U.S. Treasury Department recommended that stablecoin is regulated as an institution of banking. This may have merit if they are given the same rights as bank regulated institutions.
US Treasury Department Report: Stablecoins Regulation is Urgently Required
The rise of stablecoins within the crypto ecosystem serves as a glaring reminder that cryptocurrencies and blockchain technology have outgrown their humble beginnings, gradually positioning themselves as challengers of brick and mortar finance’s existing hegemony.
The market capitalization for stablecoins is growing at an unimaginable rate. Financial regulators and governments around the world have begun to focus on better regulation of this emerging asset class. By design, stablecoins are backed by “stable” assets that allow them to maintain a constant value relative to the underlying asset. Stablecoins can be used for lending, borrowing and trading digital assets, thanks to this characteristic.
Stablecoins are currently worth more than $135 million. There is significant potential for explosive growth once it gains mainstream acceptance by businesses and consumers as a method of payment. Because of their intrinsic qualities such as cost-effectiveness, scalingability, fast settlement and low fees, stablecoins might eventually be able to replace bank transfers. This is why governments around the world are trying to regulate stablecoins as a growing asset class.
Stablecoin Companies and Banks: The idea of Regulating
Nearly every country has either implemented or is currently experimenting with cryptocurrencies. The U.S. government was the first to show great interest in stabilcoins.
From Federal Reserve Chairman Jerome Powell urging the need to regulate stablecoins —especially those that are pegged 1:1 with the U.S. Dollar — to the Securities and Exchange Commission (SEC) chair Gary Gensler highlighting the benefits of regulation for both service providers and consumers, stablecoins have become a central attraction for policymakers.
Regulators are also concerned about the transparency of the asset backing the stablecoin. While the coins may appear pegged to the U.S. dollar, significant portions of the most popular stablecoins like USDT, USDC, and BUSD are actually backed by commercial paper and U.S. treasuries, which act as “cash-like” securities.
The U.S. Treasury Department’s most recent report says that regulation is urgently needed regarding stablecoins, as they pose risks to the integrity of financial markets, including conformity with anti-money laundering (AML) and counter-terrorism financing (CFT) laws. In addition, the U.S. Treasury Department’s most recent report explains that stablecoins have the same functions as traditional bank-regulated fiat currency in the economy. Therefore, it is important to regulate stablecoin businesses like banks.
There is a need for an equal playing field
Although the Treasury Department’s report highlights the financial risks of stablecoins, it misses out on something fundamental. On the one hand, it recommends that stablecoins be treated as fiat currencies and regulated accordingly, but it fails to consider the companies’ perspectives behind these stablecoins.
It is clear that stablecoin regulation can make all the difference for tradfi as well as defi. However, regulators and governments need to ensure that stablecoins are given the same rights as fiat currencies, and that they receive comparable treatment to regulated banks.
The U.S. Treasury Department should allow stablecoin firms to keep a fractional reserve model if it wants to regulate them as banks. At the moment, stablecoins have an almost 1:1 ratio with USD and other cash-like currencies. In contrast, U.S. deposit-taking banks are required to keep a small percentage (around 10%) of total cash deposits.
All regulated banks have a fractional reserve system that allows them to keep a small amount of deposit liability in liquid assets. The rest can be lent out to borrowers when needed. They can reinvest their money in high yield assets, rather than keeping all of their deposits in cash and cash equivalents.
Stablecoin platforms have to hold all their deposits in cash or cash equivalents like treasuries or commercial paper, and the money pooled in these platforms sits idle and doesn’t serve any other purpose. Paxos recently disclosed assets supporting stablecoins such as PAX and BUSD. It stated that 96% were in cash or cash equivalents while 4% had been invested in U.S. Treasury Bills.
The Long and Stable Road
While it’s difficult to know how the stablecoin market will develop over time, the idea of regulating them as banks and giving them equal rights is not only foolish but also ill-conceived given the many benefits this technology revolution could bring. A comprehensive audit framework and compliance framework are necessary in order to provide the assurances and transparency needed to encourage greater adoption.
Hopefully, the Treasury Department’s latest report will play a critical role in laying the groundwork for congressional leaders to establish new regulatory guidelines in the coming months to allow stablecoins to expand their reach.
Is it your opinion that stabilitycoins should not be treated as banks? Please leave your comments below.
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