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FSB’s concerns highlight algorithmic stablecoin opportunity

Posted: 20 April 2020 5:16 pm
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Algorithmic stablecoins can do some things that basic collateralised coins can't.

In a wide-ranging (that's code for "long") consultative document, the Financial Stability Board (FSB) has made a series of recommendations for stablecoin regulation

The gist is that they occupy a bit of a regulatory no-man's land, and there is currently a lack of powers in the world to effectively regulate them. It encourages authorities to work together to make sure they can be effectively regulated.

This is not only for the sake of AML laws, but also global financial stability.

"There’s been significant talk from governments and global governing bodies on banning stablecoins, specifically highlighting stablecoins’ threat to sovereign states in maintaining control over their national currencies," said Alexander Blum, COO of fintech firm Two Prime.

While stablecoins have been one of the more successful elements of cryptocurrency to date, regulatory changes could impact the value propositions that these coins have brought to users to date, he points out.

"From the stablecoin holder’s perspective, why do we need the capital controls of sovereign states such as China or the United States when there are digital versions of the same monies that hold stable value and aren’t as limited in their national sovereign rules?" Blum said.

"This is interesting in two ways. Firstly, it speaks to the real threat that cryptocurrencies present to national fiat currencies. But secondly, this potential ban also presents a real threat to stablecoins. Stablecoins such as USDT and USDC are really starting to reach a scale where they are attracting the attention of regulators and national and international governing bodies."

New rule

The fact that stablecoins are reaching scale almost inevitably means we will see new regulations specifically for stablecoins, Blum suggested.

"This probably means that significant rules or limitations are going to be placed upon them, just like what’s been done for bitcoin in a number of jurisdictions," he said.

"Unfortunately, the cat is out of the bag and you can’t undo what’s already been done. There’s no real way to shut stablecoins down. However, regulators can scare people by putting limits on what happens when individuals hold stablecoins. The technically savvy individuals will be able to continue to use stablecoins freely, similar to the way that people in China can still freely use the internet using VPN. People will find more sophisticated ways to get around the controls of nations."

“Nonetheless it speaks to the risk people take when onto stablecoins for longevity. A lot of exchanges use USDT as a trading pair. But what happens when USDT is banned or these exchanges are under significant business risk as a result of the ban?"

Stablecoins fill a need in the crypto ecosystem, and this need will remain regardless of how regulations change. This suggests that algirithmic stablecoins, which aren't pegged to any one fiat currency, will start popping up.

"It speaks to the possibility of new hybrid stablecoins that aren’t pegged to any fiat currency and are beginning to crop up," Blum predicted. "These hybrid stablecoins sit between stablecoins and cryptocurrencies that aren’t backed by reserves such as Bitcoin. Look for alternative currencies that have a finite supply but also a store of value that is backed by some kind of reserve as the market will begin moving in that direction."

Other potential benefits of algorithmic stablecoins include the fact that they bring seignorage back into the coin ecosystem where it can be shared with users, and some basic laws of economic physics around the likelihood of a stablecoin accumulating enough collateral to hit the big time.



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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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