Treating Stablecoin Issuers Like Banks Sounds Unusual, But Will Help Further Adoption
Stablecoins have come a long way from being labeled as not “real” crypto, and some commonsense measures around transparency can provide the next leg up toward broader adoption.
The conversation and tone around blockchain and cryptoassets has continued to shift from an initial lack of understanding, to a hands-off approach, to one that most accurately be described as vigorous. Even with the backdrop of increased compliance and enforcement efforts, however, the trend toward more systemic integration has continued virtually unabated. With almost every major banking institution, and most major payment processors, now offering some level of blockchain or crypto related services it is clear that cryptoassets are firmly part of the mainstream conversation.
Even with all of this investment, interest, and implementation, however, a fundamental problem and issue with cryptoassets has remained unaddressed; price volatility. Put simply, most individuals and entrepreneurs simply do not feel comfortable either accepting or making payments using a medium of exchange that can swing upwards or downwards by double-digit percentages unexpectedly.
That is where stablecoins come into the conversation.
Built and designed as a true currency alternative, stablecoins are intended to represent the best of both the fiat and crypto worlds. Running on a blockchain, and therefore obtaining all of the benefits of such a connection, stablecoins are also backed, tethered, supported, or otherwise linked to external assets. These assets can include fiat currencies, commodities, other cryptoassets, or a combination therein; the objective of price stability is the same. A question that needs to be, and increasingly is, asked is just what measures and steps are in place to ensure that 1) these stablecoins are actually stabilized, and that 2) the assets stabilizing these stablecoins are what is being reported.
Let’s take a look at why classifying stablecoins issues as banking institutions, while somewhat odd on the surface, might be a logical step that will help encourage wider crypto adoption.
Trust and transparency. The original idea of bitcoin and blockchain at large might have been to develop a trustless and permissionless platform for individuals and institutions to conduct transactions on a peer-to-peer basis. While this has indeed occurred in the bitcoin space the reality is that for most non-expert individuals and institutions want (and in some cases require) some sort of third-party analysis of either the coin in question or the issuing entity. Implementing regulations and frameworks that would require regular audits of both the stablecoin issuers and the coins themselves would increase the trust placed in these by marketplace actors.
Audits might not be as scintillating at watching crypto price volatility, but are an integral part of how financial market actors interact.
Reducing the F(ear) U(ncertainty) and D(oubt). The acronym FUD has become synonymous with regulators, investors, and businesspeople that do not, and have not, invested into blockchain or crypto due to either a lack of understanding or a lack of trust in certain market actors. Perhaps the most obvious case as how FUD can influence investor decision making are the continuing issues around Tether, issuer of USDT, the largest stablecoin by market capitalization and trading volume.
Following earlier allegations, lawsuits, and finally a settlement to resolve issues around how the USDT was backed, Tether once again made headlines due to how its flagship token was actually supported. After revealing that these tokens were not 100% backed by cash, and that an audit would be available in months (several months ago at this point), the need for consistent and comparable audits is clear. Objectively speaking, how can regulators be expected to treat and take stablecoins seriously if even a request for a simple audit causes such issues, and remains unresolved for the sector overall?
Setting global norms. It is impossible to regulate or even attempt to set global standards for such a fast moving and globally decentralized space like crypto. That said, it is worth noting that the development of stablecoins, central bank digital currencies, and other more centralized cryptoassets is not just occurring in the United States. Over 100 nations across the global are currently actively working on developing such products, and there is no guarantee that the U.S. will be first to market.
With that backdrop in mind, a commonsense step that can – and should – be taken is to attempt to develop and implement regulatory rules that encourage transparency, auditability, and the protection of individual privacy. Developing and implementing audit standards for stablecoin issuers is a reasonable first step in that direction. Open systems and networks always win out, and crypto does not appear to be an exception to this rule.
Stablecoins have come a long way in the last several years, and even though they are not supported by every corner of the crypto community, the upsides and benefits of these cryptoassets are clear. As these cryptoassets become increasingly mainstream, and continue to attract the attention and focus of regulators both in the United States and internationally, it makes sense that a renewed focus on transparency and auditability will come to the forefront. Regulating stablecoin issuers as banking institutions might seem like an unusual step given the aim of some crypto organizations, but developing a consistent and comparable audit process is necessary – and critical – step to further understanding and adoption of stablecoins.Source