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Regulation of stablecoins: what does the future hold?

 


Some industry insiders predict that the stablecoin market could reach $ 1 trillion in volume by 2025. It is therefore important to think about what regulation might look like.


What are the regulators' concerns? And how will regulation, or lack of it, affect the industry? What are the factors behind the division's impressive growth that has caught the attention of regulators?


Stablecoins are enjoying increasing popularity and usage and are primarily used in the DeFi space to generate returns for institutional entrepreneurs who do not want to get as heavily involved in volatile cryptocurrencies. In addition, stablecoins are launched for payments by Circle and others. Stablecoins are also being considered for national use.


The models for the allocation of stablecoins

There are three primary spending models for stablecoins:


Fiat-backed (i.e. bank stablecoins) - In this model, cash and cash equivalents are held by an institution. The digital stablecoins can theoretically be redeemed 1: 1 against this base value. Examples are USDC and USDT.

Derivatives (algorithmic) - This model enables the creation of financial instruments that are similar to the US dollar or of stable value. They are based on derivatives but are often volatile. DAI is one such example.

Branded Dollars - These are backed by collateral for specific projects and their assets. It is the on-chain equivalent of fiat-secured cryptos, where the digital token can be redeemed for a corresponding value in USD. ICHI is an example of this approach.

Regulation of Stablecoins: The Rise of Regulators

As mentioned earlier, there has been significant discussion at the federal level about the regulation of stablecoins. The Chairman of the US Securities and Exchange Commission, Gary Gensler, recently referred to stablecoins as "poker chips". He indicated that the government will take an active role in regulation and push Congress to act. There are also signs of supervision at the state level.


Regulators are concerned about the risk of governments and financial institutions being replaced. In particular, they are researching the security mechanisms of stablecoin and are also considering issuing tokens themselves via a digital central bank currency. Traditional financial market players feel threatened.


Regulation of stablecoins may or may not come. With or without government oversight, we expect the adoption and use of stablecoins to increase in the following areas:


Cross-Border Payments: The crypto economy is inherently global and borderless, and stablecoins make international transactions easy with no problem.

CBDCs : Some monetary authorities issue their own central bank digital currencies. Others are considering using stablecoins as their currency.

Retail and eCommerce: Numerous brands are trying out loyalty points that are integrated with their payment systems. Stablecoins make it possible to use a simple medium of exchange tied to these economic systems.

DeFi : This is probably the real “killer” use case as DeFi’s default currency . Given the increasing market size of the sector, this suggests growing usage.

Regulation of stablecoins: what's next?

First, institutions are aggressively experimenting with tokenized assets like stablecoins as a means of improving payment efficiency. Banks like Shinhan Bank issue stablecoins that are backed by fiat currencies to use for their services. The number of these applications will increase over the course of 2022.


Regulators should see this innovation as the main motive to take adequate safeguards without slowing innovation. This could include guidelines for minimum reserves or requirements for money transmitters and the issuance of tokens. Too aggressive regulation will result in these countries being sidelined when it comes to new innovations.

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All information contained on our website has been researched to the best of our knowledge and belief. The journalistic contributions are for general informational purposes only. Any action that the reader takes based on the information found on our website is entirely at your own risk.

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