Stablecoins Set the Stage for Crypto Regulation in the West

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As governments around the world struggle with how to approach regulation on cryptocurrencies, increasing amounts of economists and financial advisors rush to the front lines to offer words of caution against these digital currencies. Most recently, the pressing concern for many has been stablecoins.

Arguably, the greatest risk presented by stablecoins goes hand in hand with the fact that the cryptocurrency space lies largely undefined by law and regulations. The concern over stablecoins and the potential danger they present is not unwarranted. The lack of transparency over the assets to which the coins are pegged and to what extent leaves a question over whether the valuation is accurate or liquid enough to weather a massive sell-off.  Each country has a different approach to stablecoins and not all share the same idea on what that regulation will be moving forward.

In the UK, regulators are looking to bring stablecoins under the existing e-payment fintech umbrella which is regulated by the Financial Conduct Authority (FCA), the Bank of England, and the Payment Systems Regulator and will operate in accordance with the set standards. Britain's Chancellor of the Exchequer, Rishi Sunak, whose background before taking political office was in finance, has been a proponent of ushering the UK into the digital frontier, albeit cautiously. 

Crypto companies operating in the UK were recently required to register with the FCA with many having found themselves unable to continue business after failing to pass the vetting process. While this recent exodus of companies makes the UK seem inhospitable to digital coins, the news of bringing stablecoins under the same jurisdiction as other fintech companies is a step in the right direction and bodes well for the future of stablecoins and the crypto space altogether.  The UK may be the first in setting the standard in stablecoin regulation.

Across the pond, US policymakers view stablecoins in a similar fashion but fear the possibility that an unregulated space may cause another economic crisis similar to the housing bubble of 2008.  The first steps on how to tackle this $186 billion dollar market came in the form of the recently introduced Stablecoin Transparency Act.  The bill requires that each issuer “maintains price stability by backing the value of the digital asset to a nondigital currency that is denominated in the same currency in which the digital asset is issued” and that it must be “redeemable on a one-to-one basis in the denominated currency to which the digital asset is backed.” 

The reserves backing the stablecoins can be one of the following: government securities with maturities under 1 year, fully collateralized security repurchase agreements, or USD or other non-digital fiat currency.  Lastly, issuers are required to disclose the makeup of their reserves and publish the report, audited by a third party, every 30 days.

Alternatively, in the EU, the situation is slightly more complicated. The language and overarching reach of MiCA positions stablecoins to be sold by banking institutions alone as it requires issuers to have similar licensing. Some believe the EU will discourage the possibility of Euro pegged stablecoins moving forward. The outlook from the EU isn’t quite the issue, as both the UK and US possess their own detractors as well as supporters—the problem instead lies with how MiCA is so broad in scope. It ambitiously tries to tackle the entire cryptocurrency space, when in reality it is best approached in sections.

Policymakers in the UK and US recognize the potential fallout from stablecoins as being the most pressing concern and have chosen to tackle cryptocurrency regulation from that front. It should be noted however that all the legislation in play has yet to be fully ratified. The potential to influence and change remains a possibility but the general outlook for all three major governing bodies is becoming clearer.