Introduction
Benjamin Franklin once said, “Trade in confidence.” This statement holds true even today as the value of seemingly modern and innovative assets, such as stablecoins, relies heavily on the traditional value of trust. In this article, we will explore the concept of stablecoins and their purpose in reducing the volatility associated with other cryptocurrencies like Bitcoin and Ethereum. We will also discuss the advantages, disadvantages, and regulatory challenges that stablecoins face.
What are Stablecoins?
Stablecoins are a type of cryptocurrency designed to minimize price volatility by pegging their value to a more stable asset, such as a fiat currency (e.g., the US Dollar, Euro, or Peso), certain commodities (like gold, silver, or oil), or even other cryptocurrencies. Their primary goal is to facilitate transactions and serve as a store of value, making them more practical for everyday use compared to highly volatile cryptocurrencies.
Advantages of Stablecoins
- Reduced volatility compared to other cryptocurrencies
- Easier and more efficient transactions
- Usage in international payments and remittances
- Increased liquidity, enabling faster exchange on cryptocurrency markets
- Value in decentralized finance (DeFi), lending, and smart contracts
Disadvantages of Stablecoins
- Dependence on the underlying asset, making their stability tied to it; if the underlying asset falters or weakens, so will the stablecoin
- For collateralized stablecoins backed by fiat money, stability is linked to the success of the underlying currency and interactions with regulated financial institutions safeguarding deposits
- General challenges faced by all cryptocurrencies, including government regulation, oversight, and potential sanctions
Regulatory Landscape and the Future of Stablecoins
The allure of cryptocurrencies, in part, stems from their ability to operate beneath the radar and the ambiguity or lack of regulation in many countries. However, as governments worldwide increasingly move towards more comprehensive regulations, the question arises: Will these assets retain their appeal once fully regulated and supervised?
The United States, under President Trump’s administration, initially expressed skepticism towards cryptocurrencies. In 2021, Trump referred to Bitcoin as “a scam,” but just three years later, during the 2024 Bitcoin Conference, he expressed plans to make the US the crypto capital of the world and Bitcoin its superpower. This shift in stance can be attributed to various factors, including the growing need for international coordination regarding cybersecurity, operational compatibility, and adherence to international normative bodies like the Bank for International Settlements and the International Monetary Fund.
The European Union was the first to introduce comprehensive regulation for crypto-assets, known as MiCA (Markets in Crypto-Assets), which came into effect in June 2023. The law covers cryptocurrencies, stablecoins, and covered stablecoins while regulating subjects, activities, and objects. Meanwhile, the United States has lagged in legislative processes due to political instability and federal elections.
Regulatory Stances
Key players in the US, such as the Federal Reserve and the Department of the Treasury, have emphasized the need for a comprehensive regulatory framework. The Securities and Exchange Commission (SEC) recently published a statement on stablecoins, indicating that covered stablecoins meeting specific criteria won’t require registration processes typically needed for financial instruments. The Federal Deposit Insurance Corporation (FDIC) acknowledges the importance of regulating stablecoins to protect banking stability.
In the US, proposed legislation includes the Stable Act and Genius Act. While the European MiCA is comprehensive, covering cryptocurrencies, stablecoins, and covered stablecoins, the US proposals primarily focus on covered stablecoins. The Stable Act prioritizes stability and consumer protection, while the Genius Act aims to optimize market efficiency and foster financial innovation.
Conclusion: The Path Forward
The confidence in stablecoins directly depends on the control mechanisms established, such as 1:1 support obligations between cryptocurrencies and stable fiat currencies held in regulated financial institutions. Transparency, timely information access, direct and coordinated supervision between local and federal authorities, and independent third-party audits are crucial. The Genius Act appears to be progressing further in the legislative process, having received 18 favorable votes and 6 against in the Senate Banking Committee. Meanwhile, the Stable Act remains under discussion in the House of Representatives.
With limited time left, it is expected that the regulatory landscape for stablecoins will solidify in the coming months. The US cannot afford to delay any longer.