By Kaaran Kalantari, spokesperson for Wing Riders
One of the key functions of money is to function as a unit of account, which presupposes at least relative stability with respect to the products and services exchanged in a given economy. This is why the early best performing currencies were backed by assets, for example the British pound and the Roman denarius. When the value of a currency is stable, it means that people trust it and can count on it to regularly buy the supplies they depend on.
Stablecoins are the next logical step in this progression from seashells to gold coins to gold-backed paper money. That said, stablecoins are a cryptocurrency designed to act as a unit of account and a medium of exchange that has a stable exchange rate against a fiat currency, another cryptocurrency, or a commodity. Whether collateralized or algorithmic, stablecoins play a crucial role in the crypto ecosystem.
Or, at least, they did before the collapse of Terra stablecoin (UST) last month. While UST and LUNA holders have lost around $42 billion in total, crypto enthusiasts and outsiders alike wonder what regulatory action will follow and by how much.
find a balance
Although crypto regulation is far from a new topic of debate, before the UST crash, a few prominent US lawmakers introduced bills to establish regulatory controls for stablecoins. One of the proposed bills seeks to create a three-pronged regulatory framework for stablecoin issuers in the United States, while the other seeks to have them provide additional transparency information about the reserves backing their tokens in traffic. Both metrics are certainly understandable given the current state of the stablecoin conversation.
In the UK, the government has outlined plans to change current rules on how to handle the failure of stablecoin firms due to the “systemic” risk they potentially pose to the wider financial system. The US and UK proposals target the right areas, but their initiatives lack input from key voices within the industry.
Long before the dramatic UST depegging, many in the crypto industry were arguing that the regulatory moves went against the decentralized principles of crypto and that any government regulation or oversight would stifle innovation and drive down the market. However, there are also experts who believe that regulation can strike a healthy balance.
Finding that common ground means that lawmakers and government technocrats, whether in the US, EU, UK or elsewhere, must listen to and heed recommendations from the crypto community, including retail investors, who have already lost so much.
Since stablecoins serve as a stable unit of account or medium of exchange, their primary use cases in the crypto space are to provide liquidity, serve as a hedge against market crashes, and facilitate trades. higher trading volumes on exchanges. Preserving these functions is a necessity for the entire industry, and regulation must take this into account in addition to creating safeguards for investors.
US Senator Pat Toomey of Pennsylvania, who drafted the bill to create a three-pronged regulatory framework, said last month that stablecoins could be “inherently unstable” without specifying any difference between algorithmic and stablecoins. guarantees. He did, however, refer to a “certain mechanism designed to maintain value”.
Certainly, the future of algorithmic stablecoins, like UST, is worth discussing and considering. However, collateralized stablecoins have remained stable, continuing to play their important role in the industry, despite all the turmoil.
Collateralized stablecoins are, in fact, inherently stable because they are backed by real off-chain assets, usually dollars or cash equivalents. In fact, Circle’s USDC stablecoin undergoes monthly attestations and annual audits to provide additional assurance and transparency regarding its reserves. USDC is far from the only stablecoin that provides proof of reserves, but Tether, one of the largest stablecoins, lied about its tokens being backed one-to-one by dollars held in a bank. It turned out that Tether’s reserves held a wide range of assets, including commercial paper – unsecured debt issued by companies – revealing a flaw in the stablecoin’s system.
To avoid another Terra situation, which could further disrupt the crypto industry and broader financial markets, stablecoin regulation should focus on ensuring periodic audits and attestations of coin reserves. guaranteed stability.
When it comes to algorithmic stablecoins, finding the right reforms to avoid a repeat of what we saw with Terra is a little less clear. Therefore, the best path regulators should take is to conduct thorough research on the construction of the algorithms and the use of mathematical formulas, taking into account the extreme conditions that the market can experience. This will help expose fraudulent or faulty algorithms in the future and circumvent the domino effect that Terra triggered a few months ago.
Stablecoins have been around since the launch of Tether in 2014, and as more and more entered the crypto space, their value as a safe-haven asset during volatile market times has cemented their unique role. As the market has matured and the amount of money locked up in decentralized finance (DeFi) has exploded, the need for regulation can no longer be ignored.
With the right balance of regulations, stablecoins can retain their irreplaceable status within the crypto and blockchain ecosystems, and help the industry weather today’s bear market challenges while preparing for the next bull cycle. Stablecoins are always stable, and with the right regulatory actions, their future stability can be cemented.
About the Author
Kaaran Kalantari is a former crypto hedge fund manager with a solid understanding and knowledge of the crypto market and trading experience. Kalantari was an early investor in Web3.0 protocols, with nine years of knowledge and experience in the field. He has active experience in major industry sectors and is currently immersed in Metaverse, GameFi, NFT and DeFi 1.0 and 2.0. Plus, he brings decades of experience in marketing, and specifically digital marketing, to help brands grow and achieve their goals.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.