Financial regulators are focusing on how to regulate stablecoins as their growth is disturbing the traditional financial system. The dramatic $60 billion crash of an algorithmic stablecoin Tether [USDT] sent shockwaves across the crypto market as well as the top government tiers. This impact enforced a market sell-off and DEI another algorithmic stablecoin lost its dollar peg and dropped below 60 cents.
Even if Bitcoin and Ethereum are popular crypto investments, a stablecoin is also as important because it contributes $190 billion to the crypto ecosystem. Stablecoins are pegged to not highly volatile assets like fiat currencies or precious metals and are roughly valued the same. For example, the amount of Tether you hold in your USDT wallet on ZenGo will be equivalent to the same amount of dollars in your bank [1:1 ratio]. Theoretically, the coins seem more stable than other crypto types.
Benefits of stablecoins
- More stable value than its counterparts.
- They are fluid as you don’t need a third party [financial institution] to move stablecoin around.
- Exchange trades are made easy and cheap because they bridge the gap between cryptos on dissimilar blockchains.
- Eliminates or reduces potential transaction fees because some crypto exchanges favor trading from other cryptos and stablecoins. For example, Coinbase does not charge fees when the US dollar is exchanged for USDC and in turn, you can use Coin to invest in other cryptos.
- Has the potential to avert terrorists, finance rogue states, and money laundering laws.
With all these benefits stablecoin even has some concerns and risks. Critics debate that due to stablecoins unregulated nature the investors are exposed to price collapses and exploits as experienced with USDT and DEI. It was a severe market turbulence that revealed the stablecoins infallibility and susceptibility.
All stablecoins are different!
Stablecoins are of different types. They are based on the mechanism applied to steady their value.
Stablecoins can be broadly categorized into two –
- Collateralized stablecoins are connected with some assets. For example, stablecoins are pegged with fiat currencies like USDT and DEI.
- Algorithmic stablecoins are pegged with a code. Algorithms control the supply by burning or minting tokens to maintain a peg with supply & demand.
So, you cannot paint every stablecoin with the same regulations because this will not help protect investors. Regulators have to differentiate between various stablecoin flavors to propose reasonable policies. Experimentation will allow for consistent crypto world growth.
Regulators are working hard to integrate stablecoins into the financial system without over-regulating. They are exploring ways to avoid confusion between utility and technology.
Some regulations have been proposed like the stablecoin issuer is required to carry depository institution insurance and if this is ignored it be a breach of federal law. The stablecoin issuers will be classified as banks. It means your USDC wallet will be your account on Coinbase acting as a crypto bank.
Stablecoin seems to be the first to get regulated but the rules that govern USDT or USDC will not be the same as Ethereum or Bitcoin. However, there is a need for education to understand clearly how stablecoin products function.