Byline: Hannah Parker
Before the stablecoin crisis in the spring of 2022, the cryptocurrency markets were already struggling. However, the TerraUSD disaster triggered a far deeper ailment that considerably added to the present crypto cold.
Stablecoins strive to offer a digital asset that is “secure” and maintains a stable value in the crypto sphere. A stablecoin’s value is linked to the value of another asset, such as the US dollar. The coin should continue to have the same worth as its peg.
Physical assets support USD Coin (USDC) and other stablecoins, but TerraUSD is an algorithmic stablecoin that is only supported by the power of computer code. This made it simple pickings for astute short sellers.
After the dust settled in June 2022, the stablecoin market was scrutinised. Legislators and authorities from the state and the federal government have expressed concern about this segment of the cryptocurrency market’s shaky roots, particularly algorithmic stablecoins.
New Cryptocurrency Regulations in California and New York
A law requiring additional licences for bitcoin businesses doing business in California was approved by the California Senate in August 2022.
The law forbids trading in stablecoins that aren’t licenced by a bank and are backed by secure reserves or by the California Department of Financial Protection and Innovation because of these licensing requirements.
California law also prohibits trading any stablecoin that a bank does not issue and that does not have sufficient reserves or has not yet been granted a licence by the state of California. This effectively forbids the trading of the majority of stablecoins in California.
Cryptocurrency exchanges use stablecoins to transport cryptocurrencies on, off, and throughout their systems, which has disastrous repercussions. These organisations couldn’t function without stablecoins.
The law would take effect in January 2025 if it were to be signed into law by California Governor Gavin Newsom, who has not yet done so.
The Golden State won’t be the only state to establish its regulations and guidelines for cryptocurrency exchanges and businesses.
New York enacted a BitLicense bill in 2015, paving the way for state-level regulation of cryptocurrencies without federal legislation.
Federal Regulations in the Future
The U.S. Department of Treasury warned in a report from September that it might be “impossible to foresee” what stablecoins and associated payment systems will mean.
Treasury Secretary Janet Yellen was alerted to TerraUSD’s demise and immediately began discussing the prospect of stablecoin legislation.
According to the Bitsoft 360 review, a regulatory framework is necessary to mitigate the dangers of stablecoins.
Alex McDougall, CEO of Stablecorp, concurs that robust regulation benefits vital assets: “We’ve allowed “experiments” like TerraUSD to dominate and expand substantially beyond where they naturally should reside given their intrinsic danger.”
Senator Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) filed the Responsible Financial Innovation Act, a bipartisan piece of legislation, into the U.S. Senate in June for all of these reasons and more. This measure aims to regulate “payment stablecoins,” among other things.
According to Gillibrand, it would have prohibited the TerraUSD coin by establishing stronger regulations on stablecoins and tax obligations for other digital assets.
Additionally, the law included clauses addressing cybersecurity, the potential establishment of a self-regulatory agency, and some disclosure requirements.
Progress Toward Regulation
Politicians and bankers have only become interested in cryptocurrency because markets have grown by over 400% over the past four years, excluding the November 2021 peak.
Himes, a House Financial Services Committee member, has spent months working with colleagues to write a stablecoin bill, but there are still significant disagreements over how they should be governed.
He insisted that Congress has to take “updating statutes that allow the regulators to conduct their work” seriously. He may have been alluding to the continuing conflict between Ripple and the SEC regarding the murky subject of securities sales when he added that “if the regulators continue to do what they’re doing right now, which is sort of extrapolating or regulating by analogy, it opens up the court challenges.”
Himes claims that the senators Kirsten Gillibrand and Cynthia Lummis’s proposed legislation to regulate cryptocurrencies and stablecoins is “gathering momentum.”
This would be advantageous for the cryptocurrency sector, pushing for CFTC oversight instead of the Securities and Exchange Commission (SEC). Cryptocurrency assets are more likely to be classified as commodities under this bill than securities, subject to significantly stricter rules.
Lummis estimates it will take another six months for the law to reach the President’s desk, but nothing in American politics moves quickly.
Stablecoin and cryptocurrency rules are still on the back burner, suggesting that American legislators are preoccupied with other issues. The bill won’t be passed this Congress, according to representative Himes, who stated this during a financial conference on October 18, 2022. Himes noted that given the lack of clarity regarding crypto assets in the U.S., “it’s probably not happening in early 2023.”
With a report from the Financial Stability Oversight Council earlier this month calling for inter-agency cooperation, the Biden Administration has encouraged Congress to go forward with cryptocurrency laws. However, they remain on paper without being implemented. Only time will tell when and if stablecoins ever gain federal regulations in the USA.