By Stefano Chierici, Senior Product Manager, Financial Information, SIX.
Once on the fringes of the crypto movement, stablecoins are fast becoming the cornerstone of many financial institutions’ digital assets strategies – and watchdogs are rallying to ensure necessary guardrails are in place, without hindering this emerging asset class.
Backed by real-world assets to address the extreme volatility of cryptocurrencies like bitcoin, stablecoins’ relative safety has sparked a flurry of institutional interest of late. DWS’s joint venture AllUnity just received BaFIN approval for a new euro-denominated stablecoin – the latest in a string of similar coins launched in recent months. Even China’s government, which is characteristically anti-crypto, is under mounting pressure to support an offshore yuan stablecoin.
Meanwhile, momentum is building around how the technology can be harnessed to strengthen digital market infrastructure, with promising use cases emerging for post-trade processes like security settlement and the exchange of tokenized assets.While greater institutional adoption of the asset is an exciting development with the potential to radically transform markets, its success ultimately hinges on whether regulators can put robust and consistent frameworks in place. Without them, stablecoins could lose the trust of mainstream market participants, not to mention undermine financial stability.
Watchdogs are making solid progress on this mission. But a few concerning gaps in oversight are emerging as standards converge. It is vital these are mapped out and navigated carefully by issuers over the coming months as the stablecoin rollout ramps up.
Shifting Stablecoin Standards
Globally, the regulatory tides seem set to be buoying the stablecoin movement. The EU’s Markets in Crypto-Assets Regulation (MiCA) is arguably the most sophisticated framework so far, requiring stablecoin issuers in the EU to be licensed, transparent, and subject to ongoing oversight to ensure financial stability and consumer protection.
Perhaps most critically, it also demands that issuers maintain ‘1:1’ liquid asset reserves. This, put simply, requires a company to hold an equal amount of real money for every stablecoin issued. It basically puts the stable in stablecoin.
Similar progress is being made across the Atlantic. The recently proposed ‘GENIUS Act’ will, if enacted, align quite closely with MiCA on many provisions. It will require stablecoin issuers to be federally or state licensed, follow strict transparency and consumer protection rules, and maintain ‘1:1’ liquid asset reserves – just like MiCA.Other prominent markets are also developing their own regulatory frameworks for investment services and prudential guidelines, such as the UK, which has recently published two working papers on its stablecoin regulations. Hong Kong is developing regulations, too, while other markets such as Dubai have indicated their intent to scrutinize the asset class more closely.
Close, but Not Carbon
What we are witnessing, then, is the gradual convergence of stablecoin issuance standards across the globe. For the firms launching these coins, this is in theory good news.
If reporting requirements for every region in which a firm is issuing a stablecoin match, the stack of paperwork that must be submitted to each respective authority can be re-used. Rather than draft up new documents for a coin’s launch in, say, the UK, the company can submit the same documents used when the coin was issued in the US.
The time and cost savings with this are obvious. But we must remember that, in practice, regulatory convergence does not mean carbon copy requirements. Even tiny differences between two jurisdictions can unearth major headaches when it comes to clearing red tape.
Take, for instance, the nuances of reserve asset requirements, which we briefly touched on earlier. While the 1:1 requirement is the same for the EU’s MiCA and America’s GENIUS Act, there are distinctions in where the reserve assets must be held. MiCA is unique in requiring at least 60% of a stablecoin’s reserves to be held at a European bank, and no more than 10% at a single firm. The GENIUS Act will have no such requirements.
The EU’s rationale behind imposing these measures makes sense, helping to support European banks and tackle concentration risk. But this detail has already seen the world’s most popular stablecoin, Tether, decide against issuing in the region. The company’s leadership publicly criticized the rule, arguing it could increase risk if European banks specifically face a crisis, and that they prefer to keep reserves primarily in US Treasuries, which they consider safer.
It remains to be seen how other regulators across the world treat reserve asset requirements, but one thing is certain: market participants must pay close attention to the small print in every jurisdiction in which they wish to issue. Accessing thorough and timely data on changing digital assets regulations will be essential, painting a clearer picture of similarities and differences between regulations. These insights will enable market participants to join the stablecoin frenzy in a compliant way.
It could be what separate the winners from the losers in the global battle for stablecoin supremacy.
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