Regulators have the opportunity to map out thoughtful, strategic policy on stablecoins and more.
TerraUSD (UST) crash week was one of the most painful weeks in crypto history – and one we’ll be counting on for a long time. It wreaked havoc on the cryptocurrency market, leading to billions of dollars in devaluation. And while those in Washington, D.C., are rightly debating the next steps, an intelligent, thoughtful conversation about potential regulations is crucial.
Stablecoins are an important innovation that brings many benefits to users and a competitive advantage for the United States. Stablecoins improve the efficiency of payments and transfers, reducing costs and speeding up settlement for businesses and consumers. They make the financial system more inclusive by providing open access to anyone, anywhere, regardless of their background or economic status. They can also advance US geopolitical interests, bolstering global dollar dominance against efforts by our adversaries – such as China and Russia – to weaken America’s leadership role in the financial system.Jake Chervinsky is the head of policy at the Blockchain Association.
As the name suggests, stablecoins aim to be stable and reliable. In general, there are two major types of stablecoins: custodial and decentralized.
Custodian stablecoins are issued by a central administrator and backed by collateral held at a bank or other institution. They are usually fully collateralized: The issuer keeps one dollar in the bank for every dollar of stablecoins it issues. Custodial stablecoins represent the majority of the total stablecoin volume and are very stable and reliable, as long as the issuer is trustworthy and transparent.
Decentralized stablecoins are designed to address the fact that not all issuers are trustworthy or transparent. Their goal – just as public blockchains allow them – is to eliminate reliance on trusted intermediaries in the financial system, who often do more harm than good. They achieve that goal by producing stablecoins that seek to maintain their exchange rate to the dollar through the operation of an autonomous token rather than depending on a central issuer. Instead of being backed by dollars in the bank, decentralized stablecoins are often backed by other digital assets that are programmed as collateral on the blockchain.
Importantly, while custodial and decentralized stablecoins use different models, they are not fundamentally better or worse than others. Each has its own unique characteristics – both benefits and risks – that combine to form a highly competitive market characterized by consumer choice. We should support responsible innovation in both categories.
Unfortunately, the UST was in a category of its own, relying solely on an algorithmic mechanism to maintain price stability without any collateral, a risk model that many prediction may fail.
So, after the events of this month, how should policymakers react?
First, as US Treasury Secretary Janet Yellen pointed out in congressional testimony on May 12, policymakers should follow the process laid out by the Executive Order (EO) of the President. President Joe Biden earlier this year. The EO — which directs federal agencies to research cryptocurrencies and report on regulatory priorities and solutions — provides clear guidance on how to thoughtfully conduct stablecoin regulation. That work is important and ongoing. With input from industry stakeholders and trade groups like mine, the Blockchain Consortium, policymakers should have a clear understanding of the stablecoin space and fundamental differences. between different stablecoin designs. This is a necessary first step before effective regulations can be developed.
Second, bipartisan consensus needs to be developed in Congress. Immediately after the collapse of the UST, Congress entrenched on both sides of the aisle on the issue. But as my colleague Kristin Smith recently wrote, crypto is too big for partisan politics. We need leaders on both sides of the aisle to come together and determine the best regulatory approach for crypto. As the President’s Working Group on Financial Markets (PWG) recommended in its report on stablecoins last year, a regulatory solution must come from Congress – not from regulators.
Third, new regulations need to be passed that are fit for purpose. These policies must be balanced and consider the essential nature of dollar-dominated stablecoins to the financial security of the United States in the coming decades.
We need the right regulatory frameworks to address the specific benefits and risks of stablecoins. As for custodial stablecoins, Senators Pat Toomey (R-Pa.) and Representative Josh Gottheimer (D-N.J.) have separately proposed suitable frameworks – excellent examples of regulatory approaches. intelligence from both sides of the aisle in the Senate and House of Representatives. With time, we can also develop similarly well-regulated frameworks for decentralized stablecoins.
Stablecoins present an opportunity too great for us to risk mistaking them as a matter of policy. The United States is in an internationally competitive race to become the home of the Web 3. It’s time for strategic thinking and deliberate action. The future of the United States as a global crypto innovation hub is in the balance.