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What's the wrong tack regulators could take following the UST crash?

What's the wrong tack regulators could take following the UST crash?

Painting with a broad brush, using banking products as a regulatory guideline and diverging from the executive order guidance would be missteps, members of Protocol's Braintrust say.

Diogo Mónica

Co-founder and president at Anchorage Digital

Terra’s collapse should show regulators clearly and definitively that grouping all so-called "stablecoins" into a single asset class is misguided — in fact, the phrase “algorithmic stablecoin” should be eliminated from the crypto discourse altogether. Conflating the run risk of experimental tokens like Terra to their commodity-backed, collateralized counterparts — cornerstones to the cryptoeconomy — will only distract from the immense economic and geopolitical opportunities for the U.S. dollar that lie in sensible stablecoin regulation.

Scott Bauguess

Vice president, Global Regulatory Policy at Coinbase

Stablecoins provide the primary on-ramp into the digital asset ecosystem, and they sit at the intersection between digital assets and the traditional financial system. They already enable many kinds of activity, not only for trading digital assets, but also the promise of real improvement in financial services for everyone. With the potential for very high retail uptake, there is also a strong sense that we need standards to make sure that stablecoins function reliably and with integrity.

Legislative action can provide regulatory clarity for stablecoins and all digital assets, but only if we get it right. Good policy promotes good practices without stifling innovation. Many stablecoin issuers want to operate in a reliable, trustworthy, well-regulated way and there are a number of ways regulation could hold them to account without impeding innovation.

For example, regulation could require issuers to hold safe, liquid reserve assets and publish regular disclosures in a framework that provides regulatory clarity that stablecoins are not securities. And it is important to recognize that there is not a one-size-fits-all approach to regulation; as recent events have shown, stablecoin arrangements that use algorithms should be treated differently from custodial stablecoins backed by high-quality, liquid assets.

Regulations are most effective when the regulator has considered both specific risks and benefits for the asset or transaction being regulated. And that’s what we need to make sure happens with stablecoin regulation going forward.

Cathy Yoon

Chief legal officer at MPCH

The wrong tack regulators could take is a knee-jerk reaction that lumps all digital assets, specifically all stablecoins, in the same bucket without understanding the differences and nuances between the different types and prohibitive measures are taken as a result of such reaction. I would also caution against concluding that what happened with UST is the norm and that this is the inevitable conclusion for all digital assets. I would urge regulators and policymakers to really examine the digital asset (and stablecoin space) and see where UST fits into the whole scheme of things. A well tailored regulatory framework is possible as long as the process is open-minded, informed and intuitive.

Stu Alderoty

General counsel at Ripple

Crypto, and its underlying technology, is here to stay and can’t be ignored or regulated out of existence. That said, the industry is still developing and experimenting — we will see successes and failures. We can all agree that consumer protection and market integrity are table stakes, which can be achieved through rational and practical regulation that balances effective regulatory oversight with the promise of technology. We saw that in the mid-1990s with the birth of the internet when our government recognized that the then nascent internet couldn’t be regulated with laws designed for rotary telephones and transistor radios.

Unfortunately, because there have been such delays in addressing crypto with thoughtful, rational and practical legislation here in the U.S., there’s been a missed opportunity to both protect and educate consumers, as well as provide understandable guardrails to responsible actors in the space. Frankly, this won’t be the last time there’s a downturn in the market (we’ve seen a few over Ripple’s 10-year existence). It would be hugely detrimental to paint all of crypto (or every failed crypto experiment) with a broad brush. Continuing to choose politics and regulation by enforcement over sound and well informed policy will ensure that the U.S. loses out on embracing this transformative financial and technological moment.

Candace Kelly

Chief legal officer and head of Policy and Government Affairs at Stellar Development Foundation

With any market event, the first concern is knee-jerk reactions. In this particular instance, we aren’t starting from scratch; we don’t need to change course; and we must refrain from knee-jerk reactions. We already know what we need to do.

D.C. and the industry together have contemplated stablecoin regulation for over a year. We have agreed on both the opportunities stablecoins present and the risks that we must address. Now is not the time to go back to the drawing board or default to regulation by enforcement.

There is already broad consensus that we need regulatory authority to codify standards and provide oversight, and that stablecoins should be fully reserved, redeemable 1:1 and held at regulated banks and financial institutions. Trustworthy issuers are already holding themselves to regular audits and public disclosers of stablecoin reserves. Now we need to turn those practices into requirements and provide clear guidance on appropriate reserve assets.

We should not let this moment and the sense of urgency pass by. Instead, we should build on our progress and push to find consensus on the still outstanding issues to give consumers the clarity and understanding they need to transact with confidence.By continuing to work together and in earnest, the industry and policymakers can design transparent and sensible rules of the road to protect consumers and harness the benefits of blockchain technology.

Learn more.

Ji Kim

Head of Regulatory Affairs at Gemini

UST was an experiment that sought to create a non-volatile cryptocurrency by linking it via a redemption framework to another cryptocurrency, luna. While the broader crypto ecosystem will learn from its failures, a key regulatory learning is that precision matters when defining and regulating a financial asset.

More specifically, Terra was not — and never should have been defined as — a “stablecoin” if that term is also used to describe 1:1 fiat-backed tokens. By way of example, the Gemini dollar stablecoin (GUSD) is regulated by NYDFS, backed by cash and cash equivalents on a 1:1 basis, and the reserves are examined by an independent registered accounting firm on a monthly basis and made publicly available. The differences between these assets are dramatic, including their associated risk profiles. Regulators should accordingly ensure that any regulatory response is tailored to solve for actual risks posed by the financial asset — as we do with all other regulated assets.

Fortunately, global regulators appear to recognize these important distinctions, starting with proper definitions and taxonomy. The U.K. Treasury, for example, is developing a regulatory framework for payments stablecoins, but will exclude so-called algorithmic stablecoins because they do not ensure price stability. The same should occur in the U.S., where novel assets should be permitted to develop subject to appropriate regulation, but through frameworks distinct from fiat-backed stablecoins. Recent, thoughtful proposals regarding fiat-backed stablecoins are the right starting point, and reinforce the basic idea that precision matters when it comes to sound regulation.

Gabriella Kusz

CEO at the Global Digital Asset and Cryptocurrency Association

A total crackdown and regulation similar to banking products would harm innovation and push the U.S. to last place in terms of global leadership. Stablecoins — those that are true stablecoins — performed as described under pressure and volatile market conditions. So these are USDC Circle, BUSD Binance, GUSD Gemini and Paxos. Any regulations need to be sensitive to the difference between collateralized (asset backed) and algorithmic stablecoins. Viewing and regulating all stablecoins the same would be a huge mistake and detrimental to innovation.

Jake Chervinsky

Head of Policy at the Blockchain Association

Policymakers must fully understand these assets before making any decisions about how they should be regulated. It’s rare that good policy gets made in the heat of the moment, especially when it comes to novel technology.

The crucial process of study and evaluation has only just begun. Last November, the President’s Working Group on Financial Markets (PWG) issued a report on stablecoins, but it explicitly chose not to address decentralized or algorithmic assets. Two months ago, President Biden issued an executive order, calling for analysis and reports across government and agencies on crypto. This is a necessary first step before effective regulation can be formulated.

Following UST’s collapse, Secretary Yellen advised in testimony before Congress that we "need a regulatory framework to guard against the risks," but that stablecoins aren’t at “the scale right now where they’re a financial stability concern.” She supported the EO process and emphasized the PWG report’s recommendation that Congress “produce a comprehensive framework” through a “bipartisan effort.”

Policymakers should follow the process called for by the EO, develop a bipartisan consensus in Congress and, perhaps most importantly, adopt new regulations that are fit for purpose. Washington must study these complex financial tools before anything else. Stablecoins present too big an opportunity to risk bad policy.

Katherine Dowling

General counsel & chief compliance officer at Bitwise Asset Management

The wrong tack here in response to the UST death spiral would be to for regulators to over-rotate based on this particular occurrence. All stablecoins are not created equal and we need to make sure that the proverbial baby does not get thrown out with the bath water in the regulatory response. There are a number of money market model stablecoins backed by cash and cash equivalent reserves that have been fully functional without issues for a number years. And then there are other riskier types of stablecoins, such as UST, an algorithmic or "algo" stablecoin that are much riskier with questionable underpinnings. Both types of assets need clear regulation but they need the right regulation. Regulation based on a real understanding of the differences between these types of digital assets, the risks, use cases and how they each function --- or don't function per plan --- as was the ultimate case with UST.

See who's who in the Protocol Braintrust and browse every previous edition by category here (Updated May 25, 2022).
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