Will regulatory fears dampen stablecoin dominance?

Posted: 9 December 2020 11:24 am
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Stablecoin supply is reaching all-time highs but will regulatory concerns stymie their growth?

  • Global stablecoin usage is currently hovering around its all-time high value.
  • Exploding stablecoin popularity can, in part, be attributed to the rise of DeFi.
  • Governments all over the world are voicing concerns about stablecoins.

Stablecoins have continued to garner immense traction in recent months since they provide users with an attractive alternative to traditional fiat currencies while providing many of the benefits of cryptocurrency.

It’s no secret that 2020 has been the year of crypto, with Bitcoin (BTC) touching its all-time high value in November and Ether (ETH) continuing to hover around the $600 region. According to The Block, total on-chain stablecoin volume reached $139.21 billion in November, just $6 billion less than the all-time high for all such activity in September.

Furthermore, over the course of Q3 2020, a sizeable sum of $8 billion was added to the aggregate supply of stablecoins, essentially doubling the total supply of crypto dollars from around $11.9 billion to nearly $20 billion.

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Total stablecoin supply (source: TheBlockCrypto)

DeFi will continue to spur the rise of stablecoins

The rise of decentralised finance (DeFi) has pushed stablecoins to a whole new level of public exposure. Most notably, high yields on stablecoins in DeFi may have significantly boosted demand for them.

That being said, the increasing popularity of stablecoins over the last couple of years has resulted in various regulatory concerns being put forth by governments all over the world, not only in relation to their usability but also their privacy and anonymity.

Could the STABLE act be a game changer for the industry?

Earlier this month, three U.S. congressional Democrats announced the tabling of the STABLE Act, an 18-page bill that seeks to clearly outline regulatory criteria for stablecoin issuers, such as them having to not only acquire banking charters and possess FDIC insurance but also obtain written approvals from the Federal Reserve – allowing them to issue digital assets backed by the US dollar.

The act seeks to minimise illegal activities pertaining to stablecoins – such as money laundering, illegal money hoarding, etc – by regulating their issuance as well as certain other commercial activities.

However, on a more critical note, the authors of the STABLE act have suggested that stablecoins allow crypto holders to utilise an illegal shadow banking system that “directly affects poor communities in an adverse manner”. They also claim that the bill will help protect investors from shady digital payment mediums, citing stablecoins and Facebook's Diem as prominent examples of the same.

In response, members of the crypto industry have argued that the bill is misinformed and will stifle innovation. Experts have also pointed out that the proposal will ensure that only those with the deepest pockets will be able to apply for licenses.

Questions have also been raised about the viability of enforcing the bill if passed. Opponents have argued that it would be impossible to enforce without banning blockchain node operators. To this, one of the bill’s authors has responded that it’s a sacrifice he’s willing to make.

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Interested in cryptocurrency? Learn more about the basics with our beginner’s guide to Bitcoin, see how to keep your crypto safe with our end-to-end guide to cryptocurrency security and dive deeper with our simple guide to DeFi.


Disclosure: The author may hold the cryptocurrencies discussed in this article 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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