- Japan indicates that stablecoin issuers in the country will need to come from a small clutch of issuers and it will require certain standards for the protection of investors, especially retail.
- Move follows United Kingdom Treasury’s plan to have the Bank of England move in to protect retail investors should stablecoin issuers fail.
In 2018, few would have thought that cryptocurrencies would one day grow to such size and significance that they would eventually be deemed “too big to fail.”
But that appears to be exactly what authorities in the United Kingdom and Japan are communicating by pledging intervention in the event that stablecoins should collapse.
In the aftermath of the ruinous collapse of algorithmic stablecoin TerraUSD, regulators across the globe are scrutinizing stablecoins more closely as their use increases throughout the financial system.
Stablecoins, the earliest of which was USDT, issued by a company called Tether, were a means by which cryptocurrency traders could take a breather from the volatility inherent in trading digital assets.
Initially only backed by assets such as actual dollar deposits, the stablecoin universe has now expanded such that many issuers in essence exercise some form of fractional reserve banking, with backed stablecoins not necessarily equating to unequivocal dollars in bank accounts.
Then there are algorithmic stablecoins that maintain a peg with a currency like the dollar through the use of other underlying cryptocurrencies, sometimes a combination of other stablecoins and volatile tokens, or sometimes just the tokens altogether, as was the case of TerraUSD and its sister token Luna.
But since billions of dollars were lost in the TerraUSD collapse and with many retail investors badly burned as a result, regulators are looking to see if they can do more to protect the most vulnerable investors.
Last week, Japan passed a landmark law clarifying the legal status of stablecoins, essentially classifying them as digital currencies and imposing a mandatory link with the yen that will enshrine the fight to redeem them at face value.
Japan’s Financial Services Agency is expected to clarify the rules for stablecoin issuers in the coming months but the law will come into effect in 2023 and may make it difficult for foreign players to enter the Japanese market to issue a yen-backed stablecoin.
Under the new legal definition in Japan, the issuance of stablecoins will be restricted to banks, trust companies and certain licensed money transfer agents.
Last month, the United Kingdom’s Treasury revealed that it was working on plans for the Bank of England to take over collapsed stablecoin issuers to prevent a cryptocurrency crash affecting financial stability.
Under the U.K.’s plan, the Bank of England would place the stablecoin issuers into special administration with the goal to protect consumers if the issuers failed, and they would fall under similar rules as banks and other systemically important institutions.
Whether or not the U.S. will follow suit with similar consumer protections is however, less clear.
The U.S. had a long history of wildcat banking during its Free Banking Era from 1836 to 1865 when so-called wildcat banks that issued their own paper currency, existed alongside more stable state banks, because the country had no national banking system.
Given the reluctance of the U.S. Federal Reserve to issue its own central bank digital currency, with or without the Fed’s acquiescence, the demand for dollar-based stablecoin means that for now, these wildcat dollar-based stablecoin issuers will continue to exist.
Whether the Fed will intervene in the event of their collapse however is even more uncertain.