The word “stablecoin” can sound beautiful – wouldn’t it be nice to have something stable in an unstable crypto world? – But to critics, it is nothing more than a time bomb. Somehow, however, the desire to regulate cryptocurrencies is gaining momentum. The US and EU are getting close to formalizing their scenarios, and given the history of financial regulation coming out of Washington and Brussels, and the FATF guidance in recent years, it’s safe to say the rest of the world will. Follow suit. This example.

However, organizing your stack coins is not an easy task, as they come in all shapes and sizes, making a comprehensive solution a problem. The three major stablecoins by market capitalization – Tether (USDT), USDCoin (USDC) and Binance USD (BUSD) – are pegged to the US dollar. According to the developers involved, they are backed by reserves in US dollars and various other financial instruments so that their value always remains at the level of $1.

Tether has already come under legal scrutiny for the feasibility and sources of the reserve, prompting two other projects to disclose their respective aids. The USDC disclosure, for its part, highlighted a large amount of “commercial paper” – not necessarily high-quality or highly liquid – in the corresponding reserve. For many, this discovery led to the conclusion that the company acted as a bank, and not as a payment company.

Other lesser known stack coins take many alternative approaches. It can be linked to raw materials such as gold or oil, as in the case of the controversial Venezuelan company Petro. More exotic options include carbon-linked coins like UPCO2, active cryptocurrencies like Dai, and perhaps the rarest of all, stack coins like Terra (UST), which have absolutely no security and instead rely on algorithms to keep prices stable.

Of course, some might argue that regulation will only slow innovation, so governments should not get involved in cryptocurrencies, but this argument misses the historical context. Even earlier, at the time of crazy banking, special currencies issued by fraudulent banks often forced people to buy worthless securities, so the dollar was established as the only national currency in the United States. The same logic applies to the money market fund crisis in 2008, when the federal government introduced new rules to protect loyal clients from large investors receiving large amounts of money from them.

Time and time again, we as a society have determined that consumers need to be protected against fraud or simply wrong judgments from those who store, move assets or provide similar services. We have implemented rules and regulations governing who can issue and redeem what we consider cash, and have developed rules for those who handle money in amounts that, if handled incorrectly, could cause a financial shock. Why not do the same with Stack Coins, a market worth over $133 billion in total? It simply doesn’t make sense to carry the Damocles sword of the crypto bank on the heads of investors and traders. So where do we start?

One-to-one approach
The best way to start regulating hoarding coins is to establish rules and protocols that ensure they meet their requirements. Christine Lagarde, President of the European Central Bank, said in a recent interview that stablecoins must be backed 1:1 through a legal order, and added that the projects behind the issuance of stablecoins should:

“[…] it is controlled, monitored and regulated so that consumers and users of these devices can be effectively protected from possible distortion of information.”
The European Union has a long history of electronic money institutions (EMIs) that can issue and redeem digital euros, and these institutions back their digital euros with real euros held by a bank or, in some cases, a central bank. This could be an example for regulators in other jurisdictions that appear to be moving in the same direction.

Here we can compare the capital requirements of banks or payment companies such as EMI to ensure that users of stablecoins can exchange their coins at any time through the company that distinguishes them. For reference, one of the most important ways that banks make money is by lending money that others have invested. The process only needs to be regulated so that the bank has sufficient funds to pay for clients who may want to withdraw their funds, but not necessarily in a 1:1 ratio for each active deposit.

Source: CoinTelegraph