We knew the wagons were circling. Regulators all over the world are taking a hard look at cryptocurrency. Due to the recent events with Terra, stablecoins are now at the top of the list.
This is no surprise. It was something that was coming regardless of how things played out. Nevertheless, the UST situation only accelerated things.
Japan becomes the first major country to roll out cryptocurrency regulation. It is likely this provides a framework that other countries will mirror to some degree. If this is the case, things just got a lot more difficult.
Investor protection is always the reason for these types of regulation. In reality, the only thing protected is the power of the existing system. Here is where we see the need for continued development to take place.
Not surprisingly, the issuers of stablecoins are going to be treated akin to banks. This is where the government can assert its authority. This, too, is something we can expect to spread across the developed world.
To start, the bill discusses redemption.
Under the new law, entities offering stablecoins in Japan must ensure that their tokens are linked either to the yen or another legal tender currency and that their stablecoins are always redeemable for fiat at their face value. Additionally, the new legal definition of stablecoins dictates they can now only be issued by licensed banks, registered money transfer agents and trust companies.
Obviously this puts a dent in the idea of algorithmic stablecoins. When this bill is fully enacted, exchanges in Japan will not be able to list them.
The new legislation does not address existing asset-backed stablecoins from overseas issuers, such as Tether’s USDT, as Japanese crypto exchanges do not currently list them for trade. However, if companies like Tether want to enter the Japanese market in the future, they will need to ensure their stablecoins comply with the new regulations.
Even a stablecoin such as Tether is going to have issues. Since it admitted it is not fully backed by USD, it falls outside the scope of this law.
This is opening the door for a coin like the Hive Backed Dollar (HBD). It is also showing us the importance of being truly decentralized.
HBD is a base layer coin. This means the amount of decentralization depends upon the blockchain itself. With Hive eliminating the ninja-mined stake, the ability to control the network is severely reduced. Hence, the block producers, which number more than 100, do not operate with an overwhelming individual stake (on a percentage basis).
At the same time, we are seeing even more reason to establish deep liquidity pools. Since more exchanges are going to come under the regulation, we will shift towards alternatives.
Here we see how the idea of used centralized entities is diminished. It might get to the point where exchanges are the on/off ramp for fiat currency. Outside that, people will simply operate within the Decentralized Finance world, omitting exchanges altogether.
HBD is basically out of reach from regulators. The coin is not listed on many exchanges and, now, likely never will be. Instead, the access is going to have to come from liquidity pools.
The key is to keep building more layers. Over time, we can keep spreading the options associated with DeFi, sending the regulators into a game of whack-a-mole. We know the development pace can far outpace anything the governments can do.
Repeatedly we discussed how the foundation of cryptocurrency is starting to resemble the Eurodollar (Wholesale Banking) system. This started in the 1950s and was constructed completely outside the reach of any government or central bank. Essentially we are looking at a reserve-less system run by the international banking conglomerate.
Now we see a lot of backlash against cryptocurrency by the banking establishment. This is no surprise since cryptocurrency is a direct threat to the banking system. Stablecoins are going to be a big part of this.
HBD can basically operate unencumbered by regulatory and governmental forces. It is truly dictated by the market. Just like the products created by the Eurodollar system are untouchable by regulation, the same holds true for HBD.
Of course, it is vital that what we are dealing with is truly decentralized. If there is a point of vulnerability, it will be exploited.
In the meantime, cryptocurrency should eye the major shortcoming of the present system: a lack of USD and collateral. Since the Great Financial Crisis, the financial system was starved. We must keep in mind this is the major source of global funding and by a wide margin.
Cryptocurrency can solve this problem. Stablecoins can be the mechanism used for the funding and investing purposes.
Over time, expansion in these areas will make regulation a non-issue. Politicians and bureaucrats have the need to expand their power base. Decentralization undermines that by simply removing itself from their grasp.
HBD is already operating out of their reach. The Japanese bill means nothing in these regard.
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