate conducted a hearing entitled “Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?” on December 14. The hearing was chaired by Committee Chair Sherrod Brown and Senator Patrick J. Toomey.


This hearing focused on the security and legitimacy of stablecoins. In the opening speech, Sherrod Brown seriously criticized the current stablecoin system, arguing that the stablecoin was just a "mirror of the banking system" that did not follow any rules. He also stated that stablecoins were neither decentralized nor transparent, and ordinary investors were unable to grasp important information about digital assets. Senators Alexis Goldstein and Hilary J. Allen also acknowledged that the regulation on stablecoins should be strengthened.

However, several senators, such as Patrick J. Toomey and Jai Massari, believed that stablecoin systems are not the same as traditional banking and should not be subject to the regulatory requirements as traditional banks, which may discourage innovation. Therefore, they maintained a more inclusive attitude towards stablecoins.


Conclusion
On balance, there are three causes promoting stablecoin regulation. Firstly, there is a problem with the reserve guarantee. The 100% collateral provided by the stablecoin issuer is not all cash collateral but includes some risky cash equivalents. This brings guarantee risks and may cause a run; secondly, the issuance of non-guaranteed stablecoins may facilitate speculation and price manipulation; thirdly, the stablecoin system may impact the existing financial system and CBDC in the future. Therefore, it is imperative to implement regulation on stablecoins. However, it is necessary for countries worldwide to work together to design a mechanism that can avoid systemic risks, protect investors, and discourage innovation much less.

Currently, the two stablecoin giants USDT and USDC have taken initiatives to respond to U.S. government regulation. They have promised to change themselves to adapt to the regulation. We have reasons to believe that a stablecoin system under reasonable regulation will boost the blockchain industry and help it to create greater value.

Author: Edward. H, Gate.io Researcher
*This article represents only the views of the researcher and does not constitute any investment advice.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.

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