Market analysis

The state of stablecoin regulation: Will the US catch up with the rest of the world?

6 min read

Earlier this month (August 2023), payments giant PayPal made a great deal of noise with the launch of its regulated stablecoin, PayPal USD (PYUSD). However, several weeks after launch, investors’ response to the new offering has been tepid. 

Market commentators have suggested several reasons, including the lack of utility or ability to earn interest on PYUSD, unlike alternatives such as USDC or USDT. 

Another reason could be the uncertain regulatory landscape for stablecoins in the US, given PYUSD’s issuer Paxos Trust Company is subject to regulatory oversight by the New York State Department of Financial Services.

Decision makers in the US certainly haven’t made it easy for stablecoins to flourish. Maxine Waters, the top Democrat on the House Financial Services Committee, condemned PayPal for launching its stablecoin before a federal regulatory framework for this type of asset could be established. On 9 August, two days following the launch of PYUSD, she issued a statement saying she was “deeply concerned” about the move.

READ: How to live off the interest from your stablecoins?


The US Payment Stablecoins Act

Meanwhile, federal regulators remain divided on the proposed Payment Stablecoins Act - a US bill approved by the House Committee that would establish the necessary frameworks for stablecoin issuers. 

This week, Congress accused the Federal Reserve of attempting to “subvert” the bill by preventing banks from issuing payment stablecoins, after the central bank sent two letters to US lenders clarifying stricter rules on involvement with stablecoins.

This ongoing uncertainty weighs heavily on crypto investors and fosters caution, especially when it comes to the US. 


US versus the rest of the world?

While US lawmakers have struggled to come to an agreement regarding the Payment Stablecoins Act, other global financial centers have plowed on with their regulatory frameworks. 

Earlier this month, Singapore’s Central Bank published its rules for stablecoins, which marks another step towards its ambition to become a digital asset hub.

The requirements for stablecoin issuers include measures to assure investors of value stability and appropriate disclosures. Stablecoin issuers must maintain minimum base capital and liquid assets of at least $1 million Singapore dollars ($740,000) to reduce insolvency risk and provide redemptions no more than five business days after request. 

READ: Stablecoins 101: How do asset pegs work?

Other jurisdictions with legislative frameworks that support stablecoin issuance include Switzerland, Bermuda, Dubai and Canada. In Switzerland, former Singaporean parliamentarian Calvin Cheng recently launched stablecoins pegged to the Swiss franc and the euro via his Zug-based company, Anchored Coins.

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The EU’s Markets in Crypto Assets (MiCA) regulation, which was passed in April, also stipulates a set of standards for stablecoin issuers that will go into effect on 30 June 2024. 

In the UK, meanwhile, the Financial Services and Markets Act was passed into law in June. It gives the country’s enforcement authority the power to supervise digital assets and stablecoins.

Yet while the advanced G7 economies are more open to allowing stablecoins and creating a fit for purpose regulatory regime, some of the smaller nations that make up the G20 are less receptive. According to CoinDesk, the latter are concerned that stablecoins could threaten their monetary policies and are seeking stricter and more prohibitive measures.


USD stablecoin dominance 

This is perhaps understandable, since US dollar-pegged stablecoins make up the vast majority of this market segment. As of 31 January 2023, they accounted for 98.9% of all stablecoins, according to a CoinGecko report

As such, smaller nations worry that widespread use could derail their efforts to control their local economies and lead to increased volatility in their domestic currencies.

At the same time, however, the dominance of the US dollar in the stablecoin market means US regulation plays an oversized role in the prevailing investor sentiment towards stablecoins. This makes the proposed US stablecoin bill an important piece of legislation to watch.

READ: Coinbase vs. SEC: What the lawsuit could mean for crypto regulation

If passed, the bill would deliver much-needed regulatory clarity after years of indecision on stablecoin legislation. It outlines a clear regulatory framework for the issuance of payment stablecoins, including a requirement for stablecoins to be backed 1:1 by ultra-safe cash and cash equivalents, such as US Treasuries. 

However, there are concerns that this would create an unfair advantage for stablecoin issuer Circle’s USDC – a stablecoin backed by cash equivalents, including corporate bonds, municipal bonds and commercial paper. 

Meanwhile, other stablecoins, especially decentralized ones like DAI, whose collateral includes other crypto assets, may find themselves in a more questionable position. 


A turning tide

While the proposed US stablecoin bill may not have garnered widespread support from the crypto community, investors are demanding clarity on the rules that will govern crypto assets in the future. Typically, markets tend to favor certainty, so any form of regulatory clarity would be welcome news.

At the same time, with stablecoin transaction volumes outpacing traditional payments giants PayPal and Mastercard in 2022, according to data from Coinmetrics and Bloomberg, US lawmakers simply cannot ignore this burgeoning asset class.

Recently, a flurry of positive headlines has provided markets with hope that the tide may be slowly beginning to turn. Ripple’s win in the case against the US Securities and Exchange Commission (SEC) in July 2023 and Grayscale’s victory in its petition for review of its spot Bitcoin ETF filing on 29 August 2023 may be paving the way for more supportive US stablecoin legislation. 

Sometimes, these decisions can have a snowball effect. While market optimism remains cautious, more regulatory clarity is just what the doctor ordered for a crypto market that has struggled to break out into a prolonged rally so far in 2023.


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