As cryptocurrencies become more mainstream in society, it should come as no surprise that governments around the world are starting to regulate the space. This is especially true in the United States, where a number of states have imposed individual cryptocurrency laws. And stablecoins are no exception, in December 2020, the US government was presented with a bill which would regulate stablecoins known as the Stable Act.
First things first, just what does this bill include? Well, the Stable Act states that any company which issues a stablecoin must be licensed. But not just licensed, also backed by a Federal Reserve bank. Of course, the bill doesn’t actually say the words Federal Reserve, but it outlines the type of bank which would be required to back a stablecoin, and surprise, surprise, it sounds a lot like a Federal Reserve bank. Not only that, but no company would be able to issue a stablecoin without first getting permission from the Federal Reserve. If you haven’t noticed, this bill is basically making stablecoins into fiat currency, just a digital version, rather than being something revolutionary.
In a way, this isn’t too far off the mark, as stablecoins do have to be pegged to a fiat currency currently, and thus this does make them somewhat centralized. But this bill would change the fact that you are trusting a company with your funds to you trusting the government with your funds, which you already do, taking the revolutionary aspect out of stablecoins.
Additionally, creating a stablecoin which adhered to all of these regulations and had the correct permits would be quite costly, as entering the US economy as a bank always is. This is what has kept the system the same for decades—because it’s rare that any company has enough money to enter the banking space. And it’s unlikely these stablecoins would have the funds to do so either.
This brings up another point which must be addressed, because the US government states that this law would help save consumers from shady stablecoins. And they aren’t wrong, as several stablecoins on the market do have issues, and the companies backing them are shady. A prime example is Tether, which faced mass controversy starting in 2018 when it was revealed that they don’t actually back each Tether token minted on a one for one basis with the US dollar as they originally claimed. They have since come out defending themselves, saying that Tether is backed on a 74% ratio with cash, and the rest with “verifiable assets” but of course they haven’t verified these assets either! And Tether is only in the spotlight because it is the top ranking stablecoin on the market, so imagine what the other stablecoin companies are doing!
These compliance issues place a black mark on the world of stablecoins, so it definitely makes sense that the government would want to make them safer for everyone. The problem is, when this much regulation is put into something which is supposed to be easily accessible by everyone, it quickly makes it so that it is no longer easily accessible by anyone. The minute you apply banking regulations to stablecoins, is the minute that people who can’t get a bank account also can’t get stablecoins, which defeats the purpose in the first place.
The worst part of all about the Stable Act is that if companies are found to be out of compliance with the regulations put forth, they would be fined upwards of a million dollars, while also having criminal penalties imposed. This would cause a lot of stablecoin projects currently on the market to discontinue their coin if they can’t adhere to the rules. And this would cause a lot of trouble for holders of these coins who have invested a lot of money.
It’s also highly possible that Ethereum will be affected by this new law. Yes, you read that right. Even though Ethereum is not a stablecoin, the way the stablecoins are outlined in the law, Ethereum would have to register as a stablecoin. And this is a huge problem, because Ethereum is not backed by any fiat currency, and this is the whole point of Ethereum—decentralization! And although it is a gray area, cryptocurrency enthusiasts are afraid that this would mean the penalties listed above would apply to anyone running a node for Ethereum as well because running a node would be considered a “commercial” stablecoin activity. This second part hasn’t been verified by lawmakers, but it is a very real fear on the minds of many Ethereum supporters.
If you’re starting to panic, don’t worry just yet, as the Stable Act was proposed in December 2020, but nothing has happened in the space as of yet. And there doesn’t seem to be any action on the act since January 2021. And with the changing of executive power which happened in mid-January, the Stable Act may just disappear into oblivion.
However, even if this act doesn’t ever resurface, it’s important as a cryptocurrency enthusiast, to watch for future laws in this space. This is because obscure language which insinuates aspects which aren’t immediately visible, is a common tactic with law making in the US. Just think of all the laws currently in place which have loopholes to support the system or apply to something the law isn’t directly written about.
As mentioned above, there’s no reason to panic yet. But if you down own some stablecoins, it’s important that you look into the company’s which back your coins. This is because numerous stablecoin companies, like Tether, are not always honest about how their stablecoins are backed, and where this money is held. Generally, you should not invest in any stablecoin project, as, since it is backed by something fiat, the value you won’t change. Rather, you should use stablecoins for transaction purposes only. Save the investing for cryptocurrencies such as Bitcoin.
It is worth mentioning that stablecoins are quickly finding places in society, whether it is through major companies making their own branded stablecoins such as Walmart or Facebook, or JP Morgan making its own for banking purposes. So, while you should be cautious of stablecoins, there’s no need to discount the technology completely just yet.
This article was brought to you by the MintDice Provably Fair Bitcoin Casino. Originally posted on the MintDice Crypto Blog.
