Tag: Stablecoins

Stablecoins to face same safeguards as traditional payments, BFSI News, ET BFSI

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By Huw Jones

LONDON – Stablecoins would have to comply with the same safeguards as their more traditional competitors in payments under proposals from regulators on Wednesday as authorities get to grips with a rapidly evolving sector.

Stablecoins are cryptocurrencies designed to have a stable value relative to traditional currencies, or to a commodity such as gold, to avoid the volatility that makes bitcoin and other digital tokens impractical for most commerce.

Facebook Inc’s move in 2019 to introduce its own stablecoin Diem, then known as Libra, raised concerns among governments and central banks that a major payments competitor could emerge overnight with little regulation.

Since then, Diem has radically scaled back its ambitions and plans to launch a U.S. dollar stablecoin.

The IOSCO group of securities regulators and the Bank for International Settlements, a global forum for central banks, set out on Wednesday how current rules for major clearing, settlement and payments services should also be applied to ‘systemic’ or heavily used stablecoins.

The proposals, put out to public consultation before being finalised early next year, put into practice what regulators have long called for: the same rules for the same type of business and accompanying risks.

The rules mean a stablecoin operator must set up a legal entity which spells out how it is governed and manages operational risks like cyber attacks.

Though still little-used for commerce, the use of stablecoins in crypto trading has grown rapidly as retail and larger investors warmed to the emerging asset class during the COVID-19 pandemic.

Tether, the largest stablecoin, has a market capitalisation of around $68 billion versus just $15 billion a year ago. The value of circulating USD Coin, another major stablecoin, has also jumped dramatically to over $30 billion from just $2.7 billion a year ago, according to CoinMarketCap.

Countries that allow stablecoins to operate would be required to apply the principles as part of their affiliation to IOSCO and the BIS.

“This report marks significant progress in understanding the implications of stablecoin arrangements for the financial system and providing clear and practical guidance on the standards they need to meet to maintain its integrity,” IOSCO Chair Ashley Alder said in a statement.

The proposals do not cover issues specific to stablecoins pegged to a basket of fiat currencies, which are being considered separately.

(Additional reporting by Tom Wilson, editing by Giles Elgood)



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What are stablecoins, and how stable are they?, BFSI News, ET BFSI

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– By Manpreet Kaur

Stablecoin, a type of cryptocurrency, attempts to offer the best of both worlds – privacy of payments in cryptocurrencies and stable valuations of fiat currencies.

Tether, the first and the most popular stablecoin pegged against the US dollar, is pegged at $1 today, with a market cap of $68.7 billion.

What do stablecoins offer?

The coin aims to offer price stability, and is backed by a reserve asset – like the US dollar and gold.

Stablecoins, such as Tether that are backed by the dollar, remove transaction costs and delays that impair trade execution within the market.

It achieves price stability through collateralization or algorithmic mechanisms of buying and selling the reference asset or its derivatives.

Relatively, stablecoins are among the safer crypto assets to invest in. For instance, when $600 million was stolen from PolyNetwork last month, Tether simply froze the $33 million of its tokens that were included in the heist, which turned out to be useless to the attacker.

Stablecoins attempt to be highly liquid and tradable, making them easy to exchange into other cryptocurrencies or fiat currencies if desired.

It can help the investor manage volatility in a cryptocurrency market.

Given that they’re a stable currency, stablecoins provide an easy payment flow, which businesses can use to securely send money to their employees .

What are stablecoins, and how stable are they?

Are stablecoins volatile?

Though stablecoins are relatively less volatile than other cryptos, the coin remains to function like any other asset class – meaning it is not 100% risk averse.

Stablecoins are only as stable as their underlying asset. For instance, for stablecoins pegged 1:1 against the dollar, its solvency relies upon the strength of its reserves, which only include 3.87% of cash.

Risks of volatility in a coin’s trading volume and general market volatility remain in stablecoins, just as how it is present in other crypto assets.

Another aspect where the volatility can kick in, is if the stablecoin is centralised or decentralised. A centralised stablecoin, such as Tether, is held by an entity or exchange, while a decentralised stablecoin is hosted on a public programmable blockchain like Ethereum.

In decentralised stablecoins, large amounts of decentralised collateral such as Ether is infused to stabilise dollars, and blockchains like Ethereum can’t be controlled by an external actor.

One of the risks with stablecoins that have a central authority is trusting a third party to maintain their supply of dollars equal to the supply of stablecoins, which can be seen as going against the concept of decentralisation.

According to research firm Santiment’s data, Tether’s price remained largely stable but not all the time.

In November 2017, Tether was allegedly hacked with $31 million worth of coins stolen, and in January 2018, it hit another hurdle as the necessary audit to ensure that the real-world reserve is maintained never took place. This made the price fluctuate from $1 to $0.86 in 2018. These two incidents were among the major ones that pulled the price of Tether below $1.

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Solana, Cardano, XRP shed up to 12%, BFSI News, ET BFSI

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New Delhi: Major cryptocurrencies bled on Monday, thanks to a strong inflow of negative updates across the globe. Investors turned cautious over another meltdown in the crypto cart.

Barring stablecoins, eight out of top 10 cryptocurrencies were trading lower at 9.30 hours IST. Solana tanked as much as 12 per cent, whereas Cardano and XRP gave up over 8 per cent each.

The global crypto market cap tanked up to 6 per cent to $2.02 trillion compared to the last day. However, the total crypto market volume gained as much as 4 per cent to $91.91 billion.

“The past 24 hours were relatively quiet for the cryptocurrency market. As institutional investors become more active progressing into the new week, we would likely witness more volatility. Crypto bluechips faced minor profit booking over the weekend,” said Edul Patel, CEO and Co-founder of Mudrex.

In the meantime, US officials are examining possible insider trading and market manipulation at Binance, Bloomberg News reported, potentially adding more heat to the cryptocurrency exchange that has become a target of regulatory scrutiny in many countries.



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Stablecoins face crackdown as US discusses risk council review, BFSI News, ET BFSI

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U.S. officials are discussing launching a formal review into whether Tether and other stablecoins threaten financial stability, scrutiny that could lead to dramatically ramped-up oversight for a fast-growing corner of the crypto market.

After weeks of deliberations, the Treasury Department and other federal agencies are nearing a decision on whether to launch an examination by the Financial Stability Oversight Council, said three people familiar with the matter who asked not to be named in commenting on closed-door discussions. FSOC has the power to deem companies or activities a systemic threat to the financial system — a label that typically sets off tough rules and aggressive monitoring by regulators.

Such a designation would likely be a gamechanger for stablecoins, which are considered crucial to the crypto market because traders widely use them to buy Bitcoin and other virtual currencies.

Stablecoins have thrived in the unregulated shadows, with tokens in circulation now worth more than $120 billion, according to CoinMarketCap.com. And they are increasingly being used for transactions that resemble traditional financial products — like bank savings accounts — without offering anywhere near the same level of consumer protections.

A hallmark of stablecoins is that they are pegged to fiat currencies, meaning they are supposed to be immune to the wild price swings that have plagued Bitcoin. Tether and other firms achieve that by backing their tokens with assets like U.S. dollars and corporate debt.

The President’s Working Group on Financial Markets, which is led by Treasury Secretary Janet Yellen, has been particularly focused on Tether’s claims that it holds massive amounts of commercial paper — debt issued by companies to meet their short-term funding needs. In a private meeting U.S. officials held in July, they likened the situation to an unregulated money-market mutual fund that could be susceptible to chaotic investor runs if cryptocurrencies plunge.

The President’s Working Group plans to issue stablecoin recommendations by December, and a consensus is building among regulators involved that an FSOC review is warranted, the people said. The groups overlap, as Yellen, Federal Reserve Chairman Jerome Powell and Securities and Exchange Commission Chair Gary Gensler are members of both the PWG and oversight council.

A Treasury spokesman declined to comment.

The FSOC process includes a lengthy study and an assessment of which federal agencies should respond and how. In the end, the council could direct those agencies to intervene in the market and reduce the dangers posed by stablecoin transactions.

While Tether is the most popular stablecoin, there are multiple rivals, including Coinbase Global Inc.’s USDC token and a dollar-linked offering from Binance Holdings Ltd.

Scrutiny has been ratcheting up as stablecoins proliferate. Coinbase made headlines this week by disclosing the SEC had threatened to sue if the crypto exchange launched a product that would allow customers to earn 4% yields for lending out their USDCs to other traders. The SEC believes the Coinbase proposal is an investment contract that should be registered with the agency, a view the company aggressively contested in a blog post and a series of tweets.

Watchdogs have also privately expressed worries about Diem, a stablecoin being developed by an association that includes Facebook Inc. A top concern is that the token’s market impact could be massive because of its potential for widespread adoption — Facebook’s social media network has almost 3 billion active users.

Treasury held meetings this week with industry representatives to ask them about the potential dangers associated with stablecoins. As it and other agencies consider taking action, they’re facing intense pressure from Capitol Hill.

“I urge FSOC to act with urgency and use its statutory authority to address cryptocurrencies’ risks,” Senator Elizabeth Warren wrote in a July 26 letter to Yellen that flagged the stablecoin market’s interconnectedness and its susceptibility to investor runs. “The longer that the United States waits to adapt the proper regulatory regime for these assets, the more likely they will become so intertwined in our financial system that there could be potentially serious consequences.”

Stablecoins already face another threat from the U.S. government, as the Fed is discussing whether to launch its own digital currency. Powell told lawmakers in July that a central bank token would make stablecoins obsolete.

“That’s one of the stronger arguments in its favor,” he said.



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Risks & Regulatory Imperatives, BFSI News, ET BFSI

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In today’s age of the Internet, fiat and account-based electronic money are in a state of flux. A decade after Bitcoin was introduced to the world by Satoshi Nakamoto, token-based digital currencies have proliferated to include a wide variety of private cryptocurrencies, central bank digital currencies and stablecoins. Central bank digital currencies (CBDCs) are a direct liability of the central banks. Stablecoins, on the other hand, are fiat collateralised (linked to fiat currencies such as the US dollar or euro.) or collateralised as per the value of the underlying asset or reserve.

Regulators across the globe are concerned about the unprecedented growth of tokenized money, stablecoins in particular, and its potential to disintermediate incumbent financial institutions , create volatility and financial stability risks.

Let’s Decrypt Stablecoins
Are the concerns over stablecoins legitimate? Let’s understand this token and its various types in detail to make an informed opinion.

So, what are stablecoins? Unlike Bitcoin and other popular cryptocurrencies, known for wild volatility, stablecoins are blockchain-based cryptocurrencies backed by safe reserves.

But, are stablecoins really stable?

Let’s have a look at different types of stablecoins classified solely on the basis of the value that underpins them.

Types of Stablecoins
● Fiat-collateralized stablecoins: These stablecoins are collateralized by fiat money, such as US dollar, euro or the pound, on a 1:1 ratio. Common examples are Tether (2014), Gemini Dollar(2018) and TrueSD.

● Stablecoins backed by other asset classes: There are a few stablecoins, which are backed by a basket of multiple assets (commercial papers, bonds, real estate, precious metals, etc). The value of these stablecoins can fluctuate over time subject to movement in commodity and precious metal prices. Digix Gold, backed by

physical gold, was introduced in 2018. SwissRealCoin, launched in 2018, had a Swiss real estate portfolio.

● Crypto-collateralized stablecoins: Crypto-collateralized stablecoins are more decentralised than their peers and are backed by cryptocurrencies. The flipside is price volatility. To address the risk of price volatility, these stablecoins are over-collateralised. Dai (launched in 2017) is the most popular crypto-collateralized stablecoin.

● Non-collateralized stablecoins: These stablecoins do not have any backing and are decentralized in the true sense. The supply of non-collateralized stablecoins is governed by algorithms. Basis, introduced in 2018, is the most common stablecoin in this category.

Risks from Stablecoins
Tether, arguably the largest stablecoin issuer, disclosed in March that it held over 75% of its reserves in cash and cash equivalents, most of which are in the form of commercial paper. The remaining assets include loans to unaffiliated entities (12.55%), corporate bonds, funds & precious metals (9.96%), and additional investments which include Bitcoin and other digital tokens (1.64%).

The commercial paper holdings of Tether outnumbered leading money market funds (MMF) in the US and Europe.

In the event of a mass selloff of Tether coins along with other stablecoins, short-term credit markets will have to bear the brunt. In June this year, the crash of Iron, an algorithmic stablecoin, gave us a glimpse of the risk they run. That made Mark Cuban, an America’s billionaire entrepreneur and a victim of Iron collapse, to raise his voice for regulating stablecoins.

Fitch Ratings has rightly cautioned that potential asset contagion risks linked to the liquidation of stablecoin reserve holdings could increase pressure for tighter regulation of the nascent sector.

Clarion Call for Regulation
US Secretary of the Treasury Janet L Yellen has underscored the need to act quickly to ensure there is an appropriate US regulatory framework in place.

“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies, if you had a digital US currency,” US Fed Chairman Jerome Powell told a Congressional hearing this July.

He made it clear that the Fed is done letting stablecoins run amok. “We have a tradition in this country where the public’s money is held in what is supposed to be a very safe asset,” Powell said. “That doesn’t exist for stablecoins, and if they’re going to be a significant part of the payments universe… then we need an appropriate framework, which frankly we don’t have.”

Last year, European Commission came out with a regulatory framework proposal for crypto assets and stablecoins. The Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, has highlighted the potential of global stablecoins (GSCs). FSB says, “A widely-adopted stablecoin with a potential reach and use across multiple jurisdictions (so-called ‘global stablecoins’ or GSCs) could become systemically important in and across one or many jurisdictions, including as a means of making payments.

But those who back stablecoins say with the established use cases in cross-border payments, settlements and financial inclusion, a global regulatory framework is all that is needed to harness the full potential of stablecoins.



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Can’t wrap head around not having U.S. central bank digital currency, BFSI News, ET BFSI

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Federal Reserve Governor Lael Brainard laid out a range of reasons for “urgency” around the issue of developing a U.S. central bank digital currency, including the fact that other countries such as China are moving ahead with their own.

“The dollar is very dominant in international payments, and if you have the other major jurisdictions in the world with a digital currency, a CBDC (central bank digital currency)offering, and the U.S. doesn’t have one, I just, I can’t wrap my head around that,” Brainard told the Aspen Institute Economic Strategy Group. “That just doesn’t sound like a sustainable future to me.”

Fed officials are taking a deep dive into the digital payments universe, collecting public feedback on the potential costs and benefits as well as design considerations with a view to publishing a discussion paper in early September.

Fed Chair Jerome Powell in comments earlier this month described the analysis as a key step in accelerating the Fed’s efforts to determine if it should issue its own CDBC.

“One of the most compelling use cases is in the international realm, where intermediation chains are opaque and long and costly,” Brainard said on Friday.

But there are domestic reasons too for a U.S.-backed digital currency, she said: the dramatic rise in stable coins, a form of cryptocurrency pegged to a conventional currency such as the U.S. dollar but not backed by any government.

Stable coins could proliferate and fragment the payment system, or one or two could emerge as dominant, she said. Either way, “in a world of stable coins you could imagine that households and businesses, if the migration away from the currency is really very intense, they would simply lose access to a safe government-backed settlement asset, which is of course what currency has always provided.”

A CBDC could also help solve other problems, she suggested, including the difficulty during the pandemic of getting government payments to people without bank accounts, who also tend to be the very people who need the payments the most.



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