Stablecoins are one of the backbones of the cryptocurrency world. Most casual crypto participants might think Bitcoin is the world’s most traded crypto, but that honor falls to Tether, a stablecoin run by the same group that operates well-known cryptocurrency exchange Bitfinex (Statista, 2021). Before, crypto traders had only a few choices, but today the number of stablecoins has increased and may continue to grow. These coins provide refuge from the volatility cryptocurrencies are known for, an efficient way to transfer funds, and a tool to preserve capital for future opportunities. With their rapid adoption, regulators around the world are looking for ways to regulate and tax these assets.
Initially, the idea of a stablecoin was to have a dollar-for-dollar backed coin, not subject to market volatility, that crypto enthusiasts could use to ride out rocky markets and move funds quickly between exchanges. A $1 deposit in a US dollar-backed stablecoin was supposed to be backed up by $1USD on deposit with a reputable bank or financial institution. These deposits could be held in cash or cash equivalents. That’s no longer the case as some providers have opted to adjust the dollars held in deposit to a ratio of less than 1:1. This means that it’s possible for the stablecoin issuer to run out of funds if there was a surge in redemptions. This is not a situation governments are willing to allow to happen. US regulators have recently issued a draft report outlining possible ways stablecoin providers could be regulated. The implication in the report is that stablecoin issuers should be regulated like banks, with capital requirements, independent audits, and government oversight. You can download a copy here.
Which coins are most likely to be regulated?
Currently, US regulators are among the most aggressive. They have not laid out a timeframe, but it seems that all parties would prefer to install some regulation before the next US election. The coins most likely impacted would be those backed by US dollars. Tether tokens could have the most exposure. Tether stopped allowing US individuals and corporations access to their coins in January 2018, but the US government has many options to stop Tether from using US dollars on their platform, including imposing sanctions on their banking network. It’s not clear if Coinbase has the financial resources to meet the potential regulatory requirements. The stablecoin most likely to survive and grow would be the Gemini Dollar, which is already transparent and carefully monitored.
Potential impact on the crypto world
It’s not clear what the impact in the crypto world would be. If US banking regulators are successful, then it’s likely European and other banking systems will adopt similar standards for Euro and other denominated stablecoins. The best hope for minimal impact on the crypto world would be a special classification for stablecoin issuers that would allow them to issue their coins under strict guidelines.
The evolution of cryptocurrency in general, and stablecoins specifically is still in its early stages. Most governments seem open to the idea of cryptos operating within their borders, within the criteria they allow. For now, the only thing crypto users can do is monitor the situation and be ready to act once the rules are in place.