“Ensuring a stablecoin can maintain its peg during stressful market conditions is a solvable problem,” Catalini said. In the best-case scenario, he said, reserves would consist only of “high-quality, highly liquid assets” such as U.S. Treasury bills, and providers would maintain “adequate capital buffers.” .
In the two years since Celsius filed for bankruptcy, Tether has voluntarily increased the size of its USDT reserve buffer and slightly reduced the percentage of reserves made up of secured loans from 6.76% to 5.55%. . But Tether “does not operate under a framework that limits what company directors can and cannot do,” Catalini said. “This is where regulation is needed.”
There have been several attempts to regulate the stablecoin industry in major markets. Earlier this year, regulations regarding stablecoin issuers came into force in the EU under the Markets in Cryptoassets (MiCA) Act. This includes the amount of cash that stablecoin issuers must hold, the types of assets that can make up stablecoin reserves, and the safe storage of reserve assets.
In April, U.S. senators Cynthia Lummis and Kirsten Gillibrand proposed legislation that would prevent stablecoin issuers from lending their reserve assets. Cooper said the bill is unlikely to pass Congress before the next presidential election, but “there is recognition on both sides that some regulation is needed.”
But in general, stablecoin businesses are having to figure out how to police themselves. “The new asset classes we deal with are run by groups of people who are looking around for guidance on what is and isn’t allowed at the moment, but they understand it. “We haven’t,” Cooper said. “In an industry that thrives on risk-taking, and cryptocurrencies present many of those risks, it is no surprise that some companies are looking to push the boundaries.”
The challenge for the first handful of regulators introducing stablecoin regimes will be limiting the threat of depegging without forcing issuers out. The risk appetite of stablecoin providers, with their profitability tied to some extent to the risk allowed in their reserve assets, may lead to their withdrawal from jurisdictions that impose the most stringent restrictions. “Regulatory adjudication issues are old,” Cooper added.
Since the introduction of MiCA, Tether has reportedly not yet received a license to operate in the EU. Tether CEO Ardoino said in an interview with WIRED earlier this month that the company is still “formally developing its strategy for the European market,” but that He expressed concern about some of the reserve requirements, saying they were unsafe.
Meanwhile, Ardoino believes that stablecoins are a potential threat to traditional banks, but Tether is similarly subject to strict regulations because banks have the freedom to lend out a large portion of the deposits they receive. I hesitated in the interview because I feared I would be asked to comply with the rules. It’s different from a stablecoin company.
But as international consensus emerges on the appropriate controls to be imposed on stablecoin issuers, the window for regulatory arbitrage, whatever the motivation, will close, Catalini said. “Regulatory arbitrage is a temporary phenomenon,” he says. “It’s only a matter of time before large stablecoins are required to comply.”
