Regulating Stablecoins

Regulating Stablecoins

Stablecoins are a class of cryptocurrencies that offer financial stability being underwritten by a Fiat Currency such as the USD Dollar. Currently the global market for stablecoins is valued at USD 130 billion. The top stablecoin is Tether with a market capitalization of USD68 billion. 

Stablecoins have gained in popularity by offering not only the instant payment processing with security and privacy as offered by cryptocurrencies but also enjoy the financial stability by being pegged to Fiat currencies such as the US Dollar. 

A Fiat currency is backed by the government that issued the currency and means that these currencies are not backed by physical assets such as gold or silver. 

International Regulators for Stablecoins

Financial regulators across the global financial centres are getting increasingly worried that stablecoins (a digital asset), are beginning to exert a growing and unwanted non-regulated influence on the financial system. Earlier this week it was reported that authorities said stablecoins should be regulated in the same way that clearing houses and payment systems are regulated. They feel this is extremely important as stablecoins act as a bridge between cryptocurrencies and national currencies. 

IOSC, The International Organisation of Securities Commissions 

The IOSC is an umbrella group for regulators across the world and together with the Committee on Payments and Market Infrastructures (the CPMI, part of the Bank for International Settlements), have recommended steps to be taken to oversee the stablecoin market. 

There are several worries that concern these oversight committees. The first is that stablecoins should have no liquidity risks and little or no credit risks. They feel if stablecoins broke their one for one with fiat currencies, customers would become exposed. 

Another worry is stablecoin operators underpin their coins with different baskets of asset class. For example, Tether advises it holds in excess of USD30 billion in commercial paper, making it the seventh, YES seventh largest owner/holder of commercial paper in the world. One senior rating agency suggests that if there was a flight from cryptocurrencies to cash, it could well destabilise short-term credit markets. 

The Problems Posed by Tether 

Tether is a classic example as to why stablecoins should be regulated. Mystery upon mystery surrounds the organisation as critics scream “where is the proof of your holdings”. Tether takes in US Dollars and issues the same in stablecoins. However, there are no annual audited accounts or reports to regulators to show they have the assets or cash to back their stablecoins. The owners of the coins can invest in Bitcoin, Ether or any other cryptocurrency, and can redeem tether coins for cash at any given moment. Tether has now issued to date, 69 billion tether coins, and strangely of that 69 billion, 48 billion has been issued in 2021.  

This means according to Tether’s proclamations they hold the equivalent in cash or commercial paper. Tether has announced of the USD69 billion in cash and assets, USD30 billion is held in commercial paper. To look at this another way, if Tether was a bank, it would be in the top fifty US Banks. 

Interestingly, in the United States the commercial paper market is relatively small and therefore most of the players know each other or know of each other. Various traders from Wall Street were asked if Tether had been buying big in the market. To a person no one had seen Tether active in the commercial paper market. 

If as many regulators fear that Tether is in fact a Ponzi Scheme, it would eclipse Bernie Madoff with disastrous results. If there was suddenly a run-on Tether with customers scrambling to get their money out it could set off a nightmare chain of events.  

First Tether would have to sell or liquidate their assets at a loss, which could spill over into the regulated credit markets and cause a crash. It could well spill over into other cryptocurrencies causing a run on those companies.  

Tether is often used as a hedge, so if it lost its peg to the US Dollar it could take apart Bitcoin and Ethereum. Tether transactions in Bitcoin are greater than US Dollar transactions in Bitcoin. A run-on Tether could in fact cause the whole crypto market to fall into disarray with devastating effects. Many experts feel that Tether is part or is at the centre of Systemic Risk which means it has the ability to possibly severely damage or collapse an entire economy.  

Stablecoins – Conclusion 

The big question is do stablecoins such as Tether have the required assets to back their coinage in circulation? Currently there is no positive proof. Maybe a company such as Tether, likened to be in the top fifty largest United States banks be subject to Tier I and Tier ii Bank for International Settlement rules and regulations.  

These questions can go on and on, but it is time to stop pontificating. It has become incumbent upon regulators and government lawmakers to force these stablecoin companies to prove their assets. This is absolutely tantamount if a potential financial disaster is to be avoided.