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Stablecoin Regulation: What To Expect In 2022 And Beyond?

www.thecoinrepublic.com 28 December 2021 18:03, UTC
Reading time: ~4 m

  • Governments have started entering into DeFi via stablecoin. Stablecoin witnessed a disruptive year in 2021 as it rose to 400%, reaching a $150 billion market cap.
  • Markets in Crypto Assets (MiCA) has been given the in-charge of regulating the crypto frameworks, including stablecoin regulation in 27 member-states in the European Union.
  • In a 168-page long report, the organization stated stablecoin regulation and dissected different stablecoin. As per the report, every stablecoin issuer’s primary requirement should have at least $400,000 or 2% of their total reserve assets available.

In the early phases of crypto, only a handful of people knew about crypto assets other than Bitcoin, it used to face constant criticism.

The Vice-Chairman of Berkshire Hathaway, Charlie Munger, defined Bitcoin as “disgusting and contrary to the interests of civilization,” summarizing the attacks that happened this May.

Even after remaining underrated, Bitcoin made a place for itself in the mainstream finance sector through its merits.

In 2020, Decentralized Finance or DeFi with smart contracts as its backbone emerged as the new crypto dynamic. Ethereum became the first technology to recreate the non-mediated financial sector, expanding from $1 billion to over $158 billion in less than two years.

ALSO READ – Blockbuster DAO Eyes for Dish Network’s Blockbuster

Even before 2020, JPMorgan Chase & Co, an American multinational investment bank, first pointed out the emerging threat.

The world’s largest bank also observed that Bitcoin’s huge potential runs alongside smart contract platforms dating back to February 2018.

“Both financial institutions and their non-banking competitors face the risk that payment processing and other services could be disrupted by technologies, such as cryptocurrencies, that require no intermediation.”

Now that crypto is becoming more and more mainstream with each passing day; it is expected to witness stricter regulation. Yet again, the CEO of JPMorgan predicted this in November 2021.

“No matter what anyone thinks about it, the government is going to regulate it. They are going to regulate it for (anti-money laundering) purposes, for (Bank Secrecy Act) purposes, for tax.”

Stablecoin Regulation Still The Prime Regulatory Target

Since the launch of Tether (USDT) stablecoin, a lot has changed in crypto trading. Stablecoin’s theory is quite simple; they are backed by some assets whose value is equal to that of USD on a 1:1 ratio, stablecoins can also be redeemed for USD from the reserve.

Essentially, stablecoins work as a digital wrapper for fiat currency, just like Wrapped Bitcoin (WBTC) is for BTC on non-Bitcoin blockchain platforms such as Ethereum. Although stable coins render stability, they are pretty vulnerable.

Governments have started getting into disruptive DeFi through stable coins, but then the commercial banks would have to intervene to handle fiat currencies. In 2021, stablecoin saw an explosive year, reaching a $150 billion market cap, rising 400%.

The popularity of stablecoin raises two questions:

  • In case of a bank run, will they have enough funds to meet the withdrawal demand?
  • What place will CBDCs – Central Bank Digital Currencies hold?

The stablecoin industry is on the verge of being regulated through the Working Group (PWG) on Financial Markets in the U.S.

The group issued a report on November 1, essentially stating that the stablecoin issuers should be treated the same as commercial banks. However, the stance on stablecoin regulation wasn’t unified.

While the SEC Chair, Gary Gensler, demanded stablecoins to be registered as securities if securities reserves back them.

Dismissing the reports, Teana Baker-Taylor, chief policy officer for the Chamber of Digital Commerce, showed her dissent and said,

“But we believe that stablecoin payment systems should be regulated in the same way that other retail-focused digital payment businesses are regulated, according to the principle of same activity, same risk, same regulation.”

EU: The Most Forward Crypto Approach

Markets in Crypto Assets (MiCA) are in charge of harmonizing the crypto framework across all 27 member-states in the European Union.

The organization created a 168-page report stating regulation; it also went a step further and dissected the different kinds of stablecoins.

The core requirement of stablecoin issuers set by MiCA is that every stablecoin issuer should have instant availability of $400,000 or 2% of their total reserve assets.

In Addition, the stablecoin issuer having a market cap of over $1 billion will be subjected to a 3% backup.

Moreover, to not endanger the monetary policy or the upcoming digital euro, MiCA has restricted stablecoin to 27-nation states.

What To Expect In 2022 And Beyond?

Looking at all the advancements in the stablecoin sphere, it can be concluded that trendy waves of stablecoin regulation will be making the rounds laying the groundwork for CBDC.

Governments and Central Banks view stablecoin and other crypto-assets as something that should be transparent and tracked.

Interestingly, the U.S, as the holder of the world’s global reserve currency. has not yet spoken regarding CBDC implementation.

Hence, it’s quite possible that a decentralized conglomerate of stablecoin issuers might take up this responsibility, with agencies depending on legislation to prevent them from being too comfortable.

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