The Need to Regulate Stable Coins

I’m typically not one to call for regulation — particularly in the #crypto space. However, I’m increasingly thinking that “stable” coins need some type of oversight as they very much may prove UNstable in times of financial duress.

The crypto ecosystem is an exciting place to be, whether one just holds BTC or ETH, or one is active in DeFi or NFTs. The innovation going on at the moment across the space has never been seen before in any sector by any set of actors. Period. And stable coins are an important “lubricant”, contributing to the success of the sector.

My concern is that it would quite damaging to the cryptosphere if we had a stable coin failure.

In the last week alone, both the Fed chairman Powell and the SEC head Gensler stated quite clearly that neither had any intention of banning bitcoin / cryptocurrency. This is superb news (and one reason why we’re approaching BTC ATH again).

Last summer the Fed’s vice chair stated “we do not need to fear stablecoins”. Whereas this comment could just have been in support of a future US dollar stable coin — and indeed a CBDC does have a real world risk and would come with US government backing — can private stable coins be considered to provide similar functionality?

To be clear, there are geopolitics involved with respect to a digital dollar — the US wants to maintain the primacy of the dollar in international trade and, as other governments are pursuing their own CBDC, many believe the US must pursue this strategy as defensive alone.

What is also clear is that stable coins have been enormously beneficial to the crypto space as they provide ease of transacting in and out of different cryptocurrencies (the alternative of using bitcoin or Ethereum pairs is prohibitively expensive) as well as facilitating international trade for those living in countries with currency controls. But most — if not all — private stable coins are fractionally-reserved, meaning bonds, equities, currencies and “other” may be used as collateral to back a US dollar stable coin. One need only recall the Long Term Capital Management debacle to know that in times of duress, fractional reserves and/or collateral of different financial products can mean instability and financial loss.

So much for “stable”.

The world of crypto is innovative, disintermediating with a heavy dose of caveat emptor. However, with respect to “stable” coins, the SEC has a responsibility to prevent future LTCMs from occurring.

All governments are calling for increased regulation and oversight for the sector. Please, Messrs Powell & Gensler, start with stable coins.

#cryptocurrency #bitcoin #regulations #SEC

https://www.ft.com/content/b729cf08-6beb-4d75-b19e-779d2d3a14ce