With mass adoption approaching, stablecoins have brought new difficulties for regulators

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Stablecoins pose special challenges for regulators. Although there is no unified definition of stablecoins, the common point of commonly used definitions is that stablecoins are designed to maintain a stable value relative to a designated currency, asset, or such currency/asset pool. They are in contrast to conventional cryptocurrencies, which do not have this kind of stabilization mechanism, and their value tends to fluctuate, sometimes even sharply.

related: All the risks, no gains?The vague definition of stablecoins causes problems

Stablecoins do not represent a unified category, but various cryptographic tools that can undergo major changes in law, technology, function, and economy. Despite its name, it needs to be emphasized that this asset cannot guarantee stability, which depends on specific design functions and governance mechanisms.

related: Algorithmic stablecoins are not really stable, but can this concept be redeemed?

Regulators’ attention to stablecoins

Since 2014, stablecoins have been on the rise, when the first stablecoin Tether (U.S. dollar to U.S. dollar). Although they have become important digital assets in the blockchain ecosystem in just a few years, they have not attracted much regulatory attention.This suddenly changed Announcement of the Libra Project Initiated by the Libra Association in June 2019, Facebook is one of its founding companies.

related: Stable currency: a journey towards stability, trust and decentralization

Almost immediately, many financial institutions in the world-including Financial Stability Board, European Central Bank, Bank of England, U.S. Federal Reserve Bank And the U.S. House of Representatives Financial Services Commission -Made a strong statement to Libra, the collective mood is cautious and concerned, highlighting serious potential risks.

related: How Facebook Libra seeks compliance, but it may not launch in 2020

Libra has the potential to become global and reach billions of users through a user-centric social network platform, which shows a whole new field of stablecoins. Indeed, through the platform that has been seamlessly integrated in the lives of the global population, the potential impact of global, fast, cheap, convenient, and seamless payment solutions will be very far-reaching. The authorities have realized that this crypto asset deserves special attention due to its potential size, borderlessness, and impact on the economy and financial system.

In the next few months, many official reports and documents analyzing stablecoins European Central Bank, Group of 7, FSB, Financial Action Task Force with International Organization of Securities Commissions. They mainly emphasized risks and challenges, including financial stability risks and concerns about consumer and investor protection, anti-money laundering, combating terrorist financing, data protection, market integrity and currency sovereignty, as well as competition, monetary policy, and cybersecurity. Operational flexibility and regulatory uncertainty.

Among many official statements and reports, the Libra Association announced the redesigned Libra 2.0 project in April 2020, and shortly thereafter, this coin Was renamed DiemTo distinguish it from the controversy surrounding Libra.

related: New name, old question?Libra remodeling Diem still faces challenges

Stablecoins and the United States

In the United States, the Office of the Comptroller of Currency made an active contribution to the debate, publishing three explanatory letters related to digital assets.first of all letter The conclusion reached in July 2020 is National banks can hold digital assets Custody on behalf of their customers.second letter The conclusion reached in September 2020 is National banks can hold stablecoins Retain the account on behalf of the client.Finally, the latest letter The bonds issued in January 2021 effectively permitted the participation of the National Bank and the Federal Reserve Association Independent nodes verify nodes in the network (A common form is a distributed ledger), and use stablecoins to facilitate payment activities and other functions.

OCC recognizes that, like other electronic stored value systems, stablecoins are electronic representations of currency. It does not store value in a more traditional way, but is expressed in stable coins, but this only constitutes a technical difference and does not affect the basic activities or their permissibility. To address potential risks, banks should act in accordance with existing regulations and compliance requirements, and at the same time be consistent with applicable laws and safe and reliable banking practices.

On the other hand, in December 2020, before the end of the US Congress, the draft of the “Stablecoin Network Sharing and Banking License Enforcement (STABLE) Act” was introduced. Suggest a substantial increase in supervision For stablecoins, all stablecoin issuers are required to have a bank charter, must obtain licenses from multiple federal agencies and comply with banking regulations. The bill is in the early stages of the legislative process and has not yet been submitted to the House of Representatives.

related: Nightmare on Stable Street: Centralized stablecoins may be doomed to failure

Stablecoins and the European Union

Simultaneously, The European Commission issued a comprehensive regulatory proposal Released on the Crypto Asset Market (MiCA) in September 2020, it aims to solve the potential risks of stable currency to financial stability and orderly monetary policy, especially those currencies that may be widely accepted and systemized. MiCA provides a customized regulatory framework and establishes a unified set of rules for crypto asset service providers and issuers.

related: Europe awaits implementation of a regulatory framework for crypto assets

For stablecoins with great potential, MiCA has introduced stricter compliance obligations, including stricter capital, investor and regulatory requirements. They will cover governance, conflicts of interest, reserve assets, custody, investment and white papers, as well as regulations on the authorization and operating conditions of service providers, which require special authorization. Requirements include prudent safeguards, organizational requirements and fund custody rules. In addition, more specific requirements will apply to certain services, including crypto-asset custody; trading platforms; exchange of crypto-assets; receipt, sending and execution of orders; and advice on crypto-assets.

MiCA is one of the most comprehensive attempts to regulate stablecoins, and its goal is a stablecoin that is not subject to financial regulation. EU regulators hope not to leave any stablecoins outside of the regulatory framework. The issuance and trading of any stable currency that does not fall within the definition of MiCA (such as Tether) and does not meet regulatory requirements is not allowed within the EU. Refusing regulatory approvals for certain stablecoin products that are booming in other jurisdictions may lead to regulatory arbitrage.

Takeaway

Currently, global regulatory review focuses on investigating and emphasizing potential risks. The benefits of stablecoins and the benefits of cheap, fast and seamless payments (including cross-border remittances) are rarely emphasized, and most people just admit it.

The main regulatory challenge related to global stablecoins is the international coordination of regulatory work across different economies, jurisdictions, legal systems, and different levels of economic development and needs. Areas requiring a unified legal and regulatory framework include managing data use and sharing, competition policy, consumer protection, digital identity and other important policy issues. The significant diversity of stablecoin structures, economic functions, technical designs, and governance models has exacerbated regulatory difficulties.

Stablecoins are an important problem for the DLT-based digital economy in the future, and the challenge for regulators is to ensure appropriate regulatory measures, support innovation and pay attention to potential risks. Stablecoins may be promoted on a global scale, thereby expanding regulatory tasks, but at the same time increasing the urgency and importance of appropriate regulatory considerations.

The views, thoughts and opinions expressed in this article are only the personal views of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article is for general reference only and is not intended and should not be regarded as legal advice.

Agata Ferreira He is an assistant professor at Warsaw University of Technology and a visiting professor at many other academic institutions. She researches law in four different jurisdictions under common law and civil law systems. Agata has practiced in the UK financial industry for more than ten years in a leading law firm and an investment bank. She is a member of the expert panel of the European Blockchain Observatory and Forum, and a member of the European Blockchain Advisory Committee.

The views expressed are only the personal opinions of the author and do not necessarily reflect the views of the university or its affiliates.