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We recently highlighted five key questions which we think will drive crypto regulation and policy this year. In this blog post, we zoom in on a topic we think will dominate the regulatory agenda in 2024 like never before: stablecoins.
Stablecoins are one of the most exciting and important innovations in the evolution of cryptoassets. By offering crypto users a mechanism to access technology without the wild price swings that characterize most cryptoassets, stablecoins have opened up a new realm of opportunity for the crypto space.
Not only do stablecoins act as an important and reliable mechanism for users to move funds in and out of the crypto ecosystem – a fact that has helped fuel growth decentralized finance (DeFi) – but also offer the possibility of use in payments, a use case that has long eluded more volatile cryptoassets like Bitcoin. Indeed, an increasing number of corporations and financial institutions – such as PayPal and Societe Generale – launch stablecoins to facilitate use cases such as peer-to-peer transactions and cash management.
The potential for stablecoins to play an important and growing role in the world of payments and finance has resulted in increased scrutiny from regulators and policymakers in recent years. Indeed, it was when Mark Zuckerberg announced Meta (then Facebook) plans to launch a stablecoin in 2019. which policymakers have become worried about the risks that stablecoins could pose if they are used en masse. More recent events, such as collapse of Terra UST stable money in early 2022have led regulators and policymakers to treat stablecoins with an increasing sense of urgency.
During 2024, regulatory and political activity around stablecoins will come into focus like never before, with important consequences for stakeholders throughout the financial sector.
New rules come into force
During this year, new regulatory and legal requirements for stablecoin issuers will come into force in a number of major financial centres.
From July 2024, EU stablecoin issuers, or those issuing stablecoins pegged to the currency of an EU member state, will be captured by Market Regulation of Crypto Assets (MiCA).. A comprehensive and comprehensive framework, MiCA requires stablecoin issuers to maintain adequate reserves, secure token holders’ redemption rights, and safeguard and segregate assets—among other obligations.
Other jurisdictions are moving forward with similar measures. Singapore has already established a regulatory framework for issuers of stable bonds, whereas UK and Hong Kong plan to push for legislative updates this year that will form the basis of the regulatory framework for stablecoins. In the UK, the Bank of England will continue to make progress in addressing the risk of stablecoin payment system which could have wider implications for financial markets given their size and scale.
The introduction of these and other frameworks worldwide will not only clarify and give life to new requirements for stablecoin issuers. They will also give regulators the opportunity to scrutinize stable coin arrangements like never before. Whether they are cryptocurrency firms or financial institutions, stablecoin issuers in these jurisdictions will now be subject to a rigorous level of oversight.
A notable exception to this picture of clarifying rules and regulations is the US, where stablecoin policy has remained in limbo since January 2024. The US Congress is considering various draft legal proposals it would create a national regulatory framework for stablecoin issuers – but they seem unlikely to thrive against the backdrop of election-year partisanship.
The key question in the US is whether, in the absence of legislative action, senior US regulators may feel compelled to address the risks of stablecoins through action Financial Stability Oversight Council (FSOC) – a much rougher and sharper instrument that would probably only convince participants in the crypto space that the US does not offer a hospitable environment for stablecoin innovation.
A renewed focus on risk
During 2024, the efforts of regulators and policymakers will also focus on a key aspect of stablecoins: financial crime risks involved.
Recently discoveries The United Nations Office on Drugs and Crime suggests that stablecoins play a growing and increasingly significant role in money laundering in China and Southeast Asia. Previous Elliptic research has shown that stablecoins can emerge in increasingly complex typologies of “cross-chain” money laundering – where illicit actors attempt to exchange different cryptoassets for each other in a manner designed to avoid detection.
As stablecoins grow in scale and importance, regulators will focus increasing attention on addressing the associated risks of financial crime. The US Treasury already is indicated that it will seek expanded powers from Congress that would allow it to address sanctions evasion and other illicit financial risks from US dollar-backed stablecoin issuers located abroad.
Taking advantage of stablecoins
As regulators and policymakers intensify their oversight of stablecoins, companies looking to launch stablecoins and take advantage of the many associated opportunities will need to ensure they can manage the associated risks.
Fortunately, blockchain transparency offers a rich source of data that regulated firms can tap into to meet regulatory obligations.
Using blockchain analytics capabilitiesregulated companies can identify high-risk wallets and transactions involving stablecoins, allowing them to block funds or report suspicious activity.
Similarly, blockchain analytics can enable stablecoin issuers to gain a broader view of the risks present in the entire stable ecosystem so they can prove to regulators and other stakeholders that they are able to manage risks.
Contact us today, to learn more about how Elliptic works with cryptoasset enterprises and financial institutions to enable them to address the challenges of risk management and regulatory compliance of stablecoins.
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