Stablecoins need rules to unlock their potential: report

• Jeremy Kronick and Mark Zelmer argue in a new report that stablecoins need “a comprehensive regulatory framework.”
• The two work with C.D. Howe Institute, a leading Canadian think tank keen on raising living standards for the ordinary people by advocating for sound public policies.
• They say a lack of proper regulation risks negating the benefits of stablecoins and crypto, likely stiffling innovation.  

Stablecoins have very much been in the news this week, with Binance USD (BUSD) and USD Coin (USDC) at the center of negative regulatory-related headlines.

First, a New York regulator ordered BUSD issuer Paxos to stop minting any new tokens of the Binance branded stablecoin. Then reports emerged USDC was also in the crosshairs of the US Securities and Exchange Commission (SEC), the same regulator that was suing Paxos over an “unregistered securities” – the claim is that BUSD is a security.

Tether (USDT), the largest stablecoin by market value, did not feature negatively. 

However, the uncertainty briefly hindered the crypto markets, but Bitcoin surprisingly surged to a six-month high on Thursday as bulls broke above $25k. The move defied the bearish sentiment and was why over $230 million in shorts liquidations occurred, with traders having bet on prices going lower amid the regulatory dark cloud around stablecoins.

Stablecoins require regulation

A number of market observers say the SEC’s action against BUSD or Paxos makes no sense, while others believe a further crackdown is inevitable as regulators tighten their approach following the crypto shock waves witnessed in 2022.

Jeremy Kronick and Mark Zelmer say in a new research report that stablecoins as an industry requires “a comprehensive regulatory framework.” While regulators do not need to reinvent the wheel on this, the researchers note in the C.D Howe Institute report published 16 February that regulation is what stablecoins need if they are to unlock their full potential.

The C.D. Howe Institute is a leading Canadian think tank focused on raising living standards by promoting sound public policies. Kronick heads the institute’s Monetary and Financial Services Research division, while Zelmer is a Senior Fellow and former Deputy Superintendent of Financial Institutions.

In the report titled Stablecoins: Sailing without a Rudder, Zemler and Kronick say proper regulation will help the market offer the best to consumers as well as protect against illicit crypto-related activities. A framework that brings regulatory clarity to the sector will also protect against systemic financial risk, the two experts noted.

“Stablecoins are unlikely to reap their potential as payment vehicles unless they are properly regulated,” they wrote. “In the absence of proper regulation, it is just too tempting for some stablecoin issuers to underinvest in supporting infrastructure and look for ways to enhance their profits in the short-run by backing their stablecoins with assets that are not sufficiently safe or liquid to be able to hold their value in good times and bad.”

What does lack of proper stablecoin regulation mean?

Stablecoins account for roughly 15% of the global cryptocurrency market, with the sector collectively representing over $140 billion in market capitalization. These stable, asset-backed tokens are critical in the broader crypto market, and facilitate not just value movement across the trading platforms, but also count as major components of the current cross-border payments and remittances market.

Commenting on the importance of regulation for this market, the researchers referenced the financial and payments system of Canada, as an example.

Zemler and Kronick argue that the absence of a “well-designed regulatory framework” for stablecoins risks eroding the public confidence in these tokens’ use for payments. It is a scenario that could see the country lag others in terms of innovation, they noted.

According to the report, regulation can help bring the full benefits of stablecoins to users, particularly if policymakers work towards a framework that promotes competitiveness while still providing safeguards against unnecessary risks. 

This is how regulators can help enable a sound crypto-based payments system to flourish, Zemler and Kronick wrote.