Editor's Note: This article comes fromMengyan Finance (ID: Meng-eyes), reprinted by Odaily with authorization.
, reprinted by Odaily with authorization.
If the U.S. regains control over pseudonymity in stablecoin trading, as it seems possible, it could have major implications for the crypto industry, our columnist says.Imagine the following scenario: Someday in 2021, financial regulators announce that all stablecoin holders must be verified. So, what will happen to the cryptocurrency ecosystem?
Currently, a significant portion of stablecoin usage is pseudonymous. In other words, you or I can hold $20,000 worth of tether or USDC stablecoins in an uncustodial wallet (that is, not on an exchange) without providing them to Tether or Circle, the managers of these stablecoin platforms. Authentication. We can send the $20,000 to other users, and then they transfer the coins to the chain, and everyone on the chain does not need to reveal their identity.The only point at which stablecoin users are required to submit to the Tether or Circle KYC process is to convert the stablecoin directly into traditional bank dollars. Or vice versa, deposit USD into Tether or Circle and get a freshly minted stablecoin.
In a world where traditional non-blockchain financial institutions like PayPal, Chase, and Zelle link all payments to names and addresses, stablecoin networks have become a rare moat for digital payment privacy. This also allows for some rather exotic uses for stablecoins.
In Moscow, some Chinese gray-market clothing vendors exchanged cash for Tether to repatriate profits, CoinDesk's Anna Baydakova wrote. Ukrainian companies importing from Turkey would use Tether to circumvent foreign exchange controls. Additionally, a multimillion-dollar Ponzi scheme also relies on the Paxos standard (PAX) for payments. Meanwhile, in the world of decentralized finance (DeFi), unidentified computer programs are using USDC and other stablecoins to conduct billions of dollars in unregulated financial transactions.But will regulators allow this privacy moat to continue? What if, at this very moment, officials at the Financial Crimes Enforcement Network (FinCEN), the U.S. Treasury Department’s money laundering watchdog, were plotting how to rein in stablecoin pseudonyms?Let me speculate on possible means.FinCEN may rule that from now on, anyone who wants to acquire tether, USDC, or any other official stablecoin (TrueUSD, Paxos standard, Gemini dollar, Binance USD, HUSD) will need to apply for a verified stablecoin account. That, then, means providing ID photos, proof of address, and other information to Tether, Circle, or other issuers.This won't be a huge problem for many existing stablecoin holders. Because professional arbitrageurs using stablecoins to move value from one centralized exchange to another may have already done KYC. And retail investors who put their stablecoins on an exchange like Binance won't see any change, because the exchange has verified their identity anyway.But given that every transaction needs to be associated with a name and address, this will certainly have an impact on gray markets such as Chinese traders in Moscow.In addition, the publishers themselves would be inconvenienced. Building the infrastructure to collect and verify the identity of all users, not just the few who exchange or make deposits, is costly. In order to recoup costs, issuers like Tether and Circle may consider introducing fees. And all of this could make it harder for those who just want to use stablecoins for casual remittances.The aftermath of this impact will be felt most in the world of DeFi. Real people holding stablecoins are easily identifiable. But in DeFi, stablecoins are usually deposited into accounts controlled by autonomous code, or smart contracts, which do not have any underlying owners. So it’s unclear how stablecoin issuers are going to perform KYC on smart contracts.Maker is one of the most popular decentralized tools, with an estimated $350 million USDC stablecoin on the market. These hoarded stablecoins are collateral backed by Maker’s decentralized stablecoin, Dai. Additionally, another $130 million in USDC is deposited in Maker’s peg stable module smart contract. If the identity of all stablecoin owners has to be determined, it remains unclear who or what entity the $130 million stablecoins are subject to KYC checks.Compound, another popular DeFi tool, currently has $1.6 billion in USDC and $350 million in Tether. Lenders can deposit stablecoins into Compound smart contracts and charge interest to borrowers who withdraw from the contract.Liquidity pools are smart contracts that support decentralized exchanges such as Uniswap and Curve, and also hold a large number of stablecoins. Curve’s liquidity pool currently contains $1.25 billion worth of USDC and $450 million worth of Tether.In the strictest cases, stablecoin issuers may be required to cut off any entity that cannot provide a verified name or address. And this means that Curve, Maker, and Compound smart contracts will all be blocked from receiving stablecoins.Given the ecosystem's reliance on stablecoins, this would be a huge blow to it. Compound, Curve, and Uniswap may try to adapt, replacing FinCEN-compliant stablecoins like USDC with decentralized stablecoins like Maker’s Dai stablecoin. Because decentralized stablecoins do not rely on traditional banks, they are also less at the mercy of FinCEN.
But remember, Maker relies on USDC collateral to give Dai stability. If Maker, like Compound and Curve, can no longer hold USDC, then Dai itself will become unstable. So the usability of Compound and other protocols that rely on Dai will also be affected.Imagine a more peaceful scenario where FinCEN might allow an exemption for smart contracts. FinCEN will allow stablecoin issuers to provide financial services to smart contracts as long as the stablecoins are held in smart contracts rather than in externally controlled accounts. This way, most of the DeF will continue as before.However, this option also provides a considerable loophole for bad actors. The whole reason for requiring platforms to verify accounts is to prevent them from transferring illicit funds. If stablecoins held in smart contracts were exempt from KYC obligations, enterprising individuals would move stablecoins to the smart contract layer, spurring FinCEN control.A moderate solution is that FinCEN exempts smart contracts from KYC restrictions on stablecoins, but only if the smart contracts themselves verify the identity of all addresses that interact with the contracts. So, in this case, Curve would have to establish a customer due diligence program if it wanted to qualify for the stablecoin. Maker must audit all treasury owners.In this case, we can split DeFi in two. A purely decentralized protocol would avoid stablecoins entirely to avoid subjecting users to KYC. Less decentralized finance will start verifying users to maintain access to stablecoins.Also, there are many other potential situations. As you can see, this is a complex problem. If FinCEN is indeed exploring the issue of stablecoin pseudonymity, I don't want to be the official tasked with devising an appropriate countermeasure. Too strict, and DeFi may no longer work. Too light, and DeFi will continue to pose a money laundering threat.
