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In recent months, we have seen an attack by US entities on cryptocurrencies, which has some investors worried.

Especially with stablecoins, which play a key role in the macroeconomics of the crypto industry. It is through them that much manage to make the exchanges that ensure the value of the assets they own and facilitate their exchange for the currency of their countries. And it is precisely because of their importance that regulators are keeping an eye on them.

A bill that is pending in the US Congress provides for a series of measures to regulate the use, distribution, and creation of this type of token. But will this project, if approved as it is, make the crypto market safer?

The Security and Exchange Commission, the equivalent of the Securities and Exchange Commission in the United States, is in relentless pursuit of digital assets. The American Congress, however, in an initiative led by the pro-crypto deputy Patrick McHenry, seems to follow the opposite line of the regulatory agency, at least in relation to the creation of clearer rules, and one of the reflections of this was the presentation and appreciation of the bill of law on the regulation of stablecoins.

This is a defining moment for the US cryptocurrency market and will certainly have a huge impact on the rest of the world. And that's why we've prepared this content with everything you need to know about the bill, its possible consequences and repercussions, its positives and negatives.

What are stablecoins?

Stablecoins are cryptocurrencies designed to hold their value stable relative to an underlying asset, usually a fiat currency, such as the US dollar. This is achieved by mechanisms such as the total reserve, where each unit of the stablecoin is backed by a corresponding unit of the underlying asset, deposited in a centralized entity.

Stablecoins are a popular option for those who don't want to be exposed to the high volatility associated with other cryptocurrencies, such as Bitcoin. Last year we had the collapse of the Terra/LUNA protocol and with it the loss of parity of its algorithmic stablecoin, the UST. We recently saw USDC, one of the most popular stablecoins on the market, lose parity with the dollar due to speculation about its liquidity, which put all stablecoins under the crosshairs of the SEC and the US Congress.

Main Stablecoins

There are several stablecoins in circulation today. The market value of all of them combined adds up to a few tens of billions of dollars. Below is a list of some main ones, including:

1. Tether (USDT): Launched in 2014, Tether is a US dollar-backed stablecoin, with its circulating supply currently topping $40 billion. Tether has been criticized for its lack of transparency regarding the reserves that support it.
2. USD Coin (USDC): Launched in 2018 by Circle and Coinbase, USDC is another US dollar-backed stablecoin. Its current outstanding supply is around US$14 billion.
3. Dai (DAI): Created by MakerDAO in 2017, Dai is a decentralized stablecoin backed by a basket of assets and maintained by the community. Current circulating supply is around $3 billion.
4. Binance USD (BUSD): Launched in 2019 by Binance, BUSD is a US dollar-backed stablecoin and currently has a circulating supply of around $10 billion.
5. TrueUSD (TUSD): Launched in 2018, TrueUSD is a US dollar-backed stablecoin that calls itself “fully transparent and auditable”. Its current circulating supply is around $2 billion.
6. Paxos Standard (PAX): Launched in 2018 by the Paxos Trust Company, PAX is a US dollar-backed stablecoin and currently has a circulating supply of around $3 billion.

The main risk involving stablecoins is the lack of transparency regarding the assets used to secure their peg against the US dollar. This was the main reason that led American legislators to create a bill to regulate the issuance of cryptocurrencies, to ensure that funds are available and sufficient to cover all coins in circulation.

Proposed law

Seeking to provide more security to investors, a bill related to stablecoins was presented, called "To Provide Requirements for Payments Stablecoin Issuers, Research on a Digital Dollar, and for Other Purposes" (BILLS-118pih). The bill aims to regulate stablecoins in the United States to protect consumers and financial stability.

It is currently in a preliminary stage. What has happened so far is the publication of a draft by the Financial Services Committee of the US House of Representatives on April 15, 2023. This draft bill is still subject to legislative process revisions and modifications before it is passed. .

Once presented, the bill will be debated and may undergo changes before being approved. It is important to note that the bill may take months or even years to become law.

What the project foresees

The proposal has already been the target of several criticisms and has generated concern in the market due to some requirements considered disproportionate. But there are also those who welcome greater regulation of these very critical assets. Here are some of the main points addressed in the project:

1. Capitalization requirements: Stablecoin issuers will need to hold sufficient reserves to back all coins issued. The bill stipulates that reserves need to be held in a qualified and audited bank.
2. Transparency requirements: Stablecoin issuers will need to provide regular financial information, including public disclosure of reserves, financial audits and information about any ties to other financial entities.
3. Regulatory oversight: The SEC and CFTC would have authority to oversee stablecoins, as well as the US dollar reserve that backs them. The project would also allow the Fed to create its own digital currency, known as “Fedcoin”.
4. Bans: Proposes a ban on companies with more than $1 billion in assets issuing stablecoins or engaging in stablecoin activities. The bill would also ban financial firms from mixing their banking activities with the issuance of stablecoins.
5. Research on a Digital Dollar: Requires the Fed and the Treasury Department to conduct research on a Digital Dollar and report their findings to Congress.

Next steps include House committee discussions and possible amendments, committee vote, House vote, Senate vote, and finally approval by the President before it becomes law.

Positive and negative points

It is inevitable that some regulation will come to the crypto market, and that includes stablecoins. Therefore, we have to seek the best possible regulation. That is why there are several criticisms of the proposed law, although there are also positive points. Let's see the main qualities and defects of the project:

Positive Points of the Law Project

• Regulation can bring more transparency and security to stablecoins, which play a key role in the entire cryptocurrency ecosystem. This can have positive effects on the market.
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• Requires stablecoin issuers to maintain adequate reserves to ensure their coins remain stable, which can boost user confidence;
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• Includes provisions for research into creating a digital dollar, which could lead to further innovation and technological advances;

• It can help combat illegal activities such as money laundering and terrorist financing by requiring stablecoin companies to adhere to the same compliance rules as other financial institutions.

Negative Points of the Law Project

• The bill's prescriptive approach could significantly increase operating costs for stablecoin companies, making them less competitive relative to other cryptocurrency companies that do not have such restrictions;
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• Excessive regulation can stifle innovation in the stablecoin industry, discouraging the development of new technologies and innovative solutions to the challenges faced by stablecoin issuers;
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• It does not address important issues such as the privacy of stablecoin users and the role of cryptocurrency exchanges in the stablecoin ecosystem;
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• The authority granted to regulators could lead to excessive oversight and undermine the competitiveness and efficiency of the stablecoin industry. Overzealous regulators can stifle innovation and limit the potential of the stablecoin industry.

Opinions about the regulation of cryptocurrencies are quite polarized, which could delay the vote on the project and hinder negotiations to reach the best possible format.

Main aspects of the bill

1. Imposes licensing for the issuer of stablecoins (the activity is licensed by the Government, in advance, by a specific body). To be an issuer, it is possible to be a banking institution or not. But in any case, you need a license! Ever! A specific regulator will always oversee this. It can approve or disapprove and even revoke licenses, apply heavy punishments, fines, crime, etc.

2. All stablecoins must be backed 1:1 by US dollar reserves, treasury bills with maturities of up to 90 days or guaranteed repurchase agreements, as well as central bank reserves.
   If the bill becomes law, “endogenously-backed” stablecoins would be illegal. Thus, it can no longer be an algorithmic and even – depending on the interpretation – decentralized stablecoin. Not even backed by ETH, BTC or other assets other than that stablecoin’s own “Real World Asset”. And in the case of stablecoins, reserves, even for stablecoins paired with other fiat currencies, must always be in US dollars (Ex: EUROC or EURT)!

3. Reserves cannot be invested/speculated and must be maintained to generate liquidity in redemptions.

4. Obey the Compliance rules.

5. Protects the consumer in the event of bankruptcy: stablecoin holders have priority to redeem the amount over other debts/credits of the bankrupt issuer.

6. Direct access to Federal Reserve systems.

7. Publication of specific balance sheets and accounting (accountability) starting from 150 million dollars in emissions, to provide transparency and quality to the reports = Audit.

8. The controversy of extraterritoriality: “it shall be unlawful for any person to offer or dispose of a stablecoin payment through the use of any means or by any access in commerce in the United States or to offer or sell a stablecoin payment to an entity/person who lives in the United States, unless such stablecoin payment is issued by a licensed payment stablecoin issuer.”

What to expect

It is inevitable that regulation will arrive. Despite the operators' protests, the approval of a law like this would mean a very important step in the development of the crypto market, because it would serve as a recognition of its relevance and would even bring more security to investors.

Concessions will have to be made for the adoption of crypto assets to be greater and for users to be able to trade in a secure environment. We hope that the impact of the project will be the best possible and that it will pave the way for more investments in the development of the crypto market.

Coinbase strikes back

A recent piece of news on this imbroglio: on Monday, Coinbase filed an Injunction (being a very important lawsuit of sorts) against the SEC, alleging regulatory abuses, intimidation and lack of clarity.

Many jurists praise the piece prepared by Coinbase's legal team, which promises to bring more episodes to this regulatory war.

Conclusions

1. Stablecoins licensed in the US should gain competitive and market advantage over unlicensed stablecoins. It's a bit like having dollars deposited in a Bank of France, where your deposit is not protected by the FDIC, and having dollars deposited in an American Bank, where part of your deposit is always protected by the FDIC.

2. The points involving extraterritoriality and crime must be dropped and undergo major discussions.

3. Controversy: what about DAI, USDT, decentralized stablecoins (Liquity)?

4. It would be a victory for centralized and backed stablecoins. (Stablecoin wars solution).

5. Is Ethereum also victorious if the project is approved? Economically, it seems that, although controversial, the project would completely unlock the institutional use of payment channels in DeFi, with stablecoins and on Ethereum itself, since the big issuers are on this blockchain. It would not be an ideological victory, but an economic one.