Original title: "Testimony of Sam Bankman-FriedCo-Founder and CEO of FTX"
Compilation of the original text: Deep Tide TechFlow
Compilation of the original text: Deep Tide TechFlow
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Background of FTX
The FTX group of companies was established in 2019 as an exchange or marketplace for the trading of crypto assets. In the United States, the company is a federally regulated exchange operator with licenses from the Department of the Treasury and the Commodity Futures Trading Commission (CFTC). FTX was founded by three Americans, Samuel Bankman Fried, Gary Wong, and Nishad Singh, and has been operating since May 2019. The purpose of establishing FTX is to establish a digital asset trading and exchange platform, and is committed to developing into an innovative product with better user experience and sufficient protection for customers. FTX built the FTX.com exchange to develop a platform that is powerful enough for professional trading firms and simple enough for new users.
Given that the core founding team has experience in large-scale engineering systems at Google and Facebook, as well as trading experience on Wall Street, they have unique experience in building a trading platform from 0 to 1, and at the same time understand how the platform can be independent of legacy technologies or markets. structural impact. FTX aims to combine the best practices of the traditional financial system with the digital asset ecosystem.
Early success.The FTX.com exchange has been successful since its launch. This year, the platform has a daily transaction volume of about 15 billion US dollars, which currently accounts for about 10% of the global encryption transaction volume. The FTX team has grown to more than 200 people worldwide, most of whom are responsible for compliance and customer support. FTX Group's main international headquarters and base of operations are located in the Bahamas, where the company is registered as a digital asset business under the Digital Assets and Registered Transactions Act 2020.
In addition to offering competitive products, FTX is also known for being a high-performance and reliable exchange. During periods of high volatility across the digital asset market, FTX.com Exchange has experienced relatively short-term downtime and technical performance issues compared to key competitors. The focus on customers and product reliability is the key reason why FTX Exchange has been able to guarantee the fastest growth in trading volume among other exchanges since January 2020.
Core products include the FTX.com website (this website provides access to the market for encrypted assets. Platform users can also enter the market through the FTX application on the mobile side.), a vertically integrated single technology stack (supports the order matching engine.), a Application programming interface or API, custody services and wallets for clients, and a settlement, clearing and risk engine system. In day-to-day transactions, only buyers, sellers and exchanges are involved.
FTX Group has operations and licenses in dozens of jurisdictions around the world, including the United States. As of this writing, the FTX platform has several million registered users, and the FTX US platform has approximately one million users. For FTX.com, approximately 45% of users and clients are from Asia, 25% from the European Union (EU), and the remainder from regions other than the United States (excluding persons from sanctioned countries). Almost all FTX.us users are from the United States.
US business.FTX serves U.S. clients through the FTX US platform, which also includes FTX US Derivatives. FTX US is an independent business entity with a management structure and capital structure similar to the entire business family, with its own website FTX.US and mobile application. Like FTX.COM, the core product of FTX US is a digital asset spot exchange. Like other encryption platforms in the United States, this trading platform is enabled by having a compliance license. FTX US is headquartered in Chicago and has offices in other cities across the United States.
FTX US Derivatives was formed through the acquisition and rebranding of LedgerX and is now a business unit offering derivatives such as futures and options contracts on digital commodities to both US and non-US persons. FTX US Derivatives holds four business licenses issued by the Commodity Futures Trading Commission (CFTC): Designated Contract Market (DCM) License, Swap Execution Facility (SEF) License, Designated Clearing Organization (DCO) License and Chief Process Officer (CPO) license. Prior to the acquisition, the business was the first crypto-native platform to receive a Designated Clearing Organization (DCO) license from the U.S. Commodity Futures Trading Commission (CFTC) in 2017, a milestone for the agency and the cryptocurrency industry as a whole. The license was later amended in 2019 to allow the clearing of futures contracts.
Commitment to a diverse workforce. FTX has a proud team of employees and believes that a team culture of mutual respect and mutual cooperation is one of our key strengths. This team culture comes from the diversity of the team and requires empathy, understanding and humility. These characteristics are conducive to business development, and it is also the main reason why FTX can successfully understand customer needs and provide customers with suitable products. fTX employees come from all over the world and have different ethnic backgrounds, and 60% of the team are women in senior management.
Commitment to climate impact mitigation. FTX attaches great importance to environmental issues and has always been committed to reducing the impact of our life and work on the global environment. As a company, FTX has taken several important steps to ensure this. Here, I would like to explain to you one by one why FTX has minimal impact on the environment, and explain the additional measures FTX has taken to further reduce its impact on the environment.
1. FTX has no factories or physical products, so it does not utilize the global transportation network - the global transportation network is an important source of energy consumption. FTX has a small number of employees and not many actual office locations. It only rents a few small offices around the world and operates online. Therefore, FTX's corporate operations will not have a direct impact on climate change on a global scale.
2. Depositing and withdrawing digital assets on the FTX platform does consume energy because a public chain is required to facilitate and record these transactions. However, more than 80% of the deposits and withdrawals on the FTX platform use the low-cost, carbon-compliant proof-of-stake (PoS) public chain. These PoS-based public chains are in contrast to Proof-of-Work (PoW)-based public chains, which consume large amounts of energy to maintain the network (the Bitcoin blockchain is an example). By using the public chain of the PoS mechanism for the vast majority of FTX deposits and withdrawals, FTX has greatly reduced the impact of the blockchain on the climate. In order to reduce the energy consumption caused by the remaining 20% of deposits and withdrawals, FTX subsidizes the blockchain network fee to share the cost of paying for this energy consumption. FTX separates deposits and withdrawals. Transactions and transfers in the exchange (that is, the operation activities of most users) do not require public chain activities, but only need the amount of energy required to run a network-based trading place.
3. At the same time, FTX is still trying to bear the part of our mining environment costs related to the public chain, and has purchased carbon offsets to neutralize these costs. Due to the decentralized nature of mining activities, it is not easy to identify the source and proportion of energy consumption, so it is extremely difficult to speculate on the cost of energy consumption and carbon output related to blockchain mining. Still, FTX estimates its cost at $1 million and has purchased a total of 100,000 tons of carbon offsets through two suppliers for $1.016 million. In addition, FTX, through its affiliate FTX Climate, has created a comprehensive program focused on solutions that are as impactful as possible on climate change. In addition to achieving carbon neutrality, our initial plan also funds research that we believe can make a big impact, supporting other special projects and carbon removal solutions. FTX plans to invest at least $1 million annually through FTX Climate. If you are interested, you can go tohttps://www.ftx-climate.comRead more.
4. FTX believes that the energy consumption and impact of PoW networks should be evaluated in an appropriate context. We believe that evaluation activities should include considering their benefits, understanding their differences from PoS mechanism networks, and how each type of network is utilized and developments, and comparisons with other energy-consuming activities and even industries. For example, Bitcoin already brings benefits to many people from the perspective of access to financial products, asset transfer, and wealth creation, and these benefits should be weighed against network energy costs.
Additionally, while the energy consumption of PoW networks has drawn attention, transaction activity on PoS networks is growing dramatically due to their ability to process more transactions in less time and at lower cost. FTX believes that these PoS networks will become increasingly important over time. Over time, the PoS network will continue to minimize the climate impact of the entire blockchain. Finally, the energy consumption of PoW blockchains is relatively small compared to other industries, especially the Bitcoin network, which is often compared. Among assets that trade futures on CFTC-regulated venues, bitcoin actually ranks low in terms of environmental impact relative to traditional, physically mined commodities, oil, livestock, and other assets that have an environmental impact.
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explore
In this article I will explore the following topics:
(1) Outline the products offered by FTX and their role in the digital asset economy;
(2) Stablecoins and how to address the risks associated with these instruments;
(3) The current state of regulation and the principles guiding policymakers to achieve good policy outcomes.
In exploring these issues, I will distinguish between FTX's non-U.S. business and U.S. business, using FTX International and FTX US to denote the two, respectively.
My statement includes several key themes, as the full text touches on a variety of topics.
1. FTX empowers individual investors and consumers. We offer products that are readily available and affordable so investors and consumers can achieve their economic goals by making simplified choices. They have easy access to financial products anywhere (many do so with their phones), FTX doesn't have those gatekeepers who assess rents, and doesn't put investors at risk in the process - which is what the digital asset ecosystem is like Impact the real day-to-day lives of those involved and help them achieve financial security in the process. Such easy access to financial instruments provides a supportive and inclusive policy environment (balanced with other policy objectives) that is set to further empower individual investors.
2. FTX has designed and provided a market structure platform with reduced risk. To be sure, there are some irresponsible actors in the digital asset industry who have made headlines.But FTX is not this kind of person. In fact, FTX has built a resilient and low-risk platform, which is also one of its competitive advantages. Therefore, as long as policymakers are willing to be flexible and allow a risk-reduced, 24/7, direct-to-investor market structure to exist and exempt it from the structural requirements of traditional intermediary markets, the FTX model should be able to accommodate the highest global risk standards any regulatory framework. However, this regulatory structure is not always the best fit for individual investors.
3. FTX has been regulated by the highest federal standards in the United States, including the supervision of the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Department of the Treasury, as well as strict supervision by other global and state regulatory agencies.As discussed below, FTX embraces and aspires to operate under a unified regulatory regime across the federation. In any event, FTX views official sector regulators as stakeholders and partners with whom FTX needs to engage in an ongoing, active dialogue, a view that also applies to the U.S. Congress. We at FTX are always welcome, and we are eager to share our insights into the digital asset industry and how it can continue to improve people's daily lives.
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1. FTX products and their role in the digital asset economy
Core product: digital asset exchange.As mentioned above, FTX's core products are its digital asset exchanges, FTX.com and FTX.us. On these two platforms, users can conduct spot transactions of digital assets with other users in exchange for cash, stable coins and other digital assets. Users can place a variety of different order types on the central limit order book (CLOB) of the spot exchange. Users are able to place an order at a specific price (limit order), or trade on the central limit order book (CLOB) at the best price displayed. There is a powerful matching engine in the system that connects the orders of buyers and sellers and displays the best available prices.
Futures and volatility contracts related to digital assets are listed on the platform regardless of leverage. The leverage limit on the FTX.com platform is 20x, and so far, leverage is not available to FTX.us users (although it does offer other forms of credit facilities to qualified contract participants - see below). These platforms have listed cash settlements for quarterly settlements (and perpetual futures contracts only on FTX.com). Additionally, FTX.com offers MOVE volatility contracts. MOVE volatility contracts are similar to futures, but instead of expiring on the price of a digital asset, they expire on the dollar amount that Bitcoin's price moves over a day, week, or quarter. FTX.com also lists Bitcoin options for trading. Finally, FTX US Derivatives offers Bitcoin and Ethereum (ETH) options, futures, and swaps (swaps) to US users.
To pay initial and maintenance margins, users of derivatives and leveraged products post collateral on their accounts in the form of cash, stablecoins or other digital assets. The exchange also integrates risk management and back-office systems for clearing and settlement of trades, which includes updating ownership records (clearing) of digital assets traded or digital asset futures and options contracts, and transferring value between user accounts (settlement), using delivery versus payment or delivery versus delivery. Last week’s market events demonstrated that FTX’s core product has effective risk-reducing properties. On the evening of December 3, 2021, the value of various digital assets fell in a short period of time, and the trading volume of these assets on the FTX platform increased significantly. This is especially evident when the FTX risk engine is activated and begins to liquidate related client positions on the platform. The market decline started late, coming well after the US markets closed. However, since digital assets are traded 24/7, the FTX risk engine is able to react immediately to a drop in asset price and begin liquidating positions immediately before any client accounts become net negative. If this happened in the traditional trading market, the risk management system would not react immediately, but would wait until the market reopened more than two days later. During this time, the client's position may drop sharply before the opportunity to prevent losses in the client's account arises. Importantly, FTX's risk model avoids the systematic storage of such risks during weekends or other market closures, taking the approach of immediately addressing at-risk positions and accounts in real-time.
An off-site portal for arranging and matching user orders.FTX.com also offers an off-exchange portal so users can connect with other big users, request quotes for spot digital assets and trade directly. The portal forwards quote requests to large users, returns quotes, and allows users to place orders. It serves a similar role to other facilities in traditional markets - where a central limit order book is not used to match trades.
Margin lending.FTX platform users can lend their digital assets to those who need digital assets for spot trading. If users want to obtain digital assets that they do not have (including qualified users on FTX.us), they can post cash, stable coins, or provide collateral in the form of other digital assets held in their accounts, and lend to those who are willing to lend Users of digital assets borrow money. The FTX platform has a built-in loan book system, which has the function of matching borrowers and lenders.
NFT market.FTX operates a marketplace where users can mint, buy and sell non-forgeable tokens (NFTs). NFTs are tokens that are not interchangeable with any other token. They can be used in many forms, for example, in exchange for physical objects or experiences (such as movies or phone calls), or in connection with digital images, and so on. FTX's NFT marketplace is conducted through an auction system. In addition, users can also buy directly at the current sales price set by the seller. Users can choose to display their NFT collections on the FTX NFT Market Portal, continue to buy or sell on the NFT Market, or do both. The NFT marketplace is open to both FTX.com and FTX.us users.
FTX Pay (FTX Pay).FTX Pay is a service for merchants to accept digital assets or fiat currency payments. Users can choose to fund their FTX account with ACH or credit card, and then use their FTX account to pay registered merchants. For digital asset payments, the FTX account of the relevant user will be debited for the amount of the selected digital asset, which is equivalent to the amount due to the merchant. FTX facilitates payments to merchants by providing payment infrastructure.
mortgage.FTX.com offers users the ability to "stake" certain supported digital assets on the platform. Users can obtain staking rewards by staking these digital assets; in addition, users can use certain tokens on the FTX platform to obtain and unlock some benefits, such as reduced transaction fees, withdrawal fees, and other rewards. Generally speaking, users can "unstake" their digital assets at any time, but need to wait until after a delegation period or unstaking period has passed. As for digital assets with certain characteristics, FTX may allow users to unstake immediately by paying an unstaking fee.
Types of digital assets on the FTX platform.FTX has developed listing standards and frameworks that determine which digital assets can be listed on the FTX platform. Part of the listing criteria and framework requires assets to be assessed for safety, compliance risk, legal risk, technical risk and other factors. On FTX.com (also not available to US users), FTX already lists about 100 stablecoins and other digital assets on its spot exchange. Digital assets include tokens such as Bitcoin (BTC), Ether (ETH), Uniswap Protocol Token (UNI), Chainlink Token (LINK), Solana (SOL) and Aave (AAVE). Stablecoins include tokens such as USDT (USD Tether) and DAI.
On FTX.us, FTX takes what we consider to be a conservative approach to listing and trading digital assets. Due to the stricter listing criteria on FTX.us, far fewer tokens are listed for trading on FTX.us. The FTX.us platform has taken steps to avoid listing assets with characteristics of U.S. securities. It lists assets and tokens more akin to bitcoin and ethereum (both of which have been specifically identified by the CFTC as commodities subject to its jurisdiction).
All in all, our quick review of these products has led to the following conclusion: the current digital asset economy and the products on the FTX platform are very similar to the products in the traditional financial field. This reflects the maturity of the industry, as more sophisticated investors enter the space and demand products and solutions they are familiar with in traditional finance.
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2. The benefits of stablecoins and their risk responses
FTX believes that stablecoins are one of the most important payment innovations in the digital asset industry, and users on our platform rely heavily on using stablecoins for payments and settlement transactions. FTX recognizes the important work of the President’s Working Group on Financial Markets, and we read with interest the recently released “Report on Stablecoins.” FTX has shared recommendations on how best to ensure the safety and soundness of stablecoins, which I list here as a piece of evidence for this statement, clickhttps://www.ftxpolicy.com/stablecoinslink to read.
In addition to our recommendations on stablecoin regulation, FTX believes there are two key points worth raising to this committee, which are listed here for readers’ reference.
First, the committee should understand that FTX believes there is no bank-type federal regulation of stablecoin issuers, that FTX allows stablecoins on our platform and does use them for our own corporate money transfers because we Trust them to reduce risk. In fact, FTX has chosen to use stablecoins for very large transfers of funds, including our M&A activities, rather than routing payments through traditional banking regimes.
therefore,
therefore,FTX is skeptical of the notion that bank-like regulation of all stablecoin issuers is the best solution for consumers.Our concern is that in either case, bank-like regulation could inadvertently introduce risks that stablecoins currently avoid. However, we recognize that issuers and the stablecoins they issue should meet a minimum standard of certain core requirements, including:
1) Daily proof of which assets (cash, bonds, etc.) are backing the stablecoin
2) Regular audits to confirm whether the asset support meets the requirements
3) Impairment of assets with moderate risk
4) Provide an open line for law enforcement to blacklist addresses and people associated with financial crimes.
These core requirements can be met in a variety of regulatory contexts, including regulators other than federal banking regulators, such as the CFTC or the Securities and Exchange Commission (SEC). In fact, members of Parliament have already introduced legislation targeting these regulators.
Second point,FTX believes that continued use of stablecoins with properly standardized safeguards will protect the U.S. dollar’s hegemony as the world’s reserve currency, rather than pose a threat to it.Again, this argument may seem counterintuitive, but the most widely used stablecoins today are pegged to the U.S. dollar, so ultimately those stablecoins are also denominated in U.S. dollars. Such a system would only facilitate, not threaten, the world's continued reliance on the dollar. In fact, FTX’s concern is that overly onerous regulation of stablecoins could put the U.S. dollar’s reserve currency status at risk, as stablecoin issuers could be forced to move to other jurisdictions and focus their energies outside of the U.S. dollar stablecoins pegged to fiat currencies.
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3. The market regulation of the US encryption platform and the challenges faced by its operation
The Commission has in the past asked thoughtful questions about the best way to police cryptocurrency platforms offering transactions, and some members of the Commission have indeed proposed legislation on the topic. Other members questioned the need for federal-wide legislation. We are very grateful for that.
Last week, FTX published “Key Principles of FTX’s Cryptocurrency Trading Platform Market Regulation.” I list it here as a piece of evidence for the statement, readers can clickhttps://ftxpolicy.comto view. The document was designed and published to help the Commission and other policymakers consider how best to protect investors and serve the public through sound market regulation of cryptocurrency platforms.
There are some details in FTX's key principles document, but I want to highlight a few here for the committee's consideration.
1. When considering a framework for overseeing spot and derivatives cryptocurrency trading markets, policymakers should take a principles-based approach, drawing on existing policy objectives that apply to traditional capital and derivatives markets.These existing policy objectives are essentially common to all markets and include: ensuring the protection of customers and investors, promoting market integrity, preventing financial crime, and ensuring the safety and integrity of the overall system. FTX believes that any new policy related to cryptocurrency platforms should serve these goals as well, which necessarily means Many principles are relevant to our industry. FTX believes it makes sense to make appropriate use of these objectives, as well as the experience and expertise of the CFTC and SEC.
2. FTX and other cryptocurrency platforms have brought important innovations to trading, and a sound policy framework should preserve as much of these innovations as possible, as these innovations help minimize risk, promote capital efficiency and protect investors in order to better serve the public. As mentioned in this statement, some key innovations include: (1) an automated risk management system that ensures that client accounts trading multiple different assets do not net negative on client positions; (2) 24/7 trading hours, It reduces risk by allowing the market and its systems to manage risk without disruption and prolonged market time intervals; (3) allowing for a disintermediated market structure that gives all investors the same equal opportunity to enter the market, helping to minimize conflicts of interest; (4) All platform users receive market data for free, which aligns the interests of platform operators with those of investors.
3. A successful policy framework should allow cryptocurrency platforms to offer spot and derivatives trading of cryptocurrency assets under a unified system, with a set of rule books and a technology platform to manage the risks associated with all trading activities in customer accounts .In jurisdictions with mature markets, such as the US, the regulatory framework is designed to address the fragmentation of markets for securities, commodities and derivatives of these assets. FTX has demonstrated that bringing together assets and derivatives markets for those assets brings important benefits to market participants. These benefits stem from having one rule book that applies to all trades, having one collateral and risk margin scheme, and a single technology stack from the front end (user interface) to the back end (settlement and risk management positions). Because of its risk-mitigating and customer-protecting attributes, public policy should allow this single rule-book model to continue.
To achieve this, in places such as the United States where there are multiple market regulators, the various regulators should cooperate and can use their powers where applicable to accommodate this cryptoasset model. Our key principles paper proposes a scenario whereby crypto platform operators could opt-in to a joint CFTC and SEC regulatory program, with one of the two market regulators acting as the primary regulator and the other as a secondary regulator. This model is familiar to global market regulators, and it requires shared responsibility and cooperation among regulators. A feature of this model is the need for a primary regulator, which may be necessary to ensure the accommodation of a rulebook, a matching engine and a risk engine supported by a technology stack. It is these characteristics that again reduce the risk.
FTX believes that this model can basically be created under the existing CFTC and SEC agencies, but there may be some other policy gaps, including the appropriate treatment and disclosure of certain types of encrypted assets-which are not exactly A security, or its function and purpose, may change over time, but it will in any case meet the CEA's definition of a commodity. While some of these tokens are securities, the classification of others is unclear under existing definitions, so policymakers should probably establish more granular definitions and different disclosure frameworks for certain assets. In any case, the key principle of FTX is to once again imagine that all tokens and derivatives based on them can be traded on the same platform, under the same set of rule books, and have a unified system to manage all transactions with customer accounts risks associated with the activity.
Fourth, an appropriate crypto-asset market regulatory policy framework should maintain market structure neutrality and explicitly allow for the existence of disintermediated markets.in conclusion
in conclusion
FTX thanks the committee for giving us the opportunity to share information about the digital asset ecosystem and suggest ways to continue to reap industry benefits and deliver on promises in a responsible manner.
Stablecoin Regulation
appendix
Stablecoin Regulation
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Background on Stablecoin Regulation
As the cryptocurrency industry matures, it is critical to have a strong regulatory regime in place and grow with it. In this way, the cryptocurrency industry takes seriously its duty to protect consumers, ensure transparency, and prevent illicit activity, while still allowing for innovation and growth.
What are stablecoins?
What are stablecoins?
Let's start with the core question: What exactly is a stablecoin?
A wide variety of stablecoin designs are used in the cryptocurrency ecosystem. For the sake of illustration, we assume in this article that USD is the stablecoin, although parallel assets do exist for EUR, GBP, and others. We envision it with a 1:1 exchange ratio; that is, 1 token represents 1 USD. We also envision the token's ticker as STBC.
In this conception, a hypothetical stablecoin — STBC — is a blockchain-based asset that can be exchanged for U.S. dollars. This is usually achieved through the following mechanisms and arrangements:
Reserves: Typically, a stablecoin is backed by one or more U.S. dollar accounts or other similar assets, often held by banks, in the name of the stablecoin's originator, issuer, or other similar institution. The dollar value of these assets should be at least the stablecoin's supply.
Token: STBC is a blockchain-based token, one token representing $1 (backed by the creation/redemption process, described below). These tokens can be issued by private companies, central banks or decentralized protocols.
Creation/Redemption: In order to create 1 STBC token, eligible users must deposit 1 USD into a reserve account. In return, the protocol mints 1 new STBC token and returns it to the user.
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What are the benefits of stablecoins?
In our opinion, stablecoins are one of the most important innovations in the cryptocurrency industry.
Let's say you want to transfer $20 to a friend. What are your options?
a) You probably want you and your friends to both use the same peer-to-peer money transfer app (like Venmo), and then each figure out individually how to send money to/from that app.
b) You can send your friend a wire transfer of $20. This can take a day and cost more than $5, or a week for international money transfers and can be much more expensive.
c) If you and your friend both use US dollar bank accounts, you can send $20 via ACH. Then, the transfer will not be fully settled within a few months, and both parties to the remittance will face"refund risk"。
d) You can go to an ATM and withdraw $23, pay the $3 fee, and give $20 to your friend, who then has to figure out how to use the paper version of the dollar bill.
e) You can send 20 STBCs to your friend's cryptocurrency wallet; if using an efficient blockchain (or both parties use the same exchange), the transfer will arrive within a minute, and the transaction fee is only one cent of a cent small portion.
Option (e) gives a convincing example to demonstrate that stablecoins are an efficient method of remittance.
Taking our real-world use case a step further, imagine a user wants to build a blockchain-based application. How should users of the app store and withdraw assets?
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What are the risks of stablecoins?
There are three main risks associated with stablecoins:
Reserve Volatility Risk
If the stablecoin is backed by something other than dollars in a bank account, the asset could lose value against the dollar. For example, if you back the stablecoin with 1,000,000 tokens issued by the $1,000,000 SPY (S&P500) ETF, and the stock market drops 5%, you are left with $950,000 backing 1 ,000,000 stablecoins, which means that "stable" coins have effectively devalued, at least in terms of their purported redeemable reserves!
Unlike investment products where customers benefit from the appreciation of assets backing the product, stablecoins generally cannot be worth more than $1 because customers can always create more for each $1. This means that the core idea behind assets backing stablecoins should be to focus on assets with very low volatility, which are very similar to the U.S. dollar. U.S. Treasuries may be an appropriate asset for a stablecoin reserve; if Bitcoin is used, it would have to be over-collateralized, reducing the risk of loss for stablecoin holders. The risk of backing 100 stablecoins with $101 of BTC is unacceptable: just a 2% drop in the Bitcoin market would leave the stablecoins under-backed and no longer fully convertible to $1. Backing 100 stablecoin stocks with $400 of BTC, on the other hand, is much more defensive as 75% volatility risk is low before reserves have a chance to reduce risk. Any stablecoin issuer or designer must have a transparent, robust risk model to mitigate the volatility of its reserves and determine which assets are suitable for reserves.
redemption risk
A related concern is that a user could have 1,000 STBCs, go to the card issuer to redeem their STBCs, and be declined.
This would happen if reserves had in fact run out of dollars. So there is nothing to redeem the STBC; this probably means that the foreign exchange reserves are not USD and depreciated.
Alternatively, this could also happen if the issuer decides arbitrarily to block your redemption, perhaps to preserve a more impressive metric for the STBC.
In either case, the lack of redemption ability (or lack of transparency of the redemption process and requirements) poses a risk to users.
financial crime
A final risk with stablecoins is that they could be used for financial crimes or to finance illicit activities.
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What is a reasonable regulatory framework for stablecoins?
As mentioned above, we believe that stablecoins present a significant positive use case to the world and have the potential to transform the payments and remittance industry. Stablecoins will revolutionize the payment industry in the future, greatly reduce friction and transaction costs, and bring reliable and usable value transmission channels to people around the world. Therefore, we believe it is important to ensure ongoing regulatory discussions around a stablecoin framework approach, while being based on a pragmatic structure that equally addresses usability, reliability, transparency, consumer protection, and the identification and prevention of financial crime The problem.
We look forward to engaging with regulators on what such a framework might look like. There are many different approaches, and we are happy to get feedback from regulators and other players in the cryptocurrency industry, and welcome their active participation.
As noted above, stablecoins have real risks and efforts should be made to develop frameworks to mitigate these risks.
Therefore, while we look forward to continuing discussions on the details, we will support the proposal for a transparency-based reporting and registry for stablecoins.
A proposed framework might look like this:
a) Stablecoins must be issued to US users under the supervision of one or more US regulators and must be registered on the official list of "regulated stablecoins".
b) The registration itself will be based on notice filing, with a focus on transparency and reporting, while clarifying obligations for record keeping, reporting and periodic inspections. Regulatory authorities authorizing the program will have the authority to decertify registered stablecoins.
c) Registration will include publication of a daily list of reserves detailing the total net value of stablecoin reserves, broken down into exact amounts for specific categories (eg: "XYZ Bank $100; US Treasury Bills $95; US Corporate Level 1 $50 for commercial paper; $30 for commercial paper above Tier 1 for European companies; $10 for [other appropriate assets permitted by regulations and stablecoin registration documents]”)
d) require issuers to maintain "adequate" reserves. This can be defined by discounting various types of reserves. For example, in an FDIC-insured bank account, the haircut may be 0.10% for U.S. dollars; 1% for U.S. Treasury bills; 10% for Class 1 commercial paper; 15% for Class 1 commercial paper; , British pound, Japanese yen, Swiss franc, Canadian dollar, Australian dollar, Singapore dollar, Hong Kong dollar, etc. for a 20% discount; and a 50% discount for Bitcoin.
e) In order to confirm the representativeness of the reserves, accounting firms are required to conduct an audit every six months.
f) Stablecoins are required to have clear and transparent redemption requirements (e.g. based on know-your-customer documentation) and a clear customer complaints process if redemptions are denied.
g) To address financial crime, all registered stablecoins must be on a public ledger, and the creation and redemption process must be sufficiently structured to ensure that stablecoins are linked to illicit activity (through on-chain monitoring and analysis tools, observed through a suite of standard blockchain monitoring software) cannot be redeemed.
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