There’s no area of crypto with a more pressing need for strong and clear regulations than stablecoins.
The dollar-pegged cryptocurrencies have so many of the world’s central bankers worried enough that 100 countries went from zero to seriously studying or even creating their own digital assets to ward off the threat privately-issued stablecoins pose to their power over their economies.
Those central bank digital currencies (CBDCs) are still years away, but the need to protect the investing public from the wildest and riskiest portion of the Wild West that is the cryptocurrency market is immediate, according to economist David Evans.
Evans, chairman of Global Economics Group, told PYMNTS that he believes stablecoins are in desperate need of a tough regulatory regime right now as they are the facilitator of a lot of crypto’s biggest problems, from outright scammers to centralized and decentralized finance (CeFi and DeFi) projects that are promising the general public returns — 20% and more APY — that are far too big to be true or safe.
“The fact of the matter is the major use case for cryptocurrencies today is speculation,” Evans said. “And that speculation is increasingly hype-driven, celebrity-driven. And it’s a problem.”
His solution? Regulations that limit the use of stablecoins to financial projects that have been vetted by regulators, rather than pitched by athletes and supermodels.
Don’t Bank on Crypto
Sen. Elizabeth Warren (D-Mass.) and a bipartisan trio of colleagues released a letter Wednesday (Aug. 10) calling on Comptroller of the Currency Michael Hsu to rescind guidance by his predecessor allowing banks to custody crypto, hold stablecoin reserves and use cryptocurrencies for back-end payments.
A Regulatory Glossary
Crypto regulation is a new enough field that its biggest problem is that many existing regulations just don’t fit its decentralized and middleman-light structure. New regulations are still to come in the U.S., while others will go into effect in the European Union next March.
It’s a field with a language of its own, which is why PYMNTS has created a glossary that defines and explains the key terms you need to really understand the legal and regulatory issues that affect crypto — and that crypto affects.
Hedge Funds Under Scrutiny
The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) joined forces Wednesday on a proposal to require large hedge funds to report their cryptocurrency exposure.
The goal, according to the SEC, is “to enhance the Financial Stability Oversight Council’s (FSOC) ability to assess systemic risk” while bolstering the agency’s oversight of private fund advisers.
While the press release focused heavily on oversight of hedge funds, it’s not to see reflections of the collapse of Three Arrows Capital, a crypto hedge fund that fell to overly risky investments in decentralized finance (DeFi).
Combined with the collapse of the Terra/LUNA algorithmic (non-fiat-backed) stablecoin, Three Arrows’ failure has rippled across crypto, taking half a dozen crypto lenders into at least temporary insolvency and many into bankruptcy.
Across the Pond
Former Bank of England Deputy Governor Paul Tucker said in an interview published Sunday (Aug. 7) in the Financial Times that British regulators have dropped the ball when it comes to regulating the shadow banking sector, which includes cryptocurrency firms.
He warned that the light or missing regulatory touch leads people to invest in offerings that market themselves as “safe,” and could lead to a situation in which entire segments could quickly collapse due to a crisis in confidence.
Tucker added that while global regulation of the shadow banking sector is needed, the country can no longer wait for an international consensus.
“Airing the possibility of single jurisdictions moving on their own obviously is not comfortable,” he said. “But what if another decade passes without a general policy, and then some massive part of shadow banking unravels?”
The central bank’s current staff took aim at metaverse regulation on Aug. 9 with a blog post by researchers Owen Lock and Teresa Cascino arguing that the metaverse could become a potentially serious source of financial risk.
“If an open and decentralized metaverse grows, existing risks from cryptoassets may scale to have systemic financial stability consequences,” they wrote. “Widespread adoption of crypto in the metaverse, or any other setting would require compliance with robust consumer protection and financial stability regulatory frameworks.”
While calling crypto assets “ill-suited as a medium of exchange” due to their “highly speculative” nature, the pair said that their focus was on cryptocurrencies’ use in a potential future metaverse that is open and decentralized — what the crypto industry hopes it will become — because “existing risks from cryptoassets may scale to have systemic financial stability consequences.”
For all PYMNTS crypto coverage, subscribe to the daily Crypto Newsletter.