Says crypto stablecoins shouldn like casino

Boy.

But should Tether and other stablecoins continue to witness increased growth, soon, they could “reach a systemic size, meaning they have become ‘too big to fail,” added Boy.

Crystal balls and transparency

There’s no risk of failure as long as the creators of stablecoins have in place sufficient reserves. But again, this is another area that financial authorities seem worried about: “Stablecoin issuers are not subject to a consistent set of standards regarding the composition of reserve assets … and there is a lack of consistency in disclosure practices,” said the FSB.

Currently, the FSB must take these stablecoin producers’ promises at face value because audits of their reserves, when conducted, are not always conducted by major organizations or in accordance with international norms.


While capital requirements for state trust banks may be compatible with a full reserve approach, OCC national trust banks currently face leverage ratios of 4% to 5%, and therefore may not be a viable structure for issuers that do not engage in maturity transformation.

Even with these limitations, however, true stablecoins have utility as a medium of exchange. They would be optimized for efficiently moving value as opposed to storing value or earning interest.
Their cost structure makes them viable when their coin velocity is high and can support a large volume of payments with a small reserve. When it comes to store of value, deposit coins have an advantage, as they have a much lower cost of capital.

Deposit (Stable)coins

Deposit stablecoins are demand deposit claims against insured commercial banks, on blockchain rails.

China is the exception here: it has already cleared over $5.3 billion in transactions through its digital renminbi.) But there are also risks with private sector involvement, especially as stablecoins move beyond cryptocurrency trading and decentralized finance (DeFi). Any solution would need to address consumer protection, financial stability, and financial crime prevention.
These are the same concerns we always face in the provision of money.

So how should central banks and regulators respond? There are three simple ways we could “upgrade” money that play to the strength of both the public and private sector. They’re different but not mutually exclusive, and each presents significant opportunities for existing financial institutions, as well as fintech and crypto entrants.

Says crypto stablecoins shouldn like casinos

Stablecoins like poker chips

This came on Tuesday while Gensler spoke with David Ignatius, a columnist with Washington Post; he said several cryptocurrency projects fall under securities that SEC oversees, while the rest are better suited for the enforcement Commodity Futures Trading Commission.

He described the authority of both agencies as robust but noted that their coverage is inadequate, especially for stablecoins which could have the traits of investment contracts.

“Stablecoins are almost acting like poker chips at the casino right now.” He added that “We’ve got a lot of casinos here in the Wild West, and the poker chip is these stablecoins at the casino gaming tables.”

SEC and CFTC on Crypto

According to Gensler, both SEC and CFTC would benefit from the congress in terms of regulation and enforcement for stablecoins.

Says crypto stablecoins shouldn like casinoz

These opportunities will continue to drive partnerships between established and new players, but also will result in more fierce competition.

Upgrading Money

Modern money is a combination of public and private money. Public money includes central banks-issued cash and digital claims against central banks.

Private money includes deposit claims against commercial banks. While the public sector protects the stability of money, up to 95% of money in developed economies is private.

Stablecoins are a form of private money.
This is not a new concept — the idea of separating monetary and credit functions traces back 80 years. By lowering the cost of digital verification, blockchain technology can expand the role of both the public and private sector in the provision of money.

It is now on other countries, particularly the United States in its role as keeper of the world’s reserve currency, to develop their own thesis of what that future should look like, and what role they play.

Three Paths to Sound Money

Having spent three years working through these issues and collecting feedback from regulators, we believe there are three ways to safely harness the technology: “true” stablecoins, deposit coins, and CBDCs.

True Stablecoins

True stablecoins are non-interest bearing coins designed to have stable value against a reference currency — say USD $1. Stability is achieved through two commitments. First, the issuer agrees to mint and buy back coins at par. Second, the issuer holds assets to back its obligation to redeem the outstanding stablecoins. This “reserve” provides comfort that the issuer can buy back all outstanding coins, on demand.

An apt example is a Tether (one of the most commonly used of the entire stablecoins) which has always maintained an equal value to one USD.

The promise of stability has gone a long way into making stablecoins, and more so the tethers, “the bridge between paper currencies (such as the dollar, euro, yuan, etc.) and cryptocurrencies,” says Vincent Boy, a financial analyst and crypto expert working at IG consulting firm.

Essentially, those who’ve invested in Ethereum and Bitcoin avoid yo-yoing prices by switching their currencies in USD coins, Tethers, or binance USD – all forms of stablecoins – to be aware of their portfolios precise dollar value.

Of course, the Chinese example may well prove to be the exception to this rule.

This is where CBDCs and stablecoins are strong complements, not substitutes. The public sector could focus on issuing digital coins and delivering on sound money, while the private sector could build rails and applications.
Competition with legacy networks would further ensure a higher degree of resilience and innovation.

Simple Fixes For a Complex Problem

True stablecoins, deposit coins, and CBDCs could each deliver on what economists Gary Gorton, of the Yale School of Management, and Jeffery Zhang, of the Board of Governors of the Federal Reserve System, refer to as “no questions asked” money. Any material legal uncertainty for true stablecoins could be addressed by incremental changes to existing law.

Last week, U.S. Securities and Exchange Commission Chair Gary Gensler made a strong statement: It’s time to regulate cryptocurrency markets. He is not the only regulator who believes this. Jerome Powell, chair of the Federal Reserve, issued an urgent call for regulation of stablecoins — cryptocurrencies that are pegged to a reference asset such as the U.S. dollar — and Federal Reserve Governor Lael Brainard signaled that the case for the Federal Reserve exploring a central bank digital currency (CBDC) in response to stablecoins seems to be getting stronger.

Regulators typically only pay this level of attention to systemically important segments of the financial system, such as banks and money market funds.

He expanded on that analogy in the recent interview and referred to Stablecoins as a ‘casino chip’ or poker chip for the casinos in this “Wild West”. Gary Gensler and the SEC are currently making efforts to expand the authority of the regulator to cover Stablecoins as well.

A request for the same has been forwarded to Congress.

The comments made in this interview assume importance as Gary Gensler recently appeared before the Senate Banking Committee on the matter of cryptos. In the testimony, he argued about the importance of regulating the crypto industry.

He added that cryptocurrency exchanges like Coinbase should register themselves with the SEC. He stressed on the importance of registering, as many platforms have not complied with the rules.

The new report says the market cap for the most popular stablecoins has grown by more than 500 percent over the past year, to $127 billion.

“The rapid growth of stablecoins increases the urgency of this work,” the Treasury Department said in a statement.

Related

The Tether controversy, explained

In the report, the working group lays out some of the risks that it says stablecoins could present to the economy or to individual crypto investors. A number of scenarios could lead to a “run” on stablecoins, where holders tried to redeem them en masse because they’re worried about the currency’s viability.

For instance, If a stablecoin issuer didn’t honor a request to redeem it, or if users lost confidence in the stablecoin issuer’s ability to redeem them, this could lead to a run.

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