The stablecoin market, a crucial link between crypto and traditional currencies, is facing calls for tougher oversight, with regulations on both sides of the Atlantic lagging behind the rapid growth in digital assets.
Stablecoins claim to represent a safe harbour for traders to stash funds, making them a central part of cryptocurrency trading in a similar way money market funds are used by typical investors.
A patchwork of disclosure standards, the overall lack of consumer protections and stablecoins’ potential role as a less traceable form of money have sharpened calls for tougher oversight as the market has rapidly expanded along with broader digital asset industry.
“Certainly the direction of travel is to look at regulating them,” said John Salmon, who leads law firm Hogan Lovells’ blockchain and cryptocurrency practice.
Policymakers in the US, UK and continental Europe are all weighing up potential plans for closer oversight of stablecoins, which are “pegged” to traditional currencies, commodities or other digital assets in order to reduce volatility. Most stablecoin issuers say their coins are fully backed with reserves, usually traditional currencies or cryptocurrencies.
A group of US members of Congress late last year proposed legislation that would require stablecoin issuers to obtain a banking charter, follow banking regulations and receive approval from the Federal Reserve and Federal Deposit Insurance Corporation.
“Digital currencies, whose value is permanently pegged to or stabilised against a conventional currency like the dollar, pose new regulatory challenges while [they] also represent a growing source of the market, liquidity, and credit risk,” the group, which included Rashida Tlaib and Stephen Lynch of the House of Representatives, said.
What is a stablecoin?
Stablecoins are cryptocurrencies that are pegged to another asset, theoretically reducing their volatility. This stability makes them useful for converting between fiat currencies and other cryptocurrencies.
Stablecoins can be linked to asset classes such as physical currencies, baskets of currencies, other cryptocurrencies and even real estate.
Tether, launched in 2014, is the largest stablecoin by circulation, with about $56bn coins. Facebook-backed stablecoin, Diem (previously known as Libra) could launch this year.
Rohan Grey, a law professor at Willamette University who helped draft the bill, added that “there is this long history of new entrants into the financial sector using a technological edge . . . to offer a variation on bank money and to avoid regulation in the short term as a bank so that they can establish market share”.
“All of [the variations of stablecoins] to me are just shadow banking which should have been regulated . . . as part of the banking system,” he said.
Harry Eddis, partner at law practice Linklaters, pointed to the European Commission’s Markets in Crypto-Assets proposal and the UK Treasury’s consultation into stablecoins, both of which call for greater regulation in the sector and which note the ambiguity surrounding the status of stablecoins.
“If a stablecoin falls into the unregulated or e-money category, a lot of regulatory oversight and conduct rules fall away,” said Eddis. “That’s why you’re seeing a lot of regulators wanting to assert regulation.”
Last June, the Financial Action Taskforce, which sets global standards on money-laundering and terrorist financing, released its draft report to the G20 group of nations on stablecoins. It noted that mechanisms for stabilising the assets could present avenues for market manipulation.
The regulatory debate comes as many investors in the crypto market are scrutinising Tether, the biggest stablecoin with about $56bn in circulation, according to CoinMarketCap.com.
The stablecoin — which is “pegged” at $1 — is in focus partly because it has continued…