The Novel about Crypto “Con-Stables”: Why It is Them – Not Bitcoin – Under Regulators’ Scrutiny?

The mainstream finance’s mania to get its little piece of digitalization acquires strange forms. Following a slew of sovereign cryptocurrencies’ introduction parades, now their originators started to look into how to get a grip of the so-called stablecoins. What are stablecoins beyond their Googled-in definition?

Tether (USDT) was the first successful stablecoin and still by far the biggest by all metrics, was launched in late 2014 by a group called Tether Limited. Tether followed a relatively simple concept for creating a coin that maintained a stable exchange rate to USD, so that cryptoholders wouldn’t need to exit their holdings facing periods of elevated volatility.

For every USDT issued, the Tether Foundation kept $1 (USD) in their audited reserve. This basic rule maintained the USDT price being fixed around $1 since each unit of USDT could be redeemed for one of the US Dollars in the reserve. In this sense, Tether was basically an equivalent of the widely discussed digital dollar – albeit, certainly, with far less liquidity and application.

Soon after Tether started to rally in 2017, other stablecoins joined the club. While Tether’s reserves were controlled by the relatively opaque Tether Limited group, many of the new stablecoins were backed by larger entities, including exchanges. The most recent spike in stablecoin issuances was backed by the Etherium-based DeFi, fueling the growth of Etherium popularity as well.

USD Coin (USDC) was launched in September 2018 and was managed by Centre group, which included Coinbase (COIN) and Circle. The same month, Gemini announced the Gemini Dollar (GUSD) stablecoin. Paxos Standard Token (PAX) was also launched in late 2018. PAX was created by a company called Paxos which had previously launched Singapore-based itBit


While USDC and PAX were both also backed by USD reserves, alternative models began to emerge. In December 2017, MakerDAO launched a decentralized stablecoin called the Dai token (DAI). DAI was also designed to be pegged to $1 USD. However, unlike USDT, USDC, and PAX, DAI was not backed by a reserve of USD controlled by a single organization. Instead, DAI was collateralized by Ethereum holdings.

New stablecoins continued to launch throughout 2019. In September 2019, Binance launched Binance USD (BUSD), which is still used as a prime benchmark on their exchange. Soon after, Huobi launched Huobi USD (HUSD). Gold backed stablecoins also began to rise in 2019. Towards the end of the year, Paxos launched Paxos Gold (PAXG), which is backed by physical gold instead of US Dollars. PAXG’s price is notably pegged to one troy ounce of gold.

Stablecoin supply exploded again in the second quarter of 2020. However, this time the supply rise did not coincide with a large spike in Bitcoin price. In fact, it occurred after a historic crash.

Brick-and-mortar financial regulators started to act as if they suddenly woke up to the reality of stablecoins as direct competitors to the U.S. dollar. The “wake-up” started late last month when Eric Rosengren, president of the Federal Reserve Bank of Boston, detailed what he saw as the risks “these stable-value tokens pose to the financial system”. However, back then Rosengren was opposed by Randal Quarles, the Fed’s vice governor, who implied that wider usage of stablecoins in crypto exchanges would indirectly promote USD, rather than Bitcoin, as the main crypto benchmark. Eventually, he called on the U.S. to encourage “stablecoin innovation”.

Back in December 2020, U.S. Representatives Rashida Tlaib (D-Mich.), Jesús García (D-Ill.) and Stephen Lynch (D-Mass.) – all from Democratic Party – introduced the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act. It aimed to focus on regulating stablecoins, perhaps, because they were the direct threat and competitors to the then emerging digital dollar.

The 18-page bill specified a requirement for stablecoin issuers to obtain a banking charter while outlining approval from the Federal Reserve, Federal Deposit Insurance Corporation and the issuer’s specific state or federal bank regulator. The draft of the bill also required these entities to conduct an ongoing analysis of any systemic risks and required issuers to have FDIC insurance or maintain reserves for easy conversion back into U.S. dollars.

Fast forward, according to Bloomberg, U.S. Treasury Secretary Janet Yellen pushed top U.S. financial regulators to accelerate their consideration of “new rules to police stablecoins”, a type of cryptocurrency that’s seen rapid recent growth and remains largely unsupervised.

“The secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place” – the statement said. For this purpose on Monday, July 12 she created and summoned a meeting of the President’s Working Group on Financial Markets joined by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). The group “expected to issue recommendations in the coming months,” according to the statement.

Regulators worldwide recently doubled down on their efforts to regulate stablecoins. The Bank of England, for example, recently pointed out that payments by stablecoins should be regulated in the same way as all other payment types made by banks “if they become widely used”. A growing number of various financial watchdogs apparently see stablecoins as posing financial stability risks to the existing system. Surprisingly, eyeing such hard-to-explain threats they tend to play down the intricacies of Bitcoin. ECB President Christine Lagarde said in November last year that stablecoins could pose “serious risks.” if widely adopted. In her opinion, “they could threaten financial stability and monetary sovereignty”. Last week, U.S. Fed Chairman Powell also claimed that stablecoins or cryptocurrencies wouldn’t be needed “if we had a digital U.S. currency”, adding to a very popular misconception drawing parallels between currencies’ digitalization and the deregulated finance.

What is going to happen next?

As always, we must consider several baseline scenarios, where the stablecoin issuers’ full and unquestioning compliance must be viewed as both the most welcomed and least realistic at the same time. More likely, once it becomes a law, the current stablecoin club will cease to exist followed by automatic conversions of the existing coins into new pseudo-USD-pegged coins at a 1:1 rate.

New “pseudos” (or whatever we like to call them) will not mention USD in their declarations (white papers) at all, while implying other mechanisms of stability and/or stabilizations against major world currencies. What would be these stability tools is anyone’s guess, however, it is given that crypto markets would still require the existence of the “con-stables”. As an obvious option, there will be more gold-backed stablecoins, which will benefit the prices of gold instead of USD at the end of the day.

Vladimir Rojankovski, MBA/LIFA

VRM Research

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