How Can Crypto Stablecoins Promote Financial Stability?

The encryption industry has developed for more than ten years, and stablecoins are the biggest winners.

The data shows that the total stablecoin market has reached 11.15 billion US dollars; the market value of the leading stablecoin project USDT has surpassed XRP, ranking third; the stablecoin market is blooming everywhere, and central banks of many countries are actively researching national digital currencies. The European Union wants to launch a digital euro ; The Facebook Libra project has attracted attention; even public chains and exchanges are laying out stable coins for their own ecology.

Countless players have spied on this track, and it has also aroused our thinking. In addition to being used as a deposit and withdrawal channel, what kind of empowerment can stablecoins do for the implementation of blockchain technology (or more precisely, the implementation of open finance). Stablecoins As a value exchange medium between fiat currency and cryptocurrency, even between fiat currencies that are blocked due to geographical, political and economic reasons, what role can it play in the business model?

For this event, we invited guests such as Yang Mindao, founder of dForce, Frank Ling, vice president of Bixin, and Phil Ren, head of Velo China community. What kind of sparks will these guests collide with? Let's stay tuned.

The following is the live content:

Question 1: In the past year, three major financial watchdogs—the Bank for International Settlements, the U.S. Federal Reserve Board, and the Financial Stability Board—have expressed concern about the threat posed by encrypted stablecoins to global financial stability. What do you think? , Can the hurdle of stablecoin compliance pass, and what ideas can be used as a reference for compliance?

Phil Ren: I think, judging from the reports, all three regulators are concerned about financial stability. They worry that the emergence of encrypted stablecoins will lead to the excessive circulation of unregulated currencies, bringing turmoil and risks to the international monetary system, which will lead to potential fluctuations and crises.

A typical example is the global financial crisis of 2007-2008. One of the causes of this crisis came from excessive borrowing in the US real estate market, which eventually led to a global financial liquidity crisis. So from this history, we can summarize three main lessons as a reference for today's crypto stablecoin market:

1. The project party needs to accept supervision.

Regulations are developed to ensure the stability and safety of the market. If a market grows rapidly but is unstable, it is likely to collapse in the long run because various risks are not mitigated. Therefore, any project that wants to operate in the market for a long time needs to accept supervision and maintain market stability;

2. Participants in the encrypted stable currency project need to be limited to qualified institutions or individuals.

For stable currencies, whether it is the traditional USDT or the new DAI, they are complex financial instruments, and participants need to fully understand them, understand their respective advantages and potential risks before using and participating. In addition, a project needs to establish a corresponding review system for participants to review and ensure that all participants in its ecology are mature enough and experienced enough to avoid individual risks in the system.

3. Encrypted stablecoins need to effectively supplement the market, rather than harm the existing financial system.

If a stablecoin wants to be accepted, it must be able to solve various existing problems in the current financial system, such as lack of efficiency, or lack of effectiveness, etc., and improving the efficiency of the system is the advantage of blockchain technology.

Therefore, as long as the blockchain protocol follows the above principles in its design and development, it is likely to be accepted by the mainstream market and regulatory agencies, because the mainstream market and regulatory agencies exist to add value to the system, not to bring turmoil.

In this sense, the Velo protocol has a "compliance gene" from the beginning of its design: firstly, all participants in its ecology need to undergo qualification review; secondly, it solves the problems of market segments that cannot be solved under the existing financial system. problem, namely, the problem of providing money transfer services to the "unbanked" and "financially inaccessible" populations.

Frank Ling: 1. The threshold of compliance will definitely be crossed. In the long run, the Federal Reserve cannot control the issuance of stable coins, and the U.S. dollar will not be able to raise interest rates in the end.

2. From a financial point of view, sovereign countries will also increase the issuance of stable coins. From a long-term perspective, how to effectively issue currency and stimulate demand under the heavy financial pressure. How to effectively withdraw currency, improve the tax system, and ensure tax sources are the basis for the survival of the country.

3. When choosing between "compliance" and "fiscal", sovereign countries will choose to ensure fiscal goals, control tax sources, expand the influence of sovereign currency, and downplay compliance. Compliance is essentially the control and deterrence of the banking system. Once the real trading volume in the virtual world explodes, it is a position that cannot be missed.

Yang Mindao: Now most of the stablecoins have begun to follow the path of compliance, which has already taken the first step. At the compliance level, the main issue is the compliance supervision at the border of legal currency. I believe that global coordinated supervision will be a major trend, and KYC and AML on exchanges and wallets are relatively comprehensive.

The recent freezing of an address asset of 100,000 USDC triggered a discussion on the autonomy of encrypted assets. I think law enforcement agencies should distinguish between pools and personal addresses when enforcing the law.

The pool is not personal property, and should not be frozen in terms of law enforcement, but the relevant parties can be required to freeze the personal address. For example, as long as the funds come out of the pool and return to the personal address, the assets will be frozen.

Issuers of centralized stablecoins or decentralized stablecoins will most likely have similar mechanisms to adapt to regulation in the future.

Question 2: What are the application scenarios for compliant stablecoins? Is there an essential contradiction between stable currency and fiat currency?

Frank Ling: 1. Stablecoins are widely used now and are growing rapidly. The scenarios we can use, mainly virtual scenarios, will use stablecoins.

2. Compliant stablecoins also encounter territorial issues. This is a bit complicated. For example, I have Brazil’s USDT and USDC. Tens of millions of them will enter China to purchase goods for small and medium-sized enterprises. Is it compliant or not?

3. The stable currency itself can be a compliant purchase, but the scenarios used in circulation, the process of entering accounts, and taxation may all need to be determined by local laws.

4. Stablecoin, I personally think, is just a symbol of value, and the value connotation is riveted with USD/RMB. It is a USD Token, but it has given the soul of the USD and left the ledger.

5. Leaving the ledger, if the Federal Reserve still recognizes this stable currency, USDC is the US dollar. If the Federal Reserve denies it, the Monetary Authority considers it only compliance. It's just a proof.

Yang Mindao: There is no essential conflict. The current form of currency is a symbol, both compliant stablecoins and fiat currencies. Most compliant stablecoins are anchored behind the US dollar. This does not harm the interests of the US dollar in expanding the world. It can even be said that the US dollar Compliant stablecoins have found new scenarios for the U.S. dollar and accelerated the penetration of the U.S. dollar in various countries and regions.

Compliant stablecoins can be used in many ways, including payments, transactions, and overseas allocation of assets.

In terms of payment, as long as there are OTC merchants in the region who are willing to accept, compliant stablecoins can become a medium for convenient portability and fast settlement; in terms of transactions, whether cryptocurrency transactions are conducted on centralized exchanges or recently driven by DeFi Farming on DEX The trading volume of stablecoins is huge; in terms of overseas asset allocation, Chinese people can easily buy USDC for US dollar asset allocation.

Phil Ren: I think if we look back, stablecoins were originally created to help investors and speculators buy cryptocurrencies. Because in many regions, there is no direct channel between fiat and cryptocurrencies.

Later, as the "efficient" and "transparent" advantages of blockchain technology became more and more obvious, stablecoins gradually began to enter a wider range of financial fields, such as international transfers, loans, payments, and even derivatives.

In the past two years, we have seen the explosive growth of new situations such as distributed finance in each of the above new fields, and people are increasingly finding that financial solutions using blockchain technology are easier to use and more trustworthy .

So in my opinion, the relationship between stablecoins and fiat currencies is not contradictory, but complementary. Stablecoins correspond 1:1 to fiat currencies, so the functions and services they provide are similar.

However, as I mentioned above, since stablecoins use more "efficient and effective" blockchain technology solutions, they can reduce the cost of transferring value in traditional currencies, so those that are too costly for traditional financial service providers The high market has thus become an opportunity for encrypted stablecoins.

In the international remittance market, for example, many unbanked and financially inaccessible immigrants are unable to send money across borders because it is too costly to send using traditional systems.

Through blockchain technology, the cost of remittance can be greatly reduced, thereby providing remittance services for this part of immigrants, and cutting into markets that traditional financial service providers cannot enter.

The third question: Will the relationship between stablecoins and regulation be confrontation or acceptance? Will regulation hold back the industry?

Yang Mindao: Acceptance is not confrontation, so catering to supervision is the general trend. But there is also a game between the two, and regulation also needs to keep pace with the times.

It can be seen that both USDT and USDC have Blacklist, which is a sign of acceptance. Facebook's Libra from SDR to anchoring the US dollar is also an acceptable compromise. The tightening of national regulation may stifle financial innovation. At present, it seems that the regulation has not been completely tightened, allowing stablecoins to have some room for development.

The future game can only be crossing the river by feeling the stones, but as an entrepreneur you have to participate.

Phil Ren: The current stablecoin market lacks regulation. For example, Tether, the company that issues USDT, is known for not disclosing its currency collateral for fear of having their accounts frozen.

But over time, Tether has faced endless investigations by the federal government. Tether is now increasingly cooperating with federal regulators. As boss Mingdao just said, they have recently started to cooperate with federal regulators to freeze some problematic wallet addresses.

So I think stablecoins ultimately need to be regulated, both logically and realistically, because in essence, stablecoins are complementary to fiat currencies, have the same functions as fiat currencies, provide the same markets as fiat currencies Serve. As stablecoins become more mainstream, they need to embrace regulation in order to be accepted by the authorities overseeing mainstream markets and ensure safe use by a wider audience.

Therefore, regulation will not hinder the development of stablecoins, but will make the industry healthier. For stablecoins, the choice is nothing more than two: either actively accept supervision, or be passively supervised.

Frank Ling: In the past, the financial system used the bank as the core node, and the payment company was the small cashier. All codes of conduct can be controlled by licenses, and the supervision is relatively strict. The core of the reason for this is tax-driven and the so-called anti-money laundering.

The emergence of stablecoins has significantly increased the difficulty of actual supervision and created a vacuum in the virtual world. The current supervision is to maintain the status quo, and the FBI will destroy businesses related to crime, underground markets and darknet head websites.

KYC institutions, wallets and CEFI/exchanges cooperate in compliance.

On the whole, compliant businesses are still compliant. The purely new business and the virtual world are still very difficult. Uniswap and DeFi are a huge door. After opening, the financial industry may not be able to go back.

Many compliance and supervision are implemented in conjunction with "safety".

Question 4: Centralized stablecoin or decentralized stablecoin, which one do you prefer, and what are their respective advantages and disadvantages?

Phil Ren: Each type of stablecoin has its advantages and disadvantages.

For centralized stablecoins, these projects utilize blockchain technology, but use centralized governance and financial systems.

At its core, project owners control the supply of their tokens and can issue coins at their discretion. Therefore, the centralized model is very similar to the traditional money supply system, which is controlled by a centralized organization.

The advantage of this model is that blockchain technology more effectively improves the efficiency and effectiveness of project technology.

In terms of governance, an interesting scenario arises: if the project is compliant (like PAX and GUSD), it is of course more reliable to use, but often restricted in circulation;

If the project is non-compliant (such as USDT), its issuance and circulation are very flexible, but it needs to be subject to regulatory investigations, and it is "not so reliable" for users, because the issuer cannot disclose the collateral. Be transparent and credible enough.

On the other hand, decentralized stablecoins are also interesting.

The decentralized model utilizes blockchain technology and a distributed governance system. In a decentralized model, users typically stake cryptocurrencies to obtain stablecoins that are pegged to the value of fiat currencies.

Projects like DAI are more transparent than centralized models because all transactions are based on smart contracts that accurately reveal the details of the collateral.

However, these projects often lack sufficient risk control mechanisms for their users (because cryptocurrency projects are "open to everyone"), so such projects end up exposing many immature users to huge risks.

Therefore, in my opinion, a good model should have both the transparent advantages of a centralized system and a traditional governance system to ensure that its participants are sufficiently qualified investment entities or operators.

Only by combining an efficient and transparent system with authoritatively certified participants can we ensure that we can have an effective and high-value model.

Frank Ling: 1. I personally prefer a decentralized model, because it represents a certain idealized model. But the stable currency itself is a long-term, preferably permanently stable asset. In the long run, it must be able to resist extreme black swan risks. However, in the current state, neither centralization nor decentralization is perfect in the long run. Black swans come in groups and leave in groups. When she doesn't show up, it's all about Xiao Tiantian, and when 2020 comes, it's all about Mrs. Niu.

2. The problem of USDT itself is actually through the introduction of liquidity and OTC market making, which covers the problems in development. The advantage of centralization is that it is covered by the big brother and has the credit endorsement of the big brother. When the hole is not big, it can As long as you can cover it, it's fine.

3. What human nature likes most is a run. At a high point, the profit is sold. When it is low, run to avoid risks. Any model must block risks to prevent concatenation, or even magnify them. This is the problem with all stablecoins. Moreover, the emergence of the cryptocurrency industry is a distrust of legal currency. The risk of fiat currency has not been fully priced in. In the second half of the year, the dollar will weaken, and each company will face new tests.

4. I have no preference for stablecoins. Small and beautiful, fully competitive, fully mobile, preferably in some local markets, is good enough. Make profits as much as possible and cover risks. Risks cannot be avoided, try to grow as much meat as possible.

Yang Mindao: Centralized stablecoins and decentralized stablecoins each have their own opportunities. In the foreseeable time, centralized stablecoins will account for the majority of the market share.

The advantage of centralized stablecoins is that the minting channel is smooth, US dollars can easily enter the cryptocurrency, and there are centralized institutions behind to promote the development of the scene. The disadvantage is that the competition among centralized stablecoins is fierce, and the interests of institutions are inconsistent with each other. Issue your own stablecoin.

The advantage of decentralized stablecoins is that they are “neutral” and can be easily integrated by DeFi protocols, and have the opportunity to be further integrated by centralized institutions. The disadvantage is that the initial liquidity of the decentralized stablecoin Bootsrap is relatively difficult, and the issuance mechanisms of different decentralized stablecoins It is not as concise as the centralized stablecoin, and more arbitrage and how to regulate it under price fluctuations need to be considered.

Question 5: Has the current stablecoin market structure been determined? We have seen so many emerging stablecoins being born. Which type of stablecoin do you think can successfully break the circle?

Phil Ren: In the past few years, we have seen a rapid growth in the market share of stablecoins.

The first was Tether’s USDT, and later various new projects such as USDC appeared one after another.

Looking into the future, the stable currency market will continue to grow, as the market demand for such products will continue to expand, and usage scenarios will expand from purchasing cryptocurrencies to new aspects such as cross-border transfers, lending and payment solutions.

One of the reasons why encrypted stablecoins will continue to grow in financial services is because they are technologically superior to existing electronic payment systems.

The encrypted stable currency adopts blockchain technology, which makes it easier to transfer money in the network, and the transaction records are transparent, and its decentralized mechanism is more trustworthy.

On the other hand, however, stablecoins function the same as fiat currencies. When users transact with stablecoins, they are effectively using a medium of exchange "based on fiat currency value."

So I think that in order for any stable currency to flourish in the market in the future, it needs to be a supplement to the mainstream financial system, not a shock to it.

More specifically, I think a proper "mainstream" stablecoin should have three core characteristics: compliance, value creation, and the ability to solve real problems.

"Compliance" means that the stablecoin needs to be strictly regulated and comply with local regulatory rules.

"Value creation" refers to the fact that the stablecoin project should add value to the existing financial service market and expand the pie of the entire market, instead of grabbing stock shares from existing partners.

"Solving practical problems" means that a successful product should solve practical problems that plague the world. For example, VeloProtocol can help the large number of unbanked and financially inaccessible people in Southeast Asia solve their remittance problems.

In short, any stable currency that meets the above three characteristics has the opportunity to stand out from the cryptocurrency market and resonate with the mainstream market.

Yang Mindao: Compared with other stablecoins, USDT/USDC, the fiat currency-based stablecoin, is ahead of the competition, and BUSD and HUSD rely on exchange resources to catch up.

It is hard to say who will win between USDT and USDC in the end. Western markets accept USDC, a compliant stable currency, and do not agree or support USDT. This can bring long-term competitive advantages to USDC. On the other hand, USDT has the power to grow wildly in the market .

The first stablecoin out of the circle is USDT. It is not easy for other stablecoins to grab the status of USDT. The network effect after assets are connected by different protocols and applications to form trust/use is very strong.

It is a smarter approach for emerging stablecoins to be parasitic on fiat currency-based stablecoins. For example, our USDx can combine the characteristics of decentralization and the advantages of centralized stablecoins with less friction through synthetic methods (backed by anchoring USDC/PAX/TUSD). , the emerging stable currency musd quickly reached more than 20 million US dollars through incentives, but after the incentives, if the stable currency is not connected by enough applications and has usage scenarios, these stable coins are very difficult to retain, so how musd will accumulate in the future remains to be seen. Hard to say.

The opportunity for emerging stablecoins lies in the strategy of encircling cities from rural areas, starting with decentralized protocols, and then to second- and third-tier centralized exchanges.

Frank Ling: 1. There will be a lot of stablecoins, especially after UniSwap/Dex and other On-Chain services appear, in the future all kinds of stablecoins will flourish and be very convenient to use, just like P2P back then. Stablecoins have not yet been popularized to the general public, and they are still in a small circle.

2. It is very difficult for stablecoins to break through the circle. It is essentially trust/service driven, and there must be scenarios, otherwise it will be difficult for users to take actions.

3. In the future, more stable coins will be issued by various companies, which is equivalent to issuing bonds. The essence of the platform currency, or the long-term form, should be a stable currency.

4. Most of the stable coins will be the flow between enterprises and users. The bigger the company is, the farther the stablecoin can expand. Small businesses issue stablecoins by mortgaging BTC, while medium and large enterprises rely on cash flow and accounts receivable, or in other words, corporate credit to issue.

5. Most stablecoins are unstable. There is arbitrage space brought about by different levels of trust. Equivalent to bill discounting.

6. Today's stable currency is still in a relatively early form. In the long run, it's bonds. In the short term, it looks like legal currency.