As if reviewing the entire crypto universe with myriads of coins, concepts and half-dozen protocols, as well as introducing the first steps of its regulation by the SEC weren’t enough, the U.S. agency outlined stablecoins as a separate target of its scrutiny. The authorities try to recommend banking capital and liquidity requirements for stablecoin issuers. They are also weighing their entire class against the current regulatory guidelines of monetary funds, which are subject to well-known restrictions on the short-term assets that are allowed to be invested.
Why specifically the stablecoins which are in the spotlight?
As we know, stablecoins are special types of coins issued by companies such as Tether or Circle Internet Financial, representing a form of digital currencies linked to fiat currencies or, less often, gold or other tangible assets serving as benchmarks for trading against other non-linked volatile coins. This is in contrast to cryptocurrencies like Bitcoin, which are not backed by assets and can fluctuate greatly in price thereby implying mandatory possession of certain hedging tools for those cryptoinvestors who still measure the value of their holdings against fiat currencies (not a given). First introduced in 2014 with Tether, by 2021 the list of stablecoins included DAI, USD Coin, True USD, Digix Gold, Havven’s Nomin, Paxos Standard, and Binance USD.
So, for this reason, we may call stablecoins the semi flat cryptocurrencies. With the number of cryptocoins issued in a 1:1 ratio against the pegged fiat currency, this method is one of the simplest ways to create and operate a so-called “stable” cryptocurrency. By the way, this is more or less the same method preliminarily adopted by many central banks to issue their own versions of digital off-blockchain currencies. So they may consider stablecoins as unwanted competitors to their own ongoing sovereign currency digitalization efforts, to begin with.
This method requires a custodian to hold the fiat currency or commodity collateral, and guarantee the issuance as well the redemption of the stablecoin tokens. It also requires operational processes, including frequent audits, to ensure that the collateral is being maintained up to the mark. Tether (USDT) and TrueUSD are popular crypto coins that have a value equivalent to that of a single U.S. dollar and are backed by dollar deposits.
As early as next week, the Federal Reserve is set to state its views in a document that some officials have unofficially called a “future of money” plan, including stablecoins. It is also expected to request public comment on whether it should issue its own digital currency, a question that seems to have divided Fed officials.
“We have a lot of casinos here in the Wild West, and the poker chip is these stablecoins on the casino tables,” Gary Gensler said on this virtual SEC platform in a virtual enterprise hosted by the Washington Post. Administration officials also say if coins are adopted more broadly as a quick means of payment for consumers and businesses, it will put them in competition with banks and firms such as Visa Inc. (V), MasterCard Inc. (MA) and Diem Association, a group backed by Facebook (FB). The latter along with 25 other participating entities are reportedly preparing to launch their own stablecoin, which will be used by three billion users of the social network.
Current and former regulators show they are increasingly preoccupied with the fact that stablecoins “can be vulnerable, as in a bank run by depositors”, if large numbers suddenly rush to buy them out, forcing sponsors to sell assets at bargain prices and putting a strain on the financial system. This is exactly what has happened with some money market mutual funds. The government then took action to support the cash, and again in March 2020 as part of a broader effort to stabilize markets derailed by the coronavirus epidemic.
If the issuer of a stablecoin has no capital and its reserves fluctuate in value, “it is inevitable a risk,” said Sheila Bair, a former chief executive of the Federal Deposit Insurance Corporation. “Strict rules required to invest in assets that are stable, real cash equivalents are the best way to address volatility.”
But that concern sounds a lot less convincing given the fact that no-one can prohibit the coin issuers to link their value to whatever comes to their minds. Away from USD, the most widely used collateral has been gold. Ironically, it was gold that pushed former U.S. President Richard Nixon, who decided to unpeg the U.S. dollar from it, to create a perfect storm that contemporary historians call a “Nixon Shock”.
For this reason, it looks realistic that if fiat-currency-linked stablecoins will be, one way or another, banned or restricted, then the predominant stability collateral will be gold. That scenario would actually be extremely bullish for the precious metal.
