As previously analyzed in our articles on Terra Ecosystem, stablecoins can represent a threat not only to their holders but also to the assets tied to them. If you lack information on these instruments, we recommend to read previously our article on Terra Ecosystem.
Stablecoins are a synthetic representation of FIAT currencies designed to peg their market value in different ways. At the same time, they can be centralized (controlled by an entity) or not. One important issue to be understood by anyone aiming to trade with stablecoins is that they are NOT issued by any government and are not backed by any government as well.
This means that stablecoin stable value depends mostly on the technological and commercial solvency of the developer or NGO behind the project. Upon electing to use a stablecoin, a thorough research of the underlying backing asset should be done since the guarantee that a stablecoin is worth what it is said to be worth, is the issuer’s reliability. In this case, the issuer of a currency declaring that it is worth one dollar is not the government of the United States but a company that states having enough reserve assets to back stablecoins in circulation.
These instruments pose two threats to the world economy: in case of insolvency and/or collapse, they may bring huge economic losses to their holders and may expand the negative effect to other tied assets, as the UST collapse in May 2022. If, on the contrary, these instruments thrive and succeed, they may represent a serious threat to less than 200 states all over the world that conduct the global monetary policy, which could lose the exclusive control of “currency” issuance (a legal concept that should be revised in order to determine which of these new assets could fall into this category).
As from the pandemic, all nations were forced to excessive money-printing policies (exceeding largely stablecoins’ issuance). Some steps are expected to be taken aiming to control inflation in order to go back to pre-pandemic standards (at least in the main economies worldwide). There are a lot of information available regarding governmental money supply permitting an objective evaluation of the legal currency value. On the contrary, stablecoins’ market value is more connected to the reliability behind each
project and to the soundness of the managing team. In this sense, it is true to state that, whenever someone buys a stablecoin, the investor “is buying the risk of the project” (similar to shares). The risk is economic and technological as well.
Even though the companies behind stablecoins strive themselves to show transparency and to detail the kind of assets that make up their reserves that back their coins (even more than many nations and/or companies), the truth is that (so far) many of these companies or entities lack government control or audit of these assets. In these cases, all explanations are finally considered single statements made by the project’s developers. This aspect is to be considered upon evaluating reliable stablecoins for investments.
There is a big difference between shares issued by public companies and stablecoins. Theoretically, companies’ stocks in a regulated market, are over sought by governmental agencies through controls and audits of the assets declared by the shares’ issuers. On the contrary, this does not happen in the crypto universe purported to dissociate businesses from state controls.
Great Britain
As reported by the media Red Users, an amendment to the Britain law is under study to monitor and intervene digital currencies. The Central Bank projects to launch a digital currency (CDBC) and trade of stablecoins would fall under the category of banking activities. A non-fungible token (NFT) is also planned to be launched by Britain’s official coin-maker, the Royal Mint.
Given the activity would be regulated by the British Central Bank, it would be entitled to intervention if the value of the synthetics fails to maintain the peg (to prevent cases such as UST’s collapse). It is not clear if there is a list of stablecoins qualifying for a bailout or which of the projects are likely to be assisted to maintain the peg. It is also uncertain the right moment for intervention; steps to maintain the peg should be taken previously to public intervention.
The amendment is expected to include stablecoins as means of payment. The fact that synthetics not backed by central banks could be used for payments and transactions in such a big financial center like London poses a radical challenge for digital assets.
This move is likely to have a big impact on markets, much more than the case of El Salvador. Salvadorean reform goes much deeper, adopting a cryptocurrency as legal tender, but their market size compared with Great Britain’s, implies that this new proposal (if it passes), will have much greater impact.
Japan
The concerning aspects of stablecoins (“too successful” or “likely to collapse”) have led to a need for regulation by many states, even more, following the collapse of Luna Terra in May 2022. As from March 2022, Japan is seeking to tighten crypto regulation (we recommend to read the article published by Bank Magazine). The first item states that exchanges for crypto trade would fall under the scope of bank regulation. The target is to avoid money laundering and to enforce sanctions imposed against Russia due to the invasion of Ukraine.
Japan has been a pioneer in regulating crypto use and has always been ahead in this matter. As reported by The Verge , Japan started focusing on stablecoins as from last year. The starting point was the fine of USD 41M imposed over Tether (developer of the most adopted stablecoin in the world). This event, together with the project to launch their own stablecoin (CDBC) this year, have led Japanese authorities to design a legal framework for stablecoins and other cryptoassets.
Chile
FinTechChile has reported that, even though a CDBC is not expected to be launched in the near future due to the required technological investment, this issue is being increasingly analyzed in many sectors. The Central Bank of Chile is concerned about the implied changes in payment habits and the possible threat to monetary sovereignty.
In this context, Chile could start issuing part of its pesos digitally, backed by the Central Bank, in an attempt “to gain market” belonging to stablecoins as a means of payment. Their main concern is the future of traditional money: if users have positive experiences transacting easily and quickly from any device with access to internet, the integrity of the monetary system could be undermined in the long term.
FinTechChile has also addressed this issue releasing the Report of the Central Bank; we recommend to enter the link for an accurate reading. Briefly, in spite of the doubts regarding the financing of the program, safety aspects and the probability of fraud and scams, Chile could become the first Latin American country to launch a CDBC.
Argentina
With a completely different reality compared to above countries, Argentineans (in the Top 10 of crypto adoption) are constantly seeking (more eagerly than others) the possibility to trade with assets equivalent to hard currencies. They are so familiar with dollarized transactions that one the major newspapers such as La Nación has started to report procedures to open foreign bank accounts in hard currencies.
Among many reasons, it is connected to the restrictions to access the foreign exchange market. The lack of reserves to face the demand for digital assets by holders of pesos was one of the reasons to prevent banks from trading with cryptocurrencies.
For the time being, the lack of stablecoins’ regulatory legislation persists and the bills for cryptoassets’ legal framework seem to have declined. However, a debate could surge considering the huge losses following UST collapse. Proper legislation would help to distinguish between the several types of digital assets paving the way to separate regimes for each type of asset (for example, cryptoassets with variable value are not equal to synthetics with a fixed market value or a private stablecoin is not equal to a digital representation of a foreign currency).
The prospect to launch a CDBC in Argentina is not likely to succeed for two main reasons: in first place, high issuance rates could accelerate inflation, especially as from the pandemic and considering inflation as a chronic problem in the Argentine economy. In second place, Argentina was forced to issue pseudo-currencies to overcome one of its biggest crises by provincial and national authorities.
This background reflects the fragility of the system and the possibility to launch a digital currency baked by its Central Bank could cause bank runs. In some way, costs and restrictions associated with money printing operate like an obstacle to more money supply. The possibility to issue excessive pesos “with a click” by public authorities who struggle with persistent inflationary issues could drastically endanger confidence in the local currency.
As regards to stablecoins, they are not likely to thrive in the absence of a regulatory framework for cryptoassets.
Other countries
In the rest of the world similar concerns have arisen related to the stability of stablecoins and many countries are attempting to launch a CDBC to avoid funds migration to uncontrolled assets. Nigeria has been the pioneer to launch its CDBC with the digital Naira. Other stablecoins are likely to flourish in the near future like those related to the yuan, the euro and the US dollar.
Conclusion
The development of CDBCs highlights the differences and similarities with stablecoins. In this sense, most nations will prefer instruments likely to be controlled (in opposition to uncontrolled instruments) for sovereignty and security reasons.
If stablecoins start being controlled by central banks (and by the companies transacting them), this fact could interfere with the principle of autonomy. They were designed to be economic derivatives with a certain value without state control for quick transactions. State control could provide more stability to the overall system, leaving autonomy aside.
A quick availability of interoperable CDBCs would make stablecoins and cryptoassets in general less attractive, with a negative impact on crypto adoption. In the months to come we will be able to analyze the strategies taken by the countries involved: from banning stablecoins, competing with CDBCs and/or regulating them through government control. These are the challenges posed by the digital era and a proper interaction between digital and traditional instruments could drive to stability and inclusive progress all over the world.
