With the market capitalization of stablecoins expanding at an unprecedented rate, governments and financial regulators worldwide have started focusing on better regulating this rising asset class.
The stablecoin market is currently valued at more than $135 billion, with significant chances of explosive growth as it starts gaining mainstream attention from businesses and individuals as an accepted mode of payment.
From Federal Reserve Chairman Jerome Powell urging the need to regulate stablecoins —especially those that are pegged 1:1 with the U.S.
dollar, significant portions of the most popular stablecoins like USDT, USDC, and BUSD are actually backed by commercial paper and U.S.
Treasury Department’s most recent report says that regulation is urgently needed regarding stablecoins, as they pose risks to the integrity of financial markets, including conformity with anti-money laundering laws.
Although the Treasury Department’s report highlights the financial risks of stablecoins, it misses out on something fundamental.
There is no denying that regulating stablecoins could be a game-changer for defi and tradfi.
Treasury Department wants to regulate stablecoins as banks, it should also allow stablecoin companies to maintain a fractional reserve model.
hold just a fraction of their deposit liabilities in liquid assets as a reserve and can lend the remainder out to borrowers as needed.
Take, for instance, the recent disclosure by Paxos about assets backing stablecoins like PAX and BUSD, which states that 96% of the reserves are in cash and cash equivalents, while 4% have been invested in U.S.
It is difficult to tell how things will play out for stablecoin issuers in the long run, but regulating them as banks without equal privileges is nothing short of hasty and myopic, given the potential benefits that can be harnessed from this technological revolution.
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