U.S. regulation is comprehensively tracking stablecoins, and USDCs are at a disadvantage in the game with banks
On September 23, Beijing time, the cryptocurrency market rebounded after a two-day plunge. Bitcoin (BTC) rebounded from around $39,500 to around $44,000 within 24 hours.
The Fed's latest monetary policy is one of the fundamentals driving the rally. On September 22, US Eastern Time, the Federal Reserve stated that if the US economic recovery can continue to make expected progress, it may slow down the pace of bank bond purchases. Reducing bond purchases is not a signal of raising interest rates. At present, the benchmark interest rate continues to remain at 0 % to 0.25% range.
Federal Reserve Chairman Powell still called the current high inflation situation "temporary" in a follow-up press conference. Such a statement once again brought market opportunities to the function of cryptocurrencies as a hedge against the depreciation of the US dollar. However, the more unfavorable factor for the market in the near future is the U.S. financial regulator’s close attention to the field of encrypted assets, and the dollar-anchored stablecoin bears the brunt.
Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), directly described stablecoins as "poker chips in casinos"; the U.S. Treasury Department and the Federal Reserve are concerned that stablecoins "may disrupt the financial system" and are preparing a report with several regulatory agencies .
Since its inception, stablecoins have become an unprecedented "thorn in the eye" of the US financial regulators, especially when it is in conflict with financial payment institutions such as traditional banks. At the beginning of September, when the SEC issued a lawsuit warning to suspend the launch of stablecoin lending products by the encrypted asset exchange Coinbase, the conflict between financial upstarts and traditional institutions has become public.
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U.S. regulation comprehensively tracks stablecoins
"These stablecoins are now almost like poker chips in a casino." On September 22, SEC Chairman Gary Gensler made it clear in a live interview with The Washington Post that he doesn't like stablecoins. Cryptocurrencies are seen as a threat to investors.
Stablecoins that Gensler "dislikes" usually refer to encrypted assets that are pegged 1:1 to the US dollar. Popular stablecoins include USDT, USDC, DAI, etc. They are generated through smart contracts on the blockchain network, and their tokens are issued. The main body declares that each stablecoin is backed by an equivalent of US$1. Therefore, these companies theoretically need to hold a large amount of reserve assets, usually in the form of short-term securities such as cash, government debt or commercial paper, except DAI. A decentralized stablecoin built on the Ethereum network, which is generated by collateral assets such as ETH.
Although Gensler taught blockchain in colleges and universities before becoming chairman of the SEC, he is not a friendly army in the field of cryptocurrencies, and this is not the first time he has made negative comments on cryptocurrencies.
On September 14, he stated at a routine oversight hearing of the U.S. Senate Banking Committee that cryptocurrencies and related financial products are full of fraud and abuse in certain applications, and it is more like a "wild west", or It’s the old world of “buyer beware” that existed before securities laws, and regulators are working overtime to create a set of rules to oversee the volatile cryptocurrency market.
A KOL in China’s encryption circle jokingly said, “People who understand you are often the most stabbed.” According to Mark Cuban, a well-known crypto asset investor and owner of the NBA Mavericks, the “first knife” of regulation will be on stablecoins.
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U.S. Treasury to submit report on stablecoins next month
In mid-September, some media disclosed that the U.S. Department of the Treasury is cooperating with other financial institutions under the President’s Financial Market Working Group to submit a report within the next month, focusing on the processing and settlement methods of stablecoin transactions, among which the possible Stablecoin Regulatory Framework. From this framework, officials will know how much power they have within these agencies and whether they need to seek further authorization from Congress to regulate stablecoins.
One of the regulatory concerns is the risk of stablecoins to the operation of money market funds and so on. Since stablecoin issuers hold a large amount of commercial paper or other short-term securities, such as U.S. Treasury bonds or certificates of deposit, if the cryptocurrency plummets, investors may choose to withdraw funds suddenly. Investors suffer losses on the one hand, and the financial system is worse. There may be a run.
Another research direction of regulation is likely to mandate the transparency of stablecoins and their supports, including U.S. dollars, short-term bonds, and commercial paper. The Treasury Department and other regulators also want to rein in illicit activity related to stablecoins, many of which are used by entities with illicit financial activities hidden offshore.
In addition to the Treasury Department, including Federal Reserve Chairman Powell has also been emphasizing vigilance to the public about stablecoins, believing that they are as risky and vulnerable to fraud as other cryptocurrencies.
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USDC and the bank game are at a disadvantage
The third-party data website Coingecko has included 32 stablecoins linked to the value of the US dollar, including USDT, USDC, BUSD, etc. issued by centralized entities, as well as DAI issued by decentralized entities. The total market value of large and small US dollar stablecoins has Over US$126.6 billion, accounting for 6.2% of the total market value of the entire encrypted asset market, accounting for 40.26% of the market value of Bitcoin, and the daily trading volume of US dollar stablecoins reached US$86.1 billion.
It is difficult for such a large-scale stablecoin market directly linked to the current legal currency not to be targeted by regulation.
Regulatory crackdowns on stablecoins have been routine in the past, such as the New York Attorney General’s transparency investigation into Tether, the issuer of USDT, and Bitfinex, a cryptocurrency exchange. In the end, the company settled with regulators with fines and improved transparency . Today, the regulatory focus on stablecoins is systemic, focusing on whether these fiat-pegged cryptocurrencies pose a threat to the existing financial system, especially to banks.
Since the value of stablecoins does not fluctuate much, it could theoretically gain credibility as a mainstream payment method, especially if it is used on e-commerce platforms. At present, stablecoins are mainly used as an exchange intermediary between cryptocurrencies, and have not yet replaced traditional payment methods such as credit or debit cards. But that could change when groups like the Diem Association, which is tied to Facebook enough to leverage the social giant's billions of users, try to issue Libra (later renamed Diem), Popularize stablecoins in the direction of purchasing goods and services.
Aside from the advantage of low volatility, the broader appeal of stablecoins is speed. Be aware that in traditional US banks that process credit card payments and direct deposits, transactions are settled en masse 3 times a day, and only during business hours. That's not friendly enough for the populace. Stablecoins solve this problem because they can be transferred quickly within a blockchain network, with much lower time and transaction costs.
These advantages over banks are not enough for regulators to stand on the standpoint of "stablecoins are innovative". On the one hand, regulators want to ensure that the companies that issue these stablecoins have assets strong enough to back the value of the stablecoins so that no runs will occur when users want to convert them into cash; secondly, regulators need to consider that these stablecoins Whether currency assets are more like "unregulated bank deposits or mutual funds in disguise" and whether they will cause unfairness with regulated deposit funds; Molecules use it to carry out illegal activities such as money laundering and crime.
Now that the general direction of regulation has been clarified, can stablecoins grasp the pulse of regulation to maximize their strengths and avoid weaknesses?
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USDC issuer Circle is applying to become a national bank
This means that USDC is both regulated and has sufficient reserves, but the development of USDC has brought other pressures on the Federal Reserve, because the central bank needs to consider whether these non-mainstream financial institutions should be allowed to parallel traditional banks, in other words , Can USDC directly deposit reserves into the Fed's account.
Compliant stablecoins like USDC are becoming the main force in the game with traditional banks, but regulation, as the arbiter in the middle, still does not trust cryptocurrencies enough.
In early September, Coinbase, a compliant encrypted asset trading platform and a U.S. stock-listed company, was warned by the SEC because the exchange planned to launch a USDC-related lending product. In the end, the product plan was canceled due to this warning. There is a voice from the outside world that the SEC's plan to suspend Coinbase is likely to be that the company's products threaten the interests of banks.
Coinbase's embarrassment has made public the contradiction between the financial upstart of encrypted assets and traditional banks. Judging from the vigilance of the regulators on stablecoins, the game between the upstarts and the old forces is still at a disadvantage.
