“stablecoin” can sound nice – isn’t it good to have something stable when the crypto transmission is unstable? – But to critics, it is nothing more than a time bomb. True or not, there is a growing need to regulate currency hoarding. The United States and the European Union are close to formalizing the rules of the game, and given the history of financial regulation emerging from Washington and Brussels, and FATF guidance on cryptocurrencies in recent years, it is safe to say the rest of the world will follow.
However, organizing the pile of coins is not an easy task, as these coins come in all shapes and sizes, thus solving a problem that works for everyone. The top three stablecoins by market capitalization – Tether (USDT), USDCoin (USDC) and Binance USD (BUSD) – are all pegged to the US dollar. According to the developers involved, they are backed by dollar reserves and many other financial instruments to keep the value constantly at the $1 level.
Tether was under legal review for the feasibility and sources of the provision, which resulted in two other projects whose additional assets were disclosed. The USDC disclosure in turn highlights a large number of “certificates” – not necessarily high-quality or highly liquid – in its own holdings. For many, this discovery has led to the conclusion that the company operates as a bank and not as a payments company.
Other, more obscure stack coins take many alternative approaches. It can be associated with raw materials, such as gold or oil, for example, with the controversial Venezuelan company Petro. More exotic alternatives include carbon-linked coins like UPCO2, crypto-backed coins like Dai, and perhaps the rarest stash coins like Terra (UST), which have absolutely no security and instead rely on algorithms to keep their prices stable.
Of course, some might argue that regulation will only slow innovation, so governments should stay out of the cryptocurrency path, but this argument lacks historical context. Long ago, during the crazy age of banking, private currencies issued by fraudulent banks often allowed people to buy worthless securities, which is why the dollar was considered the only national currency in the United States. The same logic applies to the 2008 money market fund crisis, when the federal government introduced new rules to protect loyal clients from large investors withdrawing large amounts of money from them.
Time and time again, we as a society have determined that consumers need to be protected from fraud or simply miscalculation on the part of those who store, transfer value, or provide similar services. We’ve put in place rules and regulations to control who can issue and redeem what we think is cash, and we’ve written guidelines for those who handle money in amounts that could shock the economy if misused. Why not do the same with Stack Coins, a market with a total cap of over $133 billion? There is simply no point in keeping the sword of Damocles hanging over the heads of investors and merchants. So where do we start?
The best way to start regulating hoarding coins is to establish rules and protocols that ensure that they meet their requirements. Christine Lagarde, President of the European Central Bank, stated in a recent interview that stack coins should be backed by 1:1 order and added that the projects behind stack coins should:
“[…] they are monitored, monitored and regulated, so that consumers and users of these devices can be assured against any distortion of information.”
The European Union has a long history of electronic financial institutions (EMIs) that can issue and redeem digital euros, and these institutions back their digital euros with real euros held by a bank or, in some cases, a central bank. This can serve as an example for regulators in other jurisdictions that appear to be moving in the same direction.
Here we can compare the capital requirements of banks or payment companies like EMI to ensure that stablecoin users can exchange their cash at any time through the company that differentiates them. For the record, one of the most important ways banks make money is by lending money that others have put in place. The process needs simple enough regulation to ensure the bank has enough stock to pay for customers who may want to withdraw their money, but not necessarily in a 1:1 ratio for each active deposit.