Stable coins or cryptocurrencies linked to less volatile fiat money are useful tools for a number of reasons. They can be used to withdraw cryptocurrency investments, send or receive stable funds abroad and pay for daily consumer transactions without fear of hesitation. The Bank for International Settlements (BIS) recently estimated the total stablecoin supply at around $ 150 billion.
But central banks, issuers of traditional fiat money around the world, do not seem to be a big fan of stack coins. The oversupply, combined with the lack of proper regulation, has led to concerns that these stable blockchain assets could threaten the existing financial system. Fiat stablecoins such as those created by Circle (USDC) and Tether (USDT) may require future banking licenses to operate. But so far, regulators have not tried to target algorithmically stable coins, which are regulated by automatic expansion and contraction of the money supply.
In an exclusive interview with Cointelegraph, Sam Kazemian, co-founder of the stablecoin Frax protocol, described the regulatory views on the sector and algorithmic stablecoins.
Growth in cryptocurrency activity | Source: BIS
Cointelegraph: There are many algorithmically stable coins like Terra USD, Ampleforth, etc. What do you think makes Frax unique?
Sam Casemian: What makes Frax unique is that we have a system where we expand our protocol and reduce the offer in different places across the blockchain protocols, and also focus on the open market Frax stablecoin exchange rates. We like to compare it with the central bank. When he issues a coin, he never says, “Hey, you can come and get it for so much gold, or you can come and exchange it at the central bank for something dollar-related.” Do not say it anymore. So what the central bank does is that it manages its currency at the open market exchange rate.
If a central bank links its currency to gold, it will look at the price of gold in relation to its local currency. If it is less than they want, they will buy back some of the currency. If the other side is higher than they want, more coins will be printed. Frax takes this approach. This is how we developed our algorithmic stablecoin task, and it worked very well. We never broke the link, not even during [the big market crash] in May.
Stablecoin Market Value Statistics | Source: US Treasury Stable Report.
CT: Do you see the threat of retaliation threatening in the stablecoin sector? And what does Frax do to comply with the relevant established regulations?
SK: There are two parts here. I do not know if I can call it funnel, but I see that there is a lot of regulation to be expected, at least with regard to fiat currencies, which have traditional financial assets that support themselves; For example, cash equivalents or real cash in deposit accounts. However, I do not know if this really affects decentralized stack coins. I believe that Frax not only meets the requirements, it will meet all the requirements by being there and being completely decentralized.
The second part of your question is interesting because I think the current stablecoin regulation they are proposing is a bit reactive. At the moment, people say that issuers of stack coins like Circle and Tether must have banking licenses. This is a conversation. But if you think about it, it does not make sense, because even in the traditional economic space, a lot of experimentation is allowed. Things like money market funds have no bank charters. This is not a bank. This is not FDIC [Federal Deposit Insurance Corporation]. Either people are not aware of it or they are not aware of it.
Money market funds are regulated in the sense that you must [and disclose] cash equivalents. But they are not regulated by the harshness that they currently offer stack coins. This is not the case with fully decentralized such as Frax, which has absolutely no claim to real assets or even announces any kind of redemption. The whole point of Frax is that our protocol works by focusing on the stock market in the open market. I think I’m pretty sure some of the regulations will work by themselves.