Stablecoins were created to be used the way cryptocurrencies were intended for in first place: as a simplistic, stabilized, scalable, and secure means for transactions. After all, most businesses, understandably, aren’t interested in accepting a currency like bitcoin that might tank in value the very next day. That’s why stablecoins are basically an attempt to create a cryptocurrency that isn’t volatile. To accomplish that, a stablecoin’s value is pegged to a real world currency. For example, the stablecoin known as Tether, or USDT, is worth 1 US dollar and is expected to maintain this peg no matter what. But how regulators are actually weighing in the so-called stablecoin invasion?
That is precisely the question Moorwand, a dedicated BIN sponsor, tries to answer in new whitepaper Regulating Instability Coins. The whitepaper – authored by Robert Courtneidge, CEO of Moorwand and one of the world’s top 10 payment lawyers – proposes regulatory principles for stablecoins like Facebook’s Libra.
“Regulators have so far given stablecoin operators like Tether and other private currency operators like Ripple pretty much of a free pass. This approach cannot continue if Big Techs bring their network scale to the task of driving mass market adoption of private digital currencies,” recently said Robert Courtneidge CEO of Moorwand. For example, the Paxos Standard (PAX) and Gemini Dollar (GUSD) are two USD-backed stablescoins that have been approved and regulated by the New York State Department of Financial Services.
Mr Courtneidge made a direct reference to the likes of Facebook and Amazon, two big companies that are planning to launch their very own private stablecoin in the near future. And they plan to do so because this formula seems attractive for crypto players and even companies in other sectors – banks, tech, retail, etc, who have seen how this type of digital coins can actually have a real life use. In fact, there has been a so-called “stablecoin invasion” recently. At least 57 stablecoins have been released or are in development globally, according to a recent report.
Based on this analysis, Robert sets out key recommendations for what regulators need to do to tackle the threat that stablecoins pose to the global financial system, and, in particular, central banks and traditional financial institutions. The recommendations cover both what can be done within existing law, as well as new principles that regulators must adopt if they want to ensure a level playing field between ‘Big Tech’ companies like Amazon and Facebook and traditional financial service providers.
According to the expert, regulators should therefore adopt sound principles as they approach these innovations:
- Same activity, same regulation. Regulators should look through technical
jargon and schemes wrapped up in language designed to appeal to social goods like financial inclusion – look at the activity itself and apply existing regulations in an even-handed way. Do not create ‘free passes’ in the name of innovation.
- Technological neutrality. Distributed ledgers are types of databases. Regulation
should not be dependent on the technology used. Carrier pigeons, mail systems and laser beams can all be used to transmit payments but regulation should address the underlying function rather than the means to achieve it.
- Novel features are breaches. Stablecoin operators will construct schemes that blend features of different instruments and cut across regulatory boundaries. They may have features that don’t existing in current instruments. This does not mean that they should be unregulated – this means that they are in.
- Regulate tokens like their underlying instruments. We have had dematerialisation of financial instruments using traditional digital technologies for a long time, but even through there has been innovation in the types of instruments they are generally money-like, debt-like, equity-like or derivative-like. The regulations that apply in today’s world extend to the crypto world.
- Beware regulatory arbitrage: Many jurisdictions are racing to be ‘crypto-friendly’ in a bid to attract inward investment. This is very dangerous as the instruments that are created in these jurisdictions may well be transmitted globally across digital networks.
Cryptocurrency is one area where regulators much agree a multi-lateral response.
- Support competition in a responsible way: Creating space for regulated non-banks to compete for payment services and other financial services has created a flourishing fintech landscape. A balance was struck between lighter licencing regimens and limited powers. Big Tech entrance into this carefully constructed field has the potential to create significant disruption to the flowering disruptors. This would be a perverse outcome.
- Precautionary principle: First do no harm. Leaving a regulatory vacuum around stablecoins and cryptocurrency more generally would allow Big Tech players to ‘move fast and break things’. This might be bearable in ride sharing or in the short term rental market… but not in financial services. If stablecoin schemes span two regulations,
then apply both in preference to applying none.
These principles amount to the application of existing laws in a technologically neutral and internationally co-ordinated way. There are several existing frameworks that should be applied to Big Tech’s attempts to launch their own cryptocurrencies.
“Since it was announced on the 18th of June 2019, Facebook’s Libra has received widespread attention partly due to its promise to become a true global digital currency,” said Robert Courtneidge CEO of Moorwand. “However, regulators are not being prepped to manage the challenges posed by Libra and other stable coins. Stable coins, delivered by ‘Big Tech’, are being given a free pass by regulators but must be held to the same standards as a bank or payments firm if they are to operate in the same space.
“Libra for example raises a number of concerns, one major issue being Facebook’s sheer determination to find a host nation that will let it operate to its own advantage. Without a global regulatory response, Libra will be able to function as freely as its host nation’s regulatory environment. Ultimately, if we are serious about holding ‘Big Tech’ to the same standards as the rest of the finance industry, then we must act. I believe this white paper sets out a clear set of recommendations for regulators to tackle the challenge of stable coins without quashing the innovations from crypto firms and ‘Big Tech’ players,” the expert added.
Hernaldo Turrillo is a writer and author specialised in innovation, AI, DLT, SMEs, trading, investing and new trends in technology and business. He has been working for ztudium group since 2017. He is the editor of openbusinesscouncil.org, tradersdna.com, hedgethink.com, and writes regularly for intelligenthq.com, socialmediacouncil.eu. Hernaldo was born in Spain and finally settled in London, United Kingdom, after a few years of personal growth. Hernaldo finished his Journalism bachelor degree in the University of Seville, Spain, and began working as reporter in the newspaper, Europa Sur, writing about Politics and Society. He also worked as community manager and marketing advisor in Los Barrios, Spain. Innovation, technology, politics and economy are his main interests, with special focus on new trends and ethical projects. He enjoys finding himself getting lost in words, explaining what he understands from the world and helping others. Besides a journalist he is also a thinker and proactive in digital transformation strategies. Knowledge and ideas have no limits.