Stablecoin policymakers should focus on three core principles: promoting fair access, ensuring the integrity of issuers and reserves, and strengthening technical and operational flexibility.
Original title: “a16z partners talk about stablecoin regulation: policymakers should consider these three core principles”
Written by Katie Haun, Tomicah Tillemann, and James Rathmell, a16z partner, global policy director and legal advisor respectively. Compilation: Chain Catcher
The commitment to provide financial services to underserved communities around the world is the main driving force of our work. We have been worried about a counterintuitive trend that has been ingrained in Western economies over the past few decades: the growth of GDP share flows to the financial sector, but hundreds of Thousands of people are still shut out of basic financial services. From Senators Cynthia Lummis and Pat Toomey to Senators Elizabeth Warren and Kyrsten Sinema, more and more people unanimously acknowledge that digital currency may be a powerful tool to help “get more people into the system.”
As a privately issued cryptocurrency linked to stable assets such as the U.S. dollar, stablecoins play an important role in the next generation of democratized financial services. In the past year, the total supply of stablecoins has increased from US$2 billion to more than US$125 billion. Naturally, this amazing growth has aroused the interest of legislators and regulators. The technological and financial advantages of the United States have always relied on the cooperation of business leaders and policy makers to ensure that the private sector can experiment and build, and appropriate regulatory systems can help manage real downside risks that may harm consumers.
Together with stablecoin technology, smart and effective stablecoin supervision is essential to protect consumers, prevent financial crimes, and maintain the security and stability of the financial system.
Stablecoin issuers usually use one of two mechanisms to keep the value of stablecoins linked to the value of the reference asset: policymakers should focus on three core principles when considering this type of regulation: (1) promote fair access; (2) ensure The integrity of the issuer and reserves; (3) Strengthen the technical and operational flexibility of the stablecoin network.
There are already many different types of stablecoins, and the market is constantly innovating, so if we want to use this technology and reduce its risks, one-size-fits-all supervision is a bad choice. We are still in the early stages of this game. Now is the time to develop the right framework for how we hope to use this technology to benefit society.
Today’s stablecoin landscape
Before we explore these principles in more depth, we want to prepare first. The value of the three major stablecoins has increased by about 10 times from a year ago.
Traditional companies including Visa, Mastercard, JPMorgan Chase and Wells Fargo are piloting stablecoin integration to improve the efficiency of their existing infrastructure. More importantly, stablecoins have also opened up a wider range of financial service channels by supporting new consumer financial products that disintermediate the traditional financial sector. The most obvious example is their application in decentralized finance or DeFi.
Stablecoins have always been the core supporting technology behind the growth of DeFi, and DeFi requires low-volatility on-chain assets for daily transactions. In fact, if stablecoins allow access to core financial services without the involvement of banks at all, then the concept of “providing bank services for unbanked accounts” may become a thing of the past.
Stablecoin issuers usually use one of two mechanisms to keep the value of the stablecoin linked to the value of the reference asset:
- Asset-backed stablecoins use legal or cryptocurrency as collateral to maintain asset reserves and allow the demand side to carry out price arbitrage to maintain price stability
- Algorithmic stable currency, using automatically executed smart contracts to maintain price stability
One problem with asset-backed stablecoins is whether the underlying assets are safe and whether they have established contact points with the traditional financial system that may lead to systemic risks. For algorithmic stablecoins, the main risks today are technology and operations-whether smart contracts are executed as expected, whether they are susceptible to damage by malicious actors, and whether the economics and incentives of the agreement will have unexpected consequences. Identify and appropriately mitigate.
This is important when we enter policy discussions, because a one-size-fits-all solution will not solve these very different problems.
Stable currency supervision principles
We believe that policymakers should champion and responsibly supervise stablecoins. Utilizing the thriving ecosystem of private stablecoins can help the United States act quickly to win the emerging geopolitical arms race of financial innovation. This is an extremely important consideration. Looking to the future, a country’s choice of digital infrastructure may have an impact on shaping its geopolitical direction as important as past generations’ accession to NATO or the Warsaw Pact. U.S. dollar-denominated stablecoins help ensure the continued dominance of the U.S. dollar and the centrality of the U.S. financial system in the world economy.
These views are not universally understood in the eyes of legislators and regulators. Some recent legislative proposals will give the Minister of Finance the discretion to completely prohibit stablecoins backed by fiat currencies. Others have suggested that the “The Glass-Steagall Act” has given the Ministry of Justice the power to impose criminal sanctions on issuers. These methods cannot use the dollar-based stablecoins to bring opportunities. Instead, they will harm the country’s core interests-which necessitates careful supervision.
Good supervision can not only deter bad actors and control the risk of falling prices, it also establishes a framework and vision for how technology can actively benefit mankind. With this in mind, we have put forward the three principles of stablecoin supervision responsibly: it should promote fair access and deposit; ensure the integrity of stablecoin issuers and reserves; strengthen the technology and flexibility of operating the stablecoin network.
Promote fair access
The regulatory framework of stablecoins should first ensure that all consumers have equal access and can overcome existing access barriers. As Senator Robert Menendez (D-NJ) pointed out at a recent hearing, Americans who do not have access to financial services, especially those who cannot get a credit card at any time, find it difficult to participate fully in the economy.
This is largely due to the high costs, inefficiencies and other obstacles brought about by the traditional financial system. Policy makers should not copy the errors and limitations of the current financial system, but should use stablecoins as a basic building block. By transforming our basic financial facilities, laying new tracks, improving efficiency and competition, society begins to reduce or eliminate these. obstacle.
Raising public awareness and understanding of stablecoins is necessary to ensure that consumers can reliably benefit from financial innovation. The private sector, government, and civil society have an obligation to increase transparency and educate consumers so that they are fully aware of the risks and opportunities associated with new products and services. As a result of the blockchain-based infrastructure, consumers can benefit from audits and disclosures that are more powerful than anything we do in consumer finance today. Traditional disclosure-based systems can and should be modernized to take advantage of the technology’s benefits and ensure that disclosure standards focus on consumers’ understanding of the products and services available to them.
Ensure the integrity of stablecoin issuers and reserves
Provide a clear and predictable way for issuers to enter the market and meet regulatory expectations. So far, states, not the federal government, have dominated the process of granting stablecoin issuers a license to act as currency transferors. The federal government should also seriously consider the feasibility of authorizing stablecoin issuers under federal law. In response to this process, OCC issued three conditional National Trust Bank licenses to Paxos, Anchorage and Protego, and also issued a large number of stablecoin-related guidance opinions.
Including the power of the National Bank to keep stable currency reserves and guidance on their power to use stable currency as a means of payment. Although the Biden administration is reviewing this activity, regulators should seriously consider creating options for new stablecoin issuers to enter the market based on their specific circumstances. For example, certain stablecoin issuers may seek bank concessions (which may accelerate part of the reserve stablecoin banking business) or narrowly defined bank licenses (if they are willing to hold only central bank reserves and U.S. Treasury bonds).
At the same time, some stablecoins are managed by agreements composed of highly auditable smart contracts. These agreements maintain price stability through algorithms without any manual intervention. For these agreements, the bank charter is neither coordinated nor necessary. In view of this diversity, policymakers should propose a bar of options suitable for their purposes for stablecoin regulation. Continuous vague supervision will bring no small consequences to the real world. Two years ago, regulatory uncertainty led to the closure of a promising project in this field, and lack of clarity will continue to hinder innovation and cause talent to offshore.
Create a clear framework for how stable currency issuers with asset collateral must audit and disclose their reserves. Since 2018, Circle and Center Consortium have issued certificates of grant Thornton LLP to support USDC reserves. Regulators should work with issuers and auditors to use specific standards for management, such as which periodic proofs of stable currency reserves guaranteed by asset collateral must be provided.
In addition, regulators should ensure that, like the Grant Thornton report, disclosures are brief and understandable to ordinary consumers. For them, stablecoin issuers need to be proactive in ensuring transparency. For agreements based on decentralized assets (encrypted mortgages), data exists on the chain, so the verification of collateral is relatively easy; for issuers with off-chain assets, the disclosure should include regular public audit reports by certified public accountants.
Make full use of the compliance advantages of stablecoins. Given its auditability, blockchain provides national security and law enforcement agencies with new ways to detect illegal activities and enforce sanctions. Rapid technological innovation is also expected to compile regulatory compliance into smart contracts, reducing or eliminating operational defects that plague traditional compliance projects. With an appropriate privacy-first structure, public-private cooperation in stablecoins, such as the creation of shared analysis tools and data repositories, can significantly improve the status quo. Contrary to popular belief, existing systems are not doing a good job of detecting or preventing this behavior.
Strengthen technical and operational flexibility
Cooperate with market participants to formulate specific guidance on the verification and governance of encrypted mortgages and algorithmic stablecoins. Algorithmic stablecoins have the ability to unleash huge economic potential by creating a stable and decentralized trading medium. Many projects in this area are managed by the DAO, which is a challenge for regulators.
Therefore, policy makers should first focus on cooperating with established participants to formulate appropriate standard guidelines for the verification of their basic financial models and the governance of agreements. There has been a lot of thinking about the DAO’s commitment to managing stablecoins and other projects, and ways to remedy the risks that come with it. Policy makers and regulators have the opportunity to accelerate the pace and actively participate in this dialogue. In addition, a considerable number of encrypted native stablecoin projects are transparent and auditable in terms of their stability mechanisms, which can naturally align with the disclosure-based framework to adapt to the realities of the 21st century.
Support flexibility and redundancy. The conversation about stablecoins is closely related to the conversation about CBDC (Central Bank Digital Currency), a cryptocurrency issued by the government and representing sovereign obligations. However, CBDC also faces a series of challenges-especially in terms of privacy and security. When these problems fall into the hands of authoritarian regimes, the problems become more serious.
These privacy and security risks can and should be addressed, but CBDC and stablecoins can coexist. The most important goal should be to ensure that American developers will not fall behind and that the dollar remains the base currency of this emerging industry. Cultivating a series of stablecoin projects backed by the U.S. dollar will support these goals and enhance the resilience of our financial infrastructure by avoiding single points of failure.
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