15th December 2021 > > Stablecoins and US regulation.

tl;dr

A little bit of clarity and understanding would not go amiss.

Market Snap

Market Wrap

That painful price movement on Monday resulted in the liquidation of only $400mm longs, in sharp contrast to the billions liquidated on December 3rd. With perpetual funding rates stuck firmly at a bp, perhaps demand for leveraged positions has taken a permanent hit. That would be very welcome news.

Curious Cryptos’ Commentary – Stablecoins and US regulation

Regulators worldwide, but particularly those in the US, have been vocal in their desire to gain greater control over stablecoins.

The reasons for this remain unclear to me, though my personal take is that stablecoins provide an immediate and effective barrier to the success of Central Bank Digital Currencies (CBDCs). Certainly it seems that the lawmakers’ interest is limited to fiat based stablecoins and not, for example, stablecoins based on a basket of cryptos.

This week the Senate Committee on Banking, Housing and Urban Affairs, took expert witness testimony on this subject. The focus was on the potential risk that stablecoins may pose to the U.S. financial system, and how new regulation might mitigate those risks.

Alexis Goldstein, director of financial policy at Open Markets, managed to turn the discussion into a critique of Decentralised Finance (DeFi) by claiming that stablecoins were key to the movement of ransomware payments via decentralised exchanges.

She will have her own reasons for wandering off-topic, but I suspect DeFi is just one of her bugbears and it really was not relevant to this conversation at all.

At the other extreme, Dante Disparte, chief strategy office and head of global policy at Circle – issuer of stablecoin USDC – demonstrated his obvious and appropriate by claiming that stablecoins could “empower women and minority entrepreneurs and help to deliver aid”.

All technological innovations can be used for good or bad, and it sounds desperate to me to resort to using such transparent calling cards.

Finally Jai Masari, partner at Davis Polk and Wardwell, came up with some rather elegant and interesting contributions. Her key point was that stablecoin issuers should be licensed by a federal charter and not be an insured depository institution (essentially a bank in the traditional sense).

I will let Jai explain the benefits of this approach:

“A new and well-designed federal charter could accommodate a business model premised on the issuance of stablecoins fully backed by short-term, liquid assets and the provision of related payments services. This charter could impose requirements for reserve asset composition while tailoring leverage ratios or risk-based capital requirements and other requirements to the nature of the business model. And it could restrict the stablecoin issuer from engaging in riskier activities, to minimize other claims on reserve assets.”

…

Senator Elizabeth Warren was not impressed. Back in July she claimed that “shadowy super coders” are a threat to the financial system (I presume she means dollar hegemony, music to the ears of extreme politicians and conspiracy theorists worldwide) and followed up with this comment to the committee:

“Stablecoins pose risks to consumers & to our economy. They’re propping up one of the shadiest parts of the crypto world, DeFi, where consumers are least protected from getting scammed. Our regulators need to get serious about clamping down before it is too late.”

Following in the footsteps of Alexis, Elizabeth is conflating two entirely separate issues, and displays her ignorance by doing so.

Reserve Treasury Protocols (before they all go to zero