Overview Overview
This article will discuss the inevitability of DeFi facing regulation and the significance of industry self-discipline from the perspective of stablecoins.
Report report
Report report
The weakness of DeFi-stable currency
The existence of stable coins provides a bridge for the entire digital currency world to connect to the traditional world. So far, the development of the digital currency industry is inseparable from the development of stablecoins. Whether it is stablecoins manipulating currency prices or providing general equivalents and value anchors, it is undeniable that stablecoins are like red blood cells, which continuously deliver oxygen to digital currencies and carbon dioxide to blockchain projects. Provide them with a path to cash out funds.
The more important the stable currency is in the digital currency system, the more fragile the system is. We know that whether it is DeFi or other projects, a certain degree of anonymity can be achieved. As long as you register a wallet and open an account in it, no one will ever know who is behind the account except yourself. As long as you are on the chain, your anonymity can be guaranteed. But stablecoins are different. Mainstream stablecoins such as USDT, USDC, PAX, etc. are easily tracked and regulated. Once these stablecoins are lost, DeFi is likely to collapse.
increasing regulation
Institutions need to comply with standards to prevent money laundering and terrorist financing, the Financial Action Task Force, which includes some 200 countries, said in a report published in mid-April. This means that exchanges and other entities that support them may have to verify the identities of their users and comply with other policies that the FATF established last year regarding virtual assets such as bitcoin.
On April 14, 2020, the Financial Stability Board (FSB) released a report on the Global Stablecoin (GSC) framework and related crypto-assets. Published as a 'consultation paper' given the non-binding international supervisory function performed by the FSB, it is still an important publication, but it certainly reflects views within the G20 governments.
Another important aspect to recognize from the regulatory environment is that many fiat-backed stablecoins are issued by central entities. USDC, issued by Circle and Coinbase, is fully regulated in the US and may comply with the recommendations made by the FSB. As profit-making enterprises, these companies inevitably face regulation.
The difference between global stablecoins and other encrypted assets
The report highlights three characteristics that distinguish GSC from other encrypted assets and other stable mechanisms: (1) Stable mechanisms, either related to assets or related to algorithms; the combination of multiple functions and activities (such as coin issuance, redemption, stabilization and transfer, and interaction with coin users to store and exchange coins); (2) the emergence of GSCs through broad reach and adoption across multiple jurisdictions.
The risks posed by stablecoins
The report notes that GSCs could pose a range of challenges for regulatory, supervisory, supervisory and enforcement authorities. (1) challenges to financial stability; (2) protection of consumers and investors; (3) data privacy and security; (4) financial integrity, including compliance with anti-money laundering, countering the financing of terrorism and proliferation (AML/ CFT); (5) tax evasion; (6) fair competition and antitrust policy; (7) market integrity; (8) sound and effective governance; (9) cybersecurity and other operational risks; (10) financial market Security, efficiency and integrity of infrastructure such as payment systems.
Here are ten recommendations from the FSB report:
Relevant departments should have and make good use of necessary powers and means, have sufficient resources, comprehensively regulate, supervise, and supervise the arrangements and multi-functional activities of GSC, and effectively implement relevant laws and regulations.
Authorities should impose regulatory requirements on GSC arrangements in proportion to function and risk.
Authorities should ensure that GSC arrangements are fully regulated, supervised and supervised across borders and sectors. Departments should cooperate and coordinate with each other domestically and internationally to promote effective communication and consultation to support each other in fulfilling their respective responsibilities and to facilitate comprehensive regulation, supervision and oversight of GSC arrangements across borders and domains.
Authorities should ensure that GSC arrangements have a comprehensive governance structure and that accountability is clearly assigned for functions and activities within the GSC arrangement.
Authorities should ensure that GSC arrangements have an effective risk management framework, particularly with regard to reserve management, operational resilience, cybersecurity safeguards, 'anti-money laundering' measures and 'fitness-for-fit' requirements.
Authorities should ensure that GSC arrangements have robust systems in place to secure, collect, store and manage data.
Authorities should ensure that GSC arrangements have appropriate recovery and resolution plans in place.
Authorities should ensure that GSC arrangements provide users and relevant stakeholders with comprehensive and transparent information necessary to understand the functioning of GSC arrangements, including their stabilization mechanisms.
Authorities should ensure that, where applicable, legal clarity is provided to users regarding the nature and enforceability of redemption rights and redemption procedures.
Authorities should ensure that GSC arrangements meet all applicable regulatory, supervisory and supervisory requirements before commencing any operations in a particular jurisdiction and, where necessary, build systems and products that can adapt to new regulatory requirements.
The attitude of the regulators is very firm, and it is generally believed that it is imperative to intervene in the supervision of stablecoins, especially considering the possibility of tax evasion and money laundering, which undoubtedly touched the cake of government agencies. When the market value of the stable currency is 10 billion, it will not be too nervous, but what about 100 billion or 1 trillion?
"Non-violent, non-cooperative" for stablecoins
However, when it comes to understanding the true pace of stablecoin issuance in the cryptocurrency market, the attitude of stablecoin issuers to regulation is less clear. For example, Tether, the long-time king of stablecoins with a current market capitalization of more than $14.46 billion, has deliberately engaged in regulatory arbitrage to avoid the jurisdiction of the US government, which has already had a dispute in New York. In fact, Tether's strong stance against bowing to regulators is a major reason for its continued popularity in the crypto world.
For example, Tether has not even returned to a stable level of 1:1 with the US dollar. Instead, it's backed by only 74% cash, with the remaining 26% made up of a basket of assets. Most Tether users were completely unaware of this development until it was announced, but went ahead anyway. Since then, Tether’s supply has accelerated.
While Tether is unlikely to succumb to regulatory pressure, it is still a possibility. Tether is a central entity that holds reserve assets for depositors, earning interest on those deposits. Therefore, it will eventually be reviewed as a trusted third party. When this entity is included in the regulatory system, it means that the exponential expansion of cryptocurrencies will not work in a system where stablecoins are the general equivalent.
While crypto-backed currencies like Dai are prone to scaling issues, they are stable and largely immune to any heavy-handed regulation or any recommendations from the Financial Stability Board. However, there are concerns about the security of this stablecoin. When the volatility of risk assets such as ETH and BTC increases sharply, the "stable currency" such as Dai will no longer be stable.
Only industry self-discipline is the way out
The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission have announced that they have fined Abra, a crypto firm that allows users to trade tokenized stocks and foreign currencies. Both agencies fined Abra $150,000 each, and the company agreed to stop selling marked shares. As is customary in these types of settlements, Abra neither admitted nor denied the allegations.
This fully proves that regulators are not incapable of cracking down on DeFi. Over-centralization can be done by targeting companies, while decentralization can be done by cracking down on stablecoins.
Most DeFi protocols operate under the philosophy of progressive decentralization, which means that regulatory risk decreases as protocols successfully move to a fully decentralized phase. The duty of the regulatory authorities is to eliminate market operations that are obviously fraudulent or malicious, and to make the market environment more transparent and orderly, which is actually a good thing for the DeFi market.
Conclusion
risk warning:
risk warning:
Be vigilant against illegal financial activities under the banner of blockchain and new technologies. The standard consensus resolutely resists various illegal activities such as illegal fundraising, network pyramid schemes, ICO and various variants, and dissemination of bad information using blockchain.
