Stability and regulation are needed now more than ever in crypto
by Jared A Favole
Often, it’s when things break that we realise it’s time to act, as anyone who lived through the 2008 financial crisis knows. The recent meltdown of a once-booming digital currency, TerraUSD (UST), is one of those times and should spur clear action.
A few simple steps likely could have prevented this catastrophe: For one, industry leaders could’ve made clear that fragile projects have no quarter in emerging blockchain finance. And governments could’ve demanded the team behind UST follow basic e-money regulations (as they’re called in the UK) or money transmission rules (as they’re called in the US) – each of which includes oversight and requirements for safeguarding customer funds, among other rules.
For the uninitiated, consumers lost billions of dollars in the span of days when UST collapsed. This complex financial instrument was called a stablecoin, but proved once and for all that not everything deserves to be called a stablecoin. UST was supposed to be pegged to $1 by tying its value to another digital asset and having emergency reserves composed of Bitcoin. Instead, it broke the buck and investors lost billions of dollars.
Now, other digital currencies are starting to show their weakness, prompting questions about what businesses, governments, and consumers can do to avoid more financial ruin. Stability and regulation are necessary. My company’s four-year track record of operating a stable digital dollar should serve as a model for how to think about what to do next and why getting it right is so important. I say that not to boast, but because the stakes are so high.
Digital assets and blockchain technology, born from the Great Recession, represent our best shot at reshaping the global financial system for the tangible benefit of people everywhere. Blockchain technology can deliver faster, better, cheaper, more efficient payments – meaning remittances should stop being so painfully costly and slow, and accessing the financial system should stop being so prohibitively expensive for the underserved. That’s what animates our work and that’s a message Circle’s co-founder and Chief Executive Officer, Jeremy Allaire, recently took to world leaders at the World Economic Forum in Davos.
This is why USD Coin (USDC) is so important. Launched in 2018, USDC is a fully-reserved dollar digital currency backed by cash and short-duration US government obligations, allowing USDC to be redeemable 1:1 for US dollars.
As of May 26, 2022, it had a circulation of more than 53 billion. The simplicity of how it works is an important feature. If you want $100 worth of USDC, you hand us $100, we give you 100 USDC and the outstanding circulation increases by 100. When you want your dollars back, you give us 100 USDC and we give you $100. The outstanding circulation falls by 100.
It’s really that simple. We make it easy to get your dollars back, and that is why over 119 billion USDC has been redeemed easily since it was launched. USDC’s circulation has also increased by billions in recent weeks as other stablecoins have faltered, a clear example of flight-to-quality and flight-to-safety.
Circle is regulated as a money services business in the United States and has money transmission licenses in every state that requires them; those licenses demand full-reserves for USDC and subjects Circle to regular examinations by state banking supervisors. Had UST been subject to these laws or UK e-money regulations, consumers wouldn’t have lost so much.
Fortunately, governments globally are starting to recognise that not all stablecoins are created equal and that they offer an essential opportunity to lower the costs of cross-border payments, support financial inclusion, and reduce friction. In fact, about 80 countries are in some stage of researching or developing a Central Bank Digital Currency (CBDC), according to the Atlantic Council. Why? Because they all recognise how slow, exclusive, and costly current payment systems are and have seen the value provided by well-regulated, dollar digital currencies like USDC.
Just look at the UK and US to see this in action. The White House recently announced a whole-of-government approach to study and harness digital asset technology. And the UK echoed that call, even highlighting digital assets in the Queen’s Speech. Both countries are also debating whether to issue a CBDC.
Governments deserve credit for trying to innovate, but most payments innovations have come from rules-based private sector innovation. USDC was launched before any CBDC was developed, for example, yet it is contributing to why the US is winning the digital currency space race. More importantly, many of the goals of a CBDC are already being met by well-regulated financial services firms.
That’s not to say more shouldn’t be done. Businesses and governments need to take concrete steps so we can maximise the benefits, and reduce the risks, of digital asset technologies.
First, businesses need to exemplify what it means to be good actors and be vigilant in giving bad actors no place to hide in emerging blockchain finance. Issuers of stablecoins need to provide regular disclosures of the assets backing their digital currencies as fundamental consumer protection and market disclosure standards.
Exchanges where digital assets are traded need to stop being agnostic about what they list. They’re gatekeepers, whether they like it or not. Maybe learning from grocery stores would help? No grocery store puts rat poison next to baby food, both with the same label – or often even sells rat poison in the first place.
For their part, governments need to offer clear rules of the road, specifically clarity about who can issue stablecoins, requirements for reserve backing, regular public disclosures of the reserve balances and asset mix, among other areas. Circle has regularly disclosed, on a monthly basis, the reserves backing USDC and had a top global accounting firm, Grant Thornton, attest to those balances. We also recently began releasing key data points about USDC and our reserves on a weekly basis.
These measures should be mandatory instead of voluntarily, leading to harmonised standards and oversight that will give governments – and importantly consumers – confidence. The conversations we’ve had with government leaders in the UK, the US, and globally give us hope that regulation will allow responsible innovation to flourish.
I look forward to continuing to work with government leaders to modernise our payments system. Now is the time to act.
Jared A Favole is the Senior Director of Public Policy and Strategy at Circle Internet Financial, a global financial technology firm and the issuer of USD Coin (USDC).