Stablecoins have long been a key part
of the cryptocurrency economy.
But this year has seen them shoot to prominence
in the broader world.
The nominal value of these coins is
stability held by pegging to other assets,
such as dollars, has risen by around $100bn
since the start of the year, setting off
alarm bells for regulators.
For years stablecoins' consistent value combined with
a lack of friction have made them a favoured method
of buying other more volatile digital assets,
instead of using fiat currencies.
It is also made them an effective dollar
alternative in parts of the world
where access can be more limited.
But companies are increasingly pitching stablecoins
as a payment system for the non-crypto world,
arguing that they can provide faster and cheap money
transmission around the globe.
This is best reflected in the ambitions of Coinbase
and Circle's USD coin, and Pax dollar,
which is currently working with Meta's digital wallet,
Novi, to run a pilot scheme in parts of the US and Guatemala.
Their rise in popularity has drawn
growing attention from regulators
though on a number of fronts.
The first is around the question of financial stability
and consumer protection.
The oldest and largest cryptocurrency, Tether,
has had to settle with both the New York Attorney General's
office and the Commodity Futures Trading Commission this year
over claims that has misled consumers
about the status of its reserves.
Even today, all that is known about roughly half the more
than $72bn worth of underlying assets backing its coins
is that they are in commercial paper,
a form of short-term debt whose issuers' identities, or even
their nationalities, remains unknown.
Ratings agency, Fitch, warned earlier this year
that the large amounts of commercial paper held
by stablecoins such as Tether could have major consequences
for the debt markets.
Although experts have pointed out that issues such as bank
runs are less of a problem, given
that stablecoin operators can effectively choose when
to redeem their coins for cash.
The other use of stablecoins has also caught regulators' eyes.
Meta's Diem project, formerly known as Libra,
helped spur the early regulatory movement over fears
that a digital dollar run by a private company
could impact monetary policy making,
make capital flight easier, and further consolidate power
in the hands of tech titans.
Early in November the US president's working group
on financial markets, which includes
the heads of key regulators, such as the US
Treasury and the Securities Exchange Commission,
released a long anticipated report on stablecoins.
It called on Congress to ensure that they were regulated
as banks, a move which would offer greater
oversight over the nature of their reserves,
and the general operations of US-based stablecoins.
Pax also received conditional approval for a bank charter
from the Office of the Comptroller of the Currency
earlier this year, while Circle says
that it intends to apply to become a bank as well.
The President's Working Group also
suggested two legislative amendments more squarely aimed
at the second use of stablecoins.
The first was to include digital wallets, which would include
Novi, under federal oversight.
While the other would be to limit
the affiliation of stablecoin issuers
with commercial entities, a decision
which would potentially impact Meta, but also preemptively
affect other companies who sought
to create their own digital dollars in the future.
There is also the potential challenge of central bank
digital currencies, often pitched
as a government controlled alternative
to private stablecoins with direct access
to central bank vaults, and in greater transparency.
The question of whether the two forms of digital money
can coexist remains unanswered.
Although, international regulators have
suggest that it is not impossible.
so long as stablecoins are effectively and closely
regulated.
And while Diem has struggled to make headway with regulators
amid the continued fallout over Meta's corporate behaviour,
its proposal that a stablecoin could help form the rails
for future government digital currencies may yet come
to pass.
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