The stablecoin market has been growing exponentially — from only $21.5 billion in mid-October of last year to $130 billion at the start of November
The stablecoin market has been growing exponentially — from only $21.5 billion in mid-October of last year to $130 billion at the start of November; a six-fold increase — so it was only reasonable to expect that the United States government would have to come to grips with these digital assets that are designed to maintain a stable value relative to a fiat currency like the U.S. dollar (USD) or a commodity like gold.
The Treasury Department revealed its latest thinking on the subject this week with the much-anticipated President’s Working Group on Financial Markets’ (PWG’s) report on Stablecoins. That report recommended that Congress act promptly to enact legislation to ensure that payment stablecoin issuers be regulated more like U.S. banks. That is, stablecoins might be issued only through “entities that are insured depository institutions.”
Surprisingly, the report didn’t provoke much industry pushback. Perhaps the crypto community was just relieved that the government wasn’t looking to ban stablecoins outright? The report did raise some questions, though.
If enacted, what impact will such legislation have on the global stablecoin market? Could it stifle innovation as some in the crypto community have warned? Or, rather, could it bring regulatory certainty to a sector whose lack of supervision may have turned off institutional investors, corporations and even retail investors from exploring crypto alternatives?
An edge for legacy banks?
With regard to the first question, Salman Banaei, head of policy at cryptocurrency intelligence firm Chainalysis, told Cointelegraph that assuming the recommended legislation were passed and signed into law — a big “if,” given the current legislative stalemate in Washington — its provisions “would put current bank-backed stablecoins like JPM Coin in a prime competitive position versus non-bank stablecoin issuers.”
Non-bank stablecoin issuers would need, at minimum, to renegotiate arrangements with their current banking service providers, with the latter obtaining more leverage in these partnership arrangements, continued Banaei. The PWG Report contemplates that many of these relationships would be subject to the Bank Service Company Act. “Alternatively, these non-bank stablecoin issuers could apply to become depository institutions or acquire depository institutions, although these options can be expensive and slow.”
But, would it discourage financial start-ups and hinder innovation — as some in the crypto community fear? In the short term, it would likely hinder innovation, answered Banaei, as it would limit the pool of potential stablecoin issuers to depository institutions. “In the longer term, however, the legislation would encourage innovation” because clear regulatory “rules of the road” would eliminate the regulatory risk that has been the primary hindrance to broad adoption of stablecoins.
This, in turn, could “encourage the adoption of stablecoins in a variety of contexts across the financial markets,” continued Banaei. The fixed costs associated with a depository institution issuing a stablecoin are relatively low, and this could “encourage depository institutions to compete to offer stablecoins and to adopt or facilitate their use” in a variety of circumstances.
A gateway to the crypto world?
In an August blog, Chainalysis’ chief economist Philipp Gradwell wrote that “Stablecoins are vital for many institutional investors because they’re the fundamental gateway into the world of digital currency.” If that is the case, wouldn’t institutional investors and corporations prefer more market and regulatory certainty vis-a-vis stablecoins? That is, wouldn’t they arguably be supportive of the PWG’s recommendations?
In Europe, regulatory uncertainty is “without doubt discouraging them [i.e., institutional investors] from holding stablecoins, investing in cryptocurrencies through stablecoins and using stablecoins for yield in DeFi or issuing stablecoins themselves,” Patrick Hansen, head of strategy and growth at Unstoppable Finance, told Cointelegraph, adding further:
“But, contrary to many retail investors, most institutions don’t buy cryptocurrencies through stablecoins anyway — but either with fiat money or through some form of crypto trust, certificate or derivative — and, in the future, probably more and more through ETFs.”
Sidharth Sogani, CEO of crypto research firm CREBACO Global, admittedly no fan of stablecoins, tended to agree. “Nobody wants to own a stablecoin until and unless required to book profit. Also, with more ways to invest now, including ETFs, etc., I think people are reducing exposure to stablecoins,” he told Cointelegraph.
“The chief benefit of the legislation recommended by the PWG Report is it would provide a path to enter the ‘gateway’ into new financial services and technology,” commented Banaei, adding: “The PWG Report presents one model of how to open this…
cointelegraph.com