DFC

In June 2022, the New York Department of Financial Services (NYDFS) issued formal guidance for NYDFS-approved stablecoin issuers, including upgrades to the amount and quality of information that issuers must provide to the public. With the new guidance, management's assertions must now be tested and published no later than 30 days after the end of the month, but also on one randomly selected business day during the month. Secondly, stablecoin issuers will be required to submit their internal controls to audit. However, the new regulations apply to Gemini dollar (GUSD) Binance USD (BUSD) and Paxos dollar (USDP).

The Financial Services and Markets Bill 2022 has been introduced into the U.K. Parliament. Section 22 of the Bill contains a new power for the government to introduce bespoke rules on the regulation of payments, payment systems and service providers in relation to the payments that include “digital settlement assets”, which includes any digital representation of value or rights that “(a) can be used for the settlement of payment obligations; (b) can be transferred, stored or traded electronically, and (c) uses technology supporting the recording or storage of data (which may include distributed ledger technology).” The Chancellor of the Exchequer said that HM Treasury will be working to understand how distributed ledger technology could be applied to a U.K. sovereign debt instrument.

"Currently, there is no overarching regulatory framework for stablecoins in Canada, and no authority has asserted jurisdiction over the operations of their issuers. This article is the first scholarly work to provide a detailed assessment of the jurisdictional perimeter, and risk-informed regulatory design principles, for fiat-backed stablecoins in Canada. It provides two unique and vital contributions to policy formation in stablecoin regulation. First, it analyzes whether stablecoins are securities, investment funds, or derivatives based on statutory definitions and interpretive jurisprudence. Second, it assesses whether a securities-based regulatory framework is sufficient to mitigate the risks that stablecoins pose, or if it leaves gaps that must be filled by banking, payments, and systemic risk regulators. While securities authorities have a reasonable case for legal jurisdiction over stablecoins based on how they are currently used, there are several “gaps” if stablecoins are exclusively regulated under securities law, and while many protections are provided, the full breadth of risks will not be mitigated. If Canadian securities regulators move forward with a stablecoin policy framework, they must do so with an eye to resulting gaps. Ultimately, a comprehensive framework will require inter-agency cooperation, across the financial regulatory landscape, to adequately address all stablecoin risks. It must apply “same risk, same regulation” principles, contextualized to support innovation, financial inclusion, and competition, using tiered parameters, and parallel and complementary inter-agency oversight. It must seek international regulatory cooperation, data-sharing, and contemplate contagion, interconnection, and the consequences of the potential failure of a global stablecoin issuer."

Many industry participants have commented on how the gap in marketcap between Tether and its largest competitors has narrowed. However, the difference between USD₮’s 24hr trading volume and its competitors tells a clearer and more important story. For example, rather than catering to the traditional banking industry, Tether is focused on being the most used currency for peer-to-peer exchanges, remittances, a tool of freedom and inflation hedge for developing countries. This is why, while Tether’s marketcap has decreased due to the billions of cash redemptions that it's effortlessly facilitated over the past several weeks, Tether’s 24hr trading volume remains roughly 10x that of its closest competitor. This points to the utility of Tether in daily trading and is the true measure of adoption. The sheer scale of the integration of USD₮ into the financial plumbing of the crypto industry is an order of magnitude greater than its nearest competitor.

In a recent blog post, the world’s largest stablecoin issuer Tether mocked its smaller competitor, Circle (which issues USD Coin), for being unprofitable. In Circle’s first quarter of 2022, it was $113 million in the red, whereas according to JP Koning’s estimates based on an analysis of Tether’s six attestation reports, Tether earned $13 million over the twelve months ending March 31, 2022. Going forward, both Circle and Tether can be expected to earn much more interest income on their base of non-interest-paying customer deposits, but Tether may face losses on its possibly riskier investments, including $62.8 billion in the collapsed lender Celsius, which is probably worthless now.

Millicent, a fintech company co-funded by the Innovate UK, has successfully performed a test of a full-reserve stablecoin aimed at the retail market. The reserves are held in a ringfenced account safeguarded by a regulated third party, directly at the Bank of England. Millicent runs on a hybrid Layer-1 distributed ledger network (DLT). A sandboxed demonstration simulated fiat on-ramping via Faster Payments from one of the UK's largest consumer banks, as well as the on-chain conversion and minting of stablecoins pegged to the British Pound Sterling, and a variety of payment and settlement scenarios.

Issuers of stablecoins have thrived while nominal interest rates have been near zero. With high positive interest rates, the opportunity cost of holding zero-interest stablecoins increases and the issuers lose business. With significantly negative rates, the value of safe reserves declines but the tokens are still redeemable at par. Issuers face insolvency and must invest in riskier reserves for a chance to survive. If stablecoins are no longer fully backed by safe and liquid assets and are widely used, this creates financial stability risks. Suppose the issuers could pass on their interest earnings (or costs if rates are negative) on reserves to the token holders on a one-on-one basis. If interest rates are high, stablecoins are a competitive liquid store of value. If they are significantly negative, the issuers’ liabilities shrink along with their reserve; the issuer remains solvent. Stablecoins could be sustainable in all interest rate environments. There is a problem though, at least for the EU with the Regulation on Markets in Crypto-assets (MiCA) that is expected to come into force in 2024. This proscribes the paying of interest on money tokens. That would force issuers to adopt a business model that is only sustainable with near-zero interest rates.

This paper identifies three main components of any stablecoin, the peg, token and backing or reserve, that can be interpreted as three dimensions of (exchange) value fulfilled by the three functions of money: a unit of account, means of exchange, and store of value. By doing so, the stablecoin concept is not be characterized as a separate and self-contained asset class, but rather as an overarching and general meta-category from which a multitude of other classes and types of crypto-assets can be derived. By noting that different types of money and financial assets emerge from the different ways in which the three functions of money interact, the paper identifies five main cases from the various ways in which peg, token, and reserve are recombined. Various types of traditional financial assets belonging to each of these five cases and discusses how the various types of crypto-assets (and stablecoins) are identified and mapped into each of them.

This column introduces the available stablecoins and discusses the possible impact of the forthcoming Markets in Crypto-assets regulation by the European Commission on e-money issuers. The authors argue that the regulation may spur regulatory arbitrage in Europe and lead commercial banks to offer tokenised deposits on the decentralised ledger of a public blockchain.

BDO Italia has reaffirmed stablecoin issuer Tether's consolidated reserves report that showed a 58% quarterly decline in commercial paper holdings to $8.5 billion as of June 30. Tether also confirmed its expectation that commercial papers will be down to $200 million by the end of August and zero before the end of the year.

The fully reserve-backed HUSD stablecoin lost its peg on August 18, 2022, trading as low as $0.82, although it regained the $1.00 peg the next day. According to the HUSD team, the depeg was caused by a decision to close market maker accounts in some regions to comply with regulations. The time difference in banking hours had created a gap that led to a liquidity problem, leading to HUSD falling from its peg.

Binance effectively banished USD Coin (USDC), the second-biggest stablecoin, from trading at its cryptocurrency exchange in favor of its own competing product. On Sept. 29, customers' holdings of USDC will be converted to Binance USD (BUSD). The same will happen with two smaller stablecoins: Pax Dollar (USDP) and TrueUSD (TUSD).  The action effectively removes USDC as a tradable asset on one of the most prominent perches in crypto, and creates a headache for Circle Internet Financial, USDC's issuer, as the company mulls an IPO.

"Binance's move to automatically convert USDC and two other stablecoins may lead to more USDC flowing into the exchange, according to the CEO of Circle, which issues the coin. "Binance is trying to consolidate dollar liquidity w cash equivalent stables. That’s good for liquidity and market depth," said Circle CEO Jeremy Allaire on Twitter."

"At face value, it’s a vote of confidence for tokens like USDC and USDP, with Binance effectively stating that the value of those tokens are reliable enough to be allowed permanent 1-to-1 redemption with its own BUSD across withdrawals and deposits. Tether’s USDT, the largest stablecoin by market value, was notably left out of the party."

Binance will stop supporting trading in spot pairs that include these stablecoins, but will allow users to withdraw funds in the form of these stablecoins. In other words, the trading of these stablecoins will no longer be supported, but Binance users will be able to withdraw amounts denominated in these stablecoins.

Legislation to regulate stablecoins being drafted in the U.S. House of Representatives would place a two-year ban on coins similar to TerraUSD, the algorithmic stablecoin that collapsed earlier this year. It would be illegal to issue or create new “endogenously collateralized stablecoins." The definition would kick in for stablecoins marketed as being able to be converted, redeemed or repurchased for a fixed amount of monetary value, and that rely solely on the value of another digital asset from the same creator to maintain their fixed price.

"A new draft of the markets in crypto-assets (MiCA) regulation, expected to be the final version of the rulemaking, obtained by The Block shows that limitations on the use of U.S. dollar-pegged tokens within the E.U. have been removed."

Seven U.S. Republican lawmakers have thrown their weight behind Custodia Bank in its ongoing legal battle to get a master account at the Federal Reserve.

The Brookings Institution published a paper that proposes a US federal framework for the issuance of stablecoins within the existing regulatory framework for insured depository institutions, a structure that would not require any new legislation. Under current law, the Comptroller of the Currency could authorize a national trust bank charter, organized as an operating subsidiary of an insured depository institution, to create stablecoins through the use of a dedicated trust vehicle. The Comptroller would adopt standards limiting the investment of stablecoin reserves to high quality liquid assets and address redemptions and operational resilience, among other matters. The proposed framework guarantees that holders of a failed stablecoin are paid out rapidly and in full, because it uses the same resolution process by which failed banks are wound up.

Europe's Markets in Crypto-Assets (MiCA) regulation framework, as of the latest draft, limits the volume for stablecoin payments to $200 million per day. This is too low of a cap to gauge its success and is ultimately only helpful in stifling innovation and hindering what these assets can offer. Take the perspective from Belgium, where, as of July 1, 2022, all merchants must offer at least one digital payment solution. But, here’s the catch — cryptocurrency and stablecoins are not accepted as valid forms of digital payment under this provision.

The International Monetary Fund (IMF) published a Fintech Note that provides key elements that should feature in any stablecoin regulatory arrangement. Stablecoins have experienced periods of rapid growth, accelerated links with traditional finance. Without proper regulation, contagion risks to wider financial sector will increase. Global regulation for stablecoins should be comprehensive, consistent, risk-based, flexible, and focus on their structural features and use. Requirements on stablecoins should cover the entire ecosystem and all its key functions, and there should be additional oversight for systemic stablecoin arrangements. In markets where risks are growing quickly, authorities should take immediate action by using all the tools at their disposal. For effective implementation, domestic and international collaboration are key.

"Binance will no longer support competing stablecoins, including USDC, on its exchange. USDC’s market cap is down 5% since the announcement."

"A daily transaction cap for non-euro stablecoins has been reinserted into the European Union’s draft rules for cryptocurrencies. The cap will limit transactions using stablecoins denominated in other currencies, like the U.S. dollar, to €200 million transacted per day,  multiple sources confirmed to The Block. "

"This paper examines the financial stability risks associated with tokenized cash, a subset of stablecoins fully reserved with cash and cash equivalents. Using a combination of on-chain data together with uniquely collected wallet address labels, we construct empirical measures of liquidity ratios and run off rates on the largest cash token and characterize its users and their behavior. The overall circulation of tokenized cash is largely insulated from crypto price movements, though price changes correlate with re-balancing between smart contracts and private wallets. A liquidity ratio calculation, similar in concept to Liquidity Coverage Ratio (LCR), indicates that tokenized cash has at least two times the amount of High-Quality Liquid Assets (HQLA) when compared to the worst observed gross outflow over 30-day ahead periods. We discuss the implications of tokenized cash on safe asset creation, credit supply, and monetary policy transmission. The adoption of tokenized cash can reduce moral hazard risks from public guarantees and expand credit provision through market-based lending enabled by smart contracts."

Tether has cut its commercial paper holding to less than $50 million, as of September 30, and increased its holding of U.S. Treasuries to 58.1% of its total portfolio from 43.5% of its total portfolio as of June 30, according to a Tweet by its Chief Technology Officer, Paolo Ardoino.

The US National Institute of Standards and Technology (NIST) published a technical paper on the ways in which stablecoins are architected and implemented. This includes a descriptive definition, commonly found properties, and distinguishing characteristics, as well as an exploration of stablecoin taxonomies, descriptions of the most common types, and examples from a list of top stablecoins by market capitalization. This document also explores related security, safety, and trust issues with an analysis conducted from a computer science and information technology security perspective as opposed to the financial analysis and economics focus of much of the stablecoin literature

The Financial Stability Board (FSB) released two crypto-related reports, one on high-level recommendations for crypto-asset regulation that prescribes a “same activity, same risk, same regulation,” approach to digital assets, and the other an assessment of how broadly stablecoin issuers would meet the “high-standard” criteria set by the group in 2020. Citing limits on redemptions, including the ability to delay or deny them, the FSB found that most users have to sell stablecoins on exchanges in order to liquidate them, and the price could drop below the value of the currency that the coin is pegged to. The FSB also cast doubt on how most stablecoins would be able to maintain their pricing under market stress.

Tether has completely eliminated commercial paper from its USDT stablecoin reserves, replacing them with U.S. Treasury Bills.

"The global rise in interest rates is finally beginning to percolate into the stablecoin sector. One of the effects of this rise is that centralized stablecoins, which by default pay 0% to holders, are introducing backdoor routes for paying interest to large customers. While large stablecoin holders may be benefiting from this trend, small holders of stablecoins are being ignored. Small stablecoin holders need to unite. By working together through a StablecoinDAO, their bargaining power vis-a-vis the big stablecoin issuers improves. They may be able to negotiate the same interest payments that large stablecoin customers are getting... A StablecoinDAO would work along the same lines as a high-interest savings ETF. People would deposit their stablecoins -- USD Coin, Gemini Dollar, Binance USD, USDP, Tether, Dai -- into a smart contract. In return they'd get a new stablecoin called, say, UniteUSD, which would be redeemable on demand into any of the DAO's underlying stablecoins. UniteUSD itself would be useful. It could be used for purchases, deposited into smart contracts, or traded on decentralized exchanges and whatnot. StablecoinDAO would have the authority to swap one underlying stablecoin out with a new one. That potential threat would give the DAO the necessary leverage to negotiate interest payments."