14th October 2021 > > Regulating stablecoins.

tl;dr

Gary Gensler, chair of the SEC, appears to rule out regulating stablecoins..

Market Snap

Market Wrap

$820mm BTC options expire tomorrow, potentially causing some bouts of volatility both before and afterwards.

Perpetual swap funding rates are turning red across the board, indicating that any market move down would be exacerbated by forced liquidations of longs. I wish these idiots would grow up and leave us alone.

Curious Cryptos’ Commentary – Regulating stablecoins

Regulators and legislators seem to be more worried about stablecoins than the broader crypto market.

One often reads comments that the collapse of one of the larger stablecoins would have significant ramifications and would cause disruption to both crypto markets and more traditional financial markets. The CCC (back copies available on request) on 9th October 2021 looked at some of the issues around the largest stablecoin, Tether (USDT).

It isn’t clear at all that USDT is backed with high quality collateral, and in fact we know for certain that some of the collateral comprises loans that themselves are collateralised with cryptos. That circularity introduces correlation risk that is just not welcome.

So, to an extent you can understand the regulators’ worries, though I cannot shake off the feeling that this focus of theirs is less to do with market concerns and more to do with trying to restrict competition to the introduction of Central Bank Digital Currencies (CBDCs).

Sceptical I know, but that’s how I roll.

…

But I spy a potential problem with the regulation of stablecoins.

Gary Gensler, Chair of the SEC, was giving evidence to a House Committee on Financial Services. He had this to say:

“It’s a matter of how we get this field within the investor consumer protection that we have and also working with bank regulators and others — how do we ensure that the Treasury Department has it within Anti-Money Laundering, tax compliance,”

A bit convoluted and very poorly expressed but the message is clear, and there is nothing controversial there.

He also noted:

“… the financial stability issues that stablecoins could raise”.

These issues are a priority for the SEC according to Gary.

He explained why:

“… but I think the securities laws are quite clear — if you’re raising money [...] and the investing public [...] have a reasonable anticipation of profits based on the efforts of others, that fits within the securities law.”

…

Oh dear.

As Gary has pointed out, to fall within the remit of securities laws, investors must have a “reasonable anticipation of profits”. I have confirmed this wording is part of the legislative text and cannot be easily dismissed.

Stablecoins are by definition stable, at least theoretically so. The objective in the case of USDT is to remain pegged to the dollar at 1:1. It is either that (give or take a few cents) or zero.

In these circumstances, no buyer of a stablecoin can have a reasonable anticipation of profits, and therefore stablecoins are outside the remit of securities laws in the US, and outside the remit of the SEC.

…

I am a touch surprised that Gary hasn’t spotted this glaring loophole himself.