The stablecoin market is in the crosshairs of the regulators. There is a lot of discussion taking place and it looks like Canada fired the proverbial shot across the bow. What is coming from regulators is no surprise but it does provide insight into the future.
Before getting into the discussion, we have to clarify they are going to treat algorithmic stablecoins differently than those that are reserve based. Under the latter, there are assets to support the stablecoin. This is most commonly US dollars or cash equivalents such as US Treasuries.
An algorithmic stablecoin, like the Hive Backed Dollar (HBD), does not have a reserve fund. Instead, it is backed by another asset that it can be converted into. It is based upon the market capitalization of the backing agent, in this instance $HIVE.
The regulators in Canada are putting all of this under the existing securities laws.
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The Canadian Securities Administrators issued a report outlining the approach to stablecoins. This is something that we should expect to spread throughout much of the developed world over the next year or two. It is safe to say that many, if not most, countries will take a similar approach.
To start, the asset backed securities are not a problem.
Stablecoins backed by fiat currencies may be exempt from regulation provided their reserves are liquid and undergo monthly audits, according to Canadian watchdogs.
Algorithmic stablecoins, called “Value Referenced Crypto Assets” (VRCAs), will not be allowed without approval. To achieve that:
.. it is necessary to fulfill the several due diligence criteria imposed by the administrators, one of which is to guarantee that the stablecoin is backed by fiat currency.
Of course, it goes on to say:
The CSA does not anticipate giving their agreement regarding a VRCA that is not entirely supported by a good reserve but instead maintains its value via an algorithm. This is because CSA does not plan to supply such a VRCA.
In other words, unless a stablecoin is asset backed, it is out. This means trading HBD in Canada is going to be make illegal.
There is the option of getting an exemption except for the fact there is nobody to apply for it. Here is where we truly are embarking upon uncharted territory.
Nevertheless, it is becoming clear. If nations are to accept stablecoins, their views will lean towards asset backed. They will regulate the entities behind them such as Circle, which will fall under the banking laws. Do not be surprised if a company such as this ends up acquired by a major bank.
That is another piece of the puzzle. While many espouse the virtues of USDC, what happens if Circle is purchased by the likes of Goldman Sachs or JP Morgan?
The counterparty risk here is evident.
One of the reasons we cover HBD so much in these articles is to drive home the point that this is an enormous advantage to the Hive ecosystem. We are dealing with something that is limited counterparty risk along with showing how valuable something truly decentralized really is.
Hive is the decentralized approach. With HBD, there is no company that can comply. We do not even have anyone to fill out the paperwork. At the same time, regulators have no address which to send summons or file court cases. There is no door to knock on with the policing authorities to make arrests.
HBD operates on a decentralized blockchain, with nodes throughout the world. That is effectively what is behind the coin. At the same time, there is no fund or account holding reserves since the other base layer coin is the backing agent. That is freely traded and also held by people globally.
What the Canadian approach does is make it illegal for exchanges in Canada to carry HBD. Of course, this applies to centralized entities since decentralized exchanges, by definition, do not operate in one location.
Fortunately, for those holding HBD, there is an easy solution. Hive has an internal exchange where HBD can be swapped for $HIVE. This is not going to be affected by the decisions of regulators, at least not initially. If they do decide that backing coins also fall under the ban, then we simply need to establish liquidity pools whereby people can go from either $HIVE or HBD to a wrapped token such as Bitcoin.
Here is where the regulators are facing an opponent they never considered before. How do you attack something when there is no company, individual (or group of), nor institution to go after? It is a perplexing situation to think about.
The playbook for the regulators is to choke the on and off ramps. They are targeting the vulnerability to point of moving from cryptocurrency to fiat.
In the United States, we saw Operation Choke point which was used to hinder industries such as gambling and firearms from accessing banking services. The Biden Administration is implementing Operation Choke Point 2. We already see part of it is an announcement by SWIFT regarding the support of crypto exchanges.
The challenge with this is evidenced by what we are seeing in Sucre with the Hive Backed Dollar. Unlike the first operation, this choke point is going to fail because cryptocurrency itself can be used as a medium of exchange. While the industry requires converting to fiat, many doors are opening to purchase goods and services. This is the situation in Sucre where more than a dozen businesses accept HBD.
Hence, there is no on or off ramp required, at least to make purchases.
As this spreads, it will be a major hold in the armor of the regulators. There are simply going to be nations around the world where this is not outlawed.
When governments try to squeeze the money supply and if affects commerce, merchants tend to take matters into their own hands. This was the case throughout history and there is no reason to believe it will not happen again.
The future of HBD is being set. There is no way to regulate a decentralized system. As always, the focus is upon the "money", completely ignoring the monetary system. Here is where Hive excels. It is also where it is basically unmatched.
Have no fear my friends. This is a repeat of the Eurodollar System. After years of study, it is evident the politicians really do not understand it, let alone having the ability to reign it in.
I see a mirror repeating with Hive. It is being constructed in a similar manner and is equally misunderstood by those in power. When something is truly decentralized and global, it is out of the reach of any government.
That is the lesson from the past 70 years.
Hive is following a similar path. Do not look at the money, focus upon the monetary system.
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