- L Misthos and M Bacina
Stablecoins lead the regulation race
It is a momentous time for global financial markets. Interest rates continue their ascent followed swiftly by inflation and business costs while the stock and crypto markets, as well as consumer spending, have all dropped.
Despite the crypto industry being hit with a flurry of bad news, namely the Three Arrows liquidation, Terra/Luna meltdown and Celsius bankruptcy filing, stablecoins are emerging from the storm with a range of potential regulatory frameworks.
Following years of lobbying for considered regulation into crypto assets, the UK Treasury has unveiled a proposed digital asset legislation, the Financial Services and Markets Bill. The bill, which aims to retake the UK's status as a global financial leader, includes a regulation piece for stablecoins.
In a speech, the newly appointed UK Finance Minister, Nadhim Zahawi said the bill:
reinforces the U.K.'s position as a leading center for technology as we safely adopt crypto assets.
The bill extends the scope of the Banking Act 2009 and the Financial Services (Banking Reform) Act 2013 to include digital settlement assets (DSAs) which are "a digital representation of value or rights". The bill would authorise the Treasury to regulate DSAs, DSA service providers and DSA insolvency arrangements.
Regulations will be made in consultation with the Bank of England and the Financial Conduct Authority (FCA) but won't become law until it passes two more readings in the House of Commons and passes the House of Lords.
Across the Atlantic, the United States are flirting with stablecoin regulation in a different way. Speaking at Consensus 2022, Sen. Pat Toomey, who put forward his own bill on stablecoins this year, told attendees:
I'm going to go out on a limb and say we get stablecoins done this year...I know the [Biden] administration is interested in doing something in this space.
Senior Democratic and Republican officials on the House Financial Services Committee are progressing a draft bill, the Responsible Financial Innovation Act, that is likely to impose stringent regulation on collaterialised stablecoin issuers.
The bill is narrowly focused on establishing a US oversight regime for stablecoins, setting a path for nonbanks to issue them and ban commercial companies from becoming issuers while also implementing new capital and liquidity standards. It does not cover 'algorithmic' stablecoins like Terra so would have little to prevent a repeat of the Luna / Terra situation beyond encouraging better capitalised 'collateralised' stablecoins.
Negotiations over the particulars of the bill, and in particular protections to users of stablecoins, is delaying passage through the committee, and the summer break will further delay debate until September.
The rise of UK, US and EU stablecoin regulatory approaches provides an interesting opportunity to collaborate and compare differences, and the global momentum hasn't escaped the notice of Australia either, with the Governor of the Reserve Bank of Australia, Philip Lowe, identifying stablecoins as "the one piece of the crypto landscape where I think there is real promise".
When it comes to regulation, it might just be that stablecoins enjoy the first truly stable and workable set of rules.