Stablecoin Regulations in 2022 – Forbes Advisor


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Crypto markets were already in trouble before the stablecoin crisis of spring 2022. But the TerraUSD fiasco touched off a much deeper malaise, which has contributed significantly to the current crypto winter.

In cryptoland, stablecoins aim to provide a “safe” digital asset that maintains a stable valuation. The value of a stablecoin is pegged to the price of another asset, like the U.S. dollar. The goal is for the coin to maintain the same value as its peg.

Stablecoins like USD Coin (USDC) are backed by real assets, while TerraUSD was an entirely different beast—an algorithmic stablecoin backed by nothing more than the magic of computer code. This made it easy prey for savvy short-sellers.

After the dust settled in June, the entire stablecoin industry found itself under the microscope. The uncertain foundations of this corner of the crypto market—especially algorithmic stablecoins—has attracted scrutiny from state and federal lawmakers and regulators.

“In early May, when Terra lost its peg, there was a rush to draw a line in the sand between algorithmic stablecoins and centralized stables that back their coins with cash or cash equivalent reserves, like USDT and USDC,” says Ross Fedenia, CFP, managing director of Atlatl Advisers.

Let’s look at how various proposed stablecoin regulations are shaping up.

California and New York Mull New Crypto Regulations

In August, the California Senate passed a bill requiring new licensing for cryptocurrency companies that operate in California.

Due to these licensing requirements, the bill prohibits California entities from trading in stablecoins that aren’t licensed either by a bank and fully backed by secure reserves or by the California Department of Financial Protection and Innovation.

The California bill also requires any stablecoin that a bank doesn’t issue, doesn’t have proven reserves and has yet to receive licensure from the state of California to remain unable to be traded in the state.

This means that most existing stablecoins would essentially be banned from trading in California.

This has catastrophic consequences for crypto exchanges, which use stablecoins to move cryptocurrencies on, off and around their platforms. Without stablecoins, these entities would be unable to conduct business.

California Gov. Gavin Newsom has yet to sign the bill into law, but if he does, it will go into effect in January 2025.

The Golden State won’t be alone in setting its own rules and protocols for crypto exchanges and crypto companies.

New York, another U.S. state of outsized importance, passed a BitLicense bill in 2015 that has set a precedent for state-level governance over cryptocurrency in lieu of a lack of federal regulations. Popular crypto exchanges, such as Crypto.com and Binance.US do not offer their services to New York residents.

Federal Stablecoin Regulations Are Coming

In a September report, the U.S. Department of the Treasury stated that the implications of stablecoins and their payment systems could be “difficult to predict.”

The unwinding of TerraUSD caught the attention of Treasury Secretary Janet Yellen, who quickly started talking about the possibility of stablecoin regulations.

According to Yellen, a regulatory framework is needed to guard against stablecoin risks.

“We’ve allowed “experiments” like TerraUSD to dominate and grow significantly beyond where they naturally should sit given their inherent risk,” says Alex McDougall, CEO of Stablecorp, who agrees that aggressive regulation is a net positive for digital assets.

For these reasons and more, Sen. Kirsten Gillibrand (D-NY) and Sen. Cynthia Lummis (R-WY) introduced a bipartisan bill into the U.S. Senate in June dubbed the Responsible Financial Innovation Act. Among other things, this bill looks to regulate “payment stablecoins.”

“It includes tax requirements for various digital assets, and imposing stricter requirements for stablecoins, which, according to Gillibrand, would have disallowed the TerraUSD coin,” Fedenia says.

The bill also includes provisions about cybersecurity and the possible creation of a self-regulatory organization and some disclosure requirements.

“But perhaps most importantly—and the thing that has skeptics most concerned—is that the bill defines most cryptocurrency as commodities, which would be overseen by the Commodity Futures Trading Commission (CFTC), instead of securities, which would fall to the much bigger Securities and Exchange Commission (SEC),” Fedenia says.

The bill has been read twice and referred to the Senate Finance Committee, but it has yet to be voted on.



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