Image Credit: QuoteInspector.com (Flickr)
Will the Current Stablecoin Situation Hasten Regulation and Oversight?
A move toward regulating digital currencies is gaining momentum in the U.S., and elsewhere – stablecoins could be the first cryptocurrency to be handed a rulebook. The variety of Stablecoin that is designed with algorithms to provide one-for-one parity with the U.S. dollar value, are finding it difficult or impossible to remain pegged to the fiat currency. The strong onset of negative sentiment in the crypto markets has already caused some of these less speculative cryptocurrencies to “break-the buck.” True oversight may be in the best interest of preserving these new asset types, but the loss of autonomy may undermine their purpose and popularity.
The Current Concern
The attraction of stablecoins is they are designed to maintain a fixed value yet still allow for payments without getting the banking system involved. The larger stablecoins, Tether (USDT-USD) and USD Coin (USDC), have maintained their dollar pegs. But another once rising star the “algorithmic” stablecoin called TerraUSD (UST) crashed as low as $0.23 on the dollar this past week. The current price (May 12) is approximately $0.46. The decline in value of UST-USD caused $10 billion in the stablecoin to evaporate. A related crypto token called Luna (LUNA) or Terra Luna caused even greater losses. Terra Luna is down 99.6% today. This is contributing to the selloff crypto speculators are seeing in other digital currencies such as Bitcoin (BTC).
Some are likening the Terra collapse to the “Lehman Brothers moment,” referring to the surprise collapse of the once investment bank. Lehman woke markets up as to the severity of the 2008 financial crisis. The domino effect spurred by its wake-up call signaled the beginning of the awareness to problems the banking system was dealing with.
Is it a Crisis?
Is this a crypto or stablecoin crisis? The Terra losses may be an isolated event that is confined to tokens that either have a different mathematical basis or are especially vulnerable to market volatility. But it highlights risks that have always been inherent in these assets and may indicate a need to evolve with or without the help of regulatory guidance and oversight. The usefulness of stablecoins is diminished if they become one of the more controversial types of traded tokens and payment methods.
Stablecoins are already causing concern among regulators and bankers because, among other things, the money supply is impacted by privately issued digital money. A run on a stablecoin could, in theory, lead to heavy selling in assets held in reserves, such as short-term commercial debt or other cash equivalents. There has also been concern since their growth in popularity that stablecoins are substitutes for Federal Reserve Notes. The problem could be that they bypass the system that measures capital flows in global transactions and other cross-border exchanges. This was recently highlighted as both Russia and Ukraine were able to get around any attempts to shut down exchanges of currency, of the crypto variety, into or moving outside the countries.
Regulation
U.S. Regulators and lawmakers have expressed other concerns related to protecting users of any type of non-regulated token. One is about the liquidity and quality of issuers’ reserve assets. Banks are structured and have oversight to make sure they can meet redemption requests. This is why we don’t have concerns about a run on banks any longer. Panic redemptions of stablecoins or other tokens could have the same economic unsettling impact as a run on banks.
Tether considered the preferred stablecoin is still not transparent about its holdings. The company, based in the British Virgin Islands, issues a quarterly “assurance opinion” on its reserves from a Cayman Islands auditor. It shows more than 80% of its reserves were held in Treasurys, cash, certificates of deposit, and money-market funds at the end of December. Details about other holdings are barely defined. This includes $4.1 billion in “secured loans”; $3.6 billion in “corporate bonds, funds, and precious metals”; and $5 billion in “other investments,” including “digital tokens.”
To date, Tether has never refused a redemption.
The White House, for its part, wants coin issuers under federal supervision, potentially even carrying FDIC deposit insurance. Biden called on Congress to pass supervisory rules for stablecoins in a recent executive order.
Congress is also working on a variety of rules for stablecoins; a draft bill in the Senate would establish a process for banks and credit unions to issue stablecoins, among other measures.
Another concern of the house-of-cards variety is that crypto exchanges hold large amounts of Tether for market-making and trading liquidity. If Tether were to stop trading 1:1 with the U.S. Dollar, it could impact other crypto trading, which could impact crypto brokerages.
Take-Away
The future of independent stablecoins and other cryptocurrencies may hinge on what is occurring in these markets now. Stablecoins are now widely used as de facto dollars for cryptocurrency exchange. Tether, which has not shown signs of problems is widely used. So while stablecoins are only 12% of the cryptocurrency market, the trading volume is high.
Algorithmic-based coins now appear to be more vulnerable than those backed by assets such as Treasuries, CDs and cash equivalents. Those that are least transparent could also be valuable, but they will for now be considered riskier.
Managing Editor, Channelchek
Suggested Content
 Global Regulators Release Principles for Financial Market Infrastructures to Stablecoin
|
 Stealth Digital Asset Bill Surprises Crypto Market
|
 The Federal Reserve Continues to Equivocate on Crypto
|
 Safe Haven Comparison During Downturns, Bitcoin vs. Gold
|
Sources
Stay up to date. Follow us:
|
