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Stablecoins and beyond provide regulators with an opportunity to develop deliberate, strategic regulation.
The week of the terraUSD (UST) crash was one of the most traumatic in cryptocurrency history - and one we'll remember for a long time. It wreaked havoc on the cryptocurrency market, wiping off billions of dollars in value. While people in Washington, D.C. debate future moves, a sensible, serious discussion about prospective regulation is necessary.
Stablecoins are a critical invention that offers several benefits to users while also giving the US a competitive edge. Stablecoins increase payment and transfer efficiency, lowering costs and speeding up settlement for companies and consumers. They make the financial system more accessible by allowing anybody, regardless of their background or economic standing, to participate. They can also serve US geopolitical goals by bolstering worldwide dollar supremacy in the face of moves by foes like as China and Russia to undercut US financial leadership.
Stablecoins are supposed to be steady and trustworthy, as their name indicates. Stablecoins may be classified into two types: custodial and decentralized.
Custodial stablecoins are guaranteed by collateral held in a bank or other organization and issued by a central administrator. Stablecoins are typically completely collateralized, with the issuer holding one dollar in the bank for every one dollar in stablecoins issued. Custodial stablecoins account for the great majority of overall stablecoin circulation, and they are extremely stable and dependable if the issuer is trustworthy and transparent.
Stablecoins that are decentralized are intended to address the reality that not all issuers are trustworthy or transparent. Their purpose, like the public blockchains that allow them, is to reduce reliance on trusted financial middlemen, who often cause more harm than benefit. They do this by creating stablecoins that, rather than relying on a central issuer, strive to maintain their peg to the dollar through the use of autonomous code. Decentralized stablecoins are often backed by other digital assets kept programmatically as collateral on the blockchain, rather than cash in a bank.
Importantly, despite the fact that custodial and decentralized stablecoins employ distinct methods, none is inherently superior to the other. Each has its own set of characteristics - both advantages and disadvantages – that come together to create a vibrant, competitive market characterized by consumer choice. In both areas, we should encourage prudent innovation.
UST, on the other hand, was in a class by itself, relying exclusively on an algorithmic process to maintain price stability with no collateral, a hazardous concept that many anticipated would fail.
So, what should policymakers do in the aftermath of this month's events?
First, policymakers should follow the procedure outlined in President Joe Biden's executive order (EO) earlier this year, as US Treasury Secretary Janet Yellen stated in congressional testimony on May 12. The EO, which directs federal agencies to examine crypto and report on regulatory priorities and solutions, gives clear direction on how to approach stablecoin regulation carefully. This is a significant and continuing project. Policymakers should establish a good grasp of the stablecoin area and the main differences between various stablecoin designs with the support of feedback from industry players and trade associations like my employer, the Blockchain Association. Before effective regulation can be created, this is an essential first step.
Second, in Congress, a bipartisan consensus should be created. Following the failure of UST, Congress became divided on the subject on both sides of the aisle. Crypto, on the other hand, is too huge for party politics, as my colleague Kristin Smith recently argued. We need leaders from both parties to get together and figure out the best way to regulate cryptocurrency. A regulatory solution must come from Congress, not the regulatory agencies, as the President's Working Group on Financial Markets (PWG) urged in its report on stablecoins last year.
Third, new regulations that are appropriate for the situation should be adopted. These regulations must be balanced and take into account the importance of dollar-dominated stablecoins to financial security in the United States in the next decades. Stablecoins require specialized regulatory frameworks that meet their unique benefits and hazards. Sen. Pat Toomey (R-Pa.) and Rep. Josh Gottheimer (D-N.J.) have suggested specialized frameworks for custodial stablecoins, which are excellent examples of savvy regulatory approaches from both sides of the aisle in the Senate and House of Representatives. Similarly well-tailored frameworks for decentralized stablecoins can be developed over time.
Stablecoins provide much too much of a risk for us to take the chance of getting them incorrect as a matter of policy. The United States is competing with other countries to be the home of Web 3. It's time to think strategically and take action. The United States' status as a worldwide crypto innovation engine is in jeopardy.
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