How Should Stablecoins be Regulated?

Categories: GeneralPublished On: November 3rd, 20202.8 min read

As if regulating digital currencies was not difficult enough, now we have to figure out a way to properly regulate stablecoins… or do we?

Based on the original principle behind Bitcoin — and by extension alt coins, protection against government oversight and central regulations were some of the primary reasons for its original creation. The idea was to have a global currency that is governed not by a central bank or fiscal policies, but rather open market economics and decentralized transactions. Of course, true adoption could only happen after government and financial institutions dipped their fingers in the pie in order to carve out a piece for themselves, and thus regulations. At least the purpose and incentives behind creating regulations for cryptocurrencies are clear — financial incentives for centralized systems. We can argue about the ethical or moral aspects of this, but those arguments are more or less futile and probably unproductive.

But what about stablecoins?

Regulators can make a fairly solid argument that unlike digital currencies, stablecoins should indeed be regulated since they are sometimes a direct clone of fiat currencies, and are proportionally pegged (usually) at a 1:1 ratio. If the USD is regulated and controlled by the US government, what about USD backed stablecoins like USDT or USDS? Much of the argument boils down to the creator of the currency, such as Tether or Stably — do these companies get regulated the same way a US treasury department does?

It is an interesting question, and a question whose answer will be left up to the judgement of the regulators. In addition, what about stablecoins that are not pegged to fiat currencies, do they get regulated differently than ones who do? Taking this one-step further, what about stablecoins like the proposed Libra coin from Facebook — which was supposed to be backed by a basket of low risk collateral including treasury bonds, and a collection of global fiat currencies. Whether stablecoins should be regulated isn’t just a yes or no question, but rather an intrinsic maze of rounded corners leading to a deeper level of the maze where more rounded corners await you.

Another major hurdle in proper regulation of stablecoins, is their usage. As stated in a recent IOSCO study, “a stablecoin’s features or the way it is used could mean that it falls under several categories at any one time or at different points in its lifecycle.” This makes it extremely hard to identify proper regulation because regulators can’t simply fit on a hat that previously worked for crypto. They must start from scratch, and identify a stablecoins purpose and feature throughout its use cycle. If I use USDS for “x”, it should be regulated as “x” — but if I am using it as “y,” it must then be regulated as “y.” We are not saying that this is an impossible task, but rather that regulators need to start from scratch and disregard previously held notions of how to either regulate fiat or non-stable digital currencies. With new forms of currency come new ways of thinking of and regulation.

Regulations are important. They bring in a certain level of trust and attention that will grow the pie further, rewarding everyone who’s carved out a piece for themselves — including the central banks, governments and financial institutions who are doing the regulating.

Stably is a venture-backed FinTech from Seattle, Washington. We provide regulatory-compliant stablecoin and onramp infrastructure for emerging blockchains, Web3 applications, and financial institutions, enabling their users in 170+ countries/regions to easily buy, sell, or swap digital assets at competitive rates across multiple blockchain networks with stablecoins and fiat payments. Our mission is to power the next billion Web3 users with a superior fiat & stablecoin onramp.

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