May 11
Stable coins are taking the world by storm, and the era of regulation may be upon us
At a hearing broadcast live on May 10, U.S. Treasury Secretary Janet Yellen called for the passage of stablecoin legislation by the end of the year and highlighted the risks surrounding TerraUSD (UST), saying, “A stablecoin called TerraUSD (UST) experienced a crash and depreciated in value. I think it just shows that this is a fast-growing product and there is a risk of fast growth…There is a risk to financial stability and we need an appropriate framework.” In response to a question from Republican Senator Pat Toomey (R-PA) about stablecoins, Yellen said it was “very important, even urgent” for Congress to pass stablecoin legislation, and further said it would be “very appropriate” for Congress to do so before the end of the year. The company also said it was “very appropriate” for Congress to do so by the end of the year.
Today, bitcoin lost the $30,000 mark. The collapse of the largest blue-chip cryptocurrency drove a series of cottage coins down, with the Luna token plummeting in price, causing the UST, a stablecoin, to decouple, and the butterfly effect of the accumulation leading to a slow death cycle. As of now, according to the data from the Bi Push terminal, the market capitalization of UST is less than $16 billion, while previously, the market capitalization of UST had once reached $20 billion, making it the third largest stablecoin in cryptocurrencies and also successfully among the top 10 cryptocurrencies.
As of today, according to coinmarketcap, four stablecoins appear in the top 10 crypto by market cap: Tether (USDT), USDC, BUSD, and UST. the total market cap of stablecoins reached over $180 billion.
Stablecoin’s market capitalization has grown exponentially in 2021 and stablecoin has become one of the most common and useful value mediums in the crypto market today. In the early days of the crypto market, the underlying asset in the eyes of investors was Bitcoin, and all other cryptocurrencies needed to be exchanged using Bitcoin. However, the tremendous volatility of Bitcoin in its early days caused the exposure of crypto investors to become much larger. With the emergence of ethereum and the development of its ecosystem, stablecoins emerged to meet the needs of more investors for risk control and exit. It can be argued that the emergence of stablecoins has further contributed to the rapid growth and rise of the crypto market.
Problems in Stable Coins
The lack of stability in stablecoins has been repeatedly mentioned by regulators, who are concerned that the mushrooming of stablecoins, most of which are pegged to the U.S. dollar, threatens to sow the seeds of instability in the overall financial markets, with effects that could be more immediate than the turmoil in blue-chip cryptocurrencies.
What is troubling to regulators is the assets that stablecoins use as reserves to achieve the promised 1:1 peg to the U.S. dollar. As many may believe, it is not just U.S. dollar cash, but a combination of commercial paper, notes, bonds and loans.
Credit rating agency Fitch has noted, “We believe that authorities are unlikely to intervene to save the stablecoin in the event of a disruptive event, in part because of moral hazard. Authorities could step in to support dealers and major money market funds if redemptions of stablecoins lead to or amplify a broader commercial paper (CP) sell-off that puts pressure on market liquidity and discourages the issuance of new CPs.”
The problem a stablecoin can cause is not just decoupling from the value of the U.S. dollar, but that decoupling could lead to a series of selling pressures on the assets behind it, which could cause more severe market shocks. Simply put, a $180 billion market cap stablecoin is backed by $180 billion worth of assets. And it is this $180 billion in assets that is causing the bigger problem.
Embrace and Ban
On July 19, 2021, U.S. Treasury Secretary Yellen met with the heads of several federal agencies for a discussion on stablecoin regulation, where participants discussed the rapid growth of stablecoins, their potential use as a means of payment, and ultimately the potential risks to users, the financial system, and national security. According to the minutes, Yellen emphasized the need to act quickly today to ensure that stablecoins have an appropriate regulatory framework in the United States.
The development and regulation of stablecoins has also been discussed several times at meetings of Group of 20 (G20) finance ministers and central bank governors. At the G20 Finance Ministers and Central Bank Governors meeting held in early July 2021, the parties agreed to implement the G20 roadmap for improving cross-border payment systems, looked forward to discussions on topics related to central bank digital currencies, and emphasized the need for global stablecoins to comply with relevant legal and regulatory requirements.
Of course, there is still no mature plan for the regulation of stablecoins. But the contribution of stablecoins in cross-border remittances, B2B/B2C, digital economy, etc. should not be underestimated. Stablecoin solves the problem of complicated and cumbersome cross-border remittance process, and greatly simplifies the process of transfer/payment. In the future development and transformation of the digital economy, stablecoin will probably reap a lot of enterprise level adoption.
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