Stablecoins seem to be the (relatively) new kid on the block. Even though the first Stablecoin, BitUSD, was launched in 2014, it took about six years to get global buzz and attention. The same year, Tether Limited launched one of the most popular stablecoins today, Tether (USDT).
With the unprecedented growth in trading volume and market capitalization of stablecoins alongside blockchain developers introducing different stablecoins into the market, it is, therefore, expedient to identify what Stablecoins entail and everything you need to know before using stablecoins in the United States.
The United States of America has remained one of the countries that has the highest number of crypto users. Well, the reasons are not far for anyone to see. Many founders in the crypto ecosystem are born or reside in the country. This same reason is why the country is known for using stablecoins like USDT and USDC the most. So, in this article, we will try to explain what stablecoins are and how they are regulated in the United States of America. So first, let’s define what crypto stablecoins are.
Stablecoins: Explained In Simple Terms
Stablecoins are a class of cryptocurrencies and have every feature of a crypto token. They serve as a medium of exchange, and you can use them to facilitate crypto transactions. The main difference between a stablecoin and other classes of cryptocurrency is that Stablecoins have their values tied to a commodity, fiat currency or financial instrument.
That is, stablecoins are tied to the Dollar, Euro, Gold, stocks etc. For instance, Stablecoins such as USD Coin (USDC), Tether (USDT) and Binance USD (BUSD) are pegged to the US Dollar. These coins pegged to the US Dollar are also backed by the US Dollar reserves. Therefore, 1 USD is equivalent to $1.
Furthermore, Stablecoins are built and issued to maintain price volatility by locking reserves of the underlying asset as collateral. In some cases, the price stability is maintained by mathematical algorithms controlling the token supply.
Experts and developers of stablecoins say they are issued as alternatives to highly volatile cryptocurrencies such as Bitcoin and Ethereum. The question is that since they have both dominated the market, have stablecoins served as viable alternatives to the volatile tokens? Similarly, barely two years since the mainstream adoption of Stablecoins, have they been able to stand the test of time? These and other important questions will be answered in this article.
The next chapter will identify the kinds of stablecoins that users in the United States and every other part of the world can own and trade. All of these, you can find on several exchanges including broker software available on the Immediate Edge website.
Types Of Stablecoins
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There are three main types of Stablecoin— based on the mechanism used to stabilize their value. They include;
Fiat-Collateralized Stablecoins
Stablecoins that fall under the fiat-collateralized category maintain a reserve of fiat currencies. That is, the value of such stablecoins is pegged to a fiat currency.
In this category, a stablecoin can be collateralized by other assets, such as gold or silver, and commodities, like crude oil. However, most of the available fiat-collateralized stablecoins have their reserves in the US dollar. Popular stablecoins such as Tether (USDT) and True USD (TUSD) are backed by the US Dollar reserve.
Crypto-Collateralized Stablecoins
Like fiat-collateralized stablecoins are backed by fiat currencies, cryptocurrencies back crypto-collateralized stablecoins.
In the case of other crypto tokens backing a stablecoin, such stablecoins are overcollateralized. The value of the cryptocurrency backing it and held in reserves will exceed the value of the stablecoin issued. This over-collateralization is because the cryptocurrency backing the stablecoin is highly volatile.
That is, a cryptocurrency of $4 million worth would be held in reserve to issue $2 million or less in a crypto-backed stablecoin. This arrangement has insured about a 50% decline in the price of the reserve. A popular stable coin backed by another cryptocurrency is MakerDAO. It is backed by Ethereum and also pegged to the US Dollar.
Algorithmic Stablecoins
Algorithmic Stablecoins are somewhat different from fiat-backed or crypto-backed stablecoins. Algorithmic stablecoins may hold or may not hold reserve assets. The peculiarity of stablecoins in this category is that mathematical algorithms or computer programs are used to stabilize their values.
However, in case of a crisis or market meltdown, algorithmic stablecoins mostly do not have a reserve to fall back on. A popular algorithmic stablecoin is TerraUSD (UST).
It is worthy of note that in May 2022, the price of TerraUSD (UST), an algorithmic stablecoin, declined by about 60%. Instead of its peg to $1, 1UST that was equal to $1 fell to less than 50 cents.
Report showed that before the TerraUSD crash, the total market value stood at about $18.5 billion, and today, the total market value is worth less than $5 billion.
It is on this premise that all stablecoins, whether fiat/ crypto backed or algorithmic issued, come under heavy scrutiny by regulators in the United States and all other parts of the world.
Stablecoin Regulation in The United States
There has been a continuous call for the legislation of stablecoins in the United States. It was on this premise that Josh Gottheimer, a member of the US House financial committee, introduced the “Stablecoin Innovation and Protection Act 2022” on the 15th of February, 2022.
According to the bill, qualified stablecoins are to be issued by insured depository institutions and non-banking entities. The bill proposed the introduction of a qualified stablecoin insurance fund. The fund will safeguard the interest of stablecoin holders and allow the holders to exchange their stablecoins for dollar equivalents.
Similarly, the “Stablecoin Innovation and Protection Act 2022” will provide the Office of the Comptroller of the Currency (OCC) with oversight powers over the stablecoin.
It is important to know that the bill will increase the power and oversight functions of the Security and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). They will have the power to examine non-qualified stablecoins and cryptocurrencies. The first duty is to identify the “qualified” stablecoins and flag the “non-qualified” ones.
However, experts uncovered a loophole in the draft bill. Even though the draft bill seeks to distinguish accredited stablecoins from the broader market, it does not clearly state how the regulatory framework will cover the existing stablecoins. You would recall that the Securities and Exchange Commission states that cryptocurrencies should be categorized as commodities instead of Securities categorization.
The move to have a regulatory framework for stablecoin took another twist when Cynthia Lummis, a Republican senator and Kristen Gillibrand, a Democratic senator, proposed a more comprehensive framework. In June 2022, the duo unveiled the Responsible Financial Innovation Act (RFIA).
The newly unveiled Responsible Financial Innovation Act (RFIA) aims to bring all cryptocurrency products under the jurisdiction of the Commodity Futures Trading Commission (CFTC). According to the RFIA bill, the CFTC will maintain exclusive jurisdiction and oversight function on all matters relating to crypto products.
Similarly, the Responsible Financial Innovation Act (RFIA) introduces “Ancillary asset,” — which includes cryptocurrencies and digital assets that are provided or sold to investors in relation to the sale and purchase of a security. The bill says that an ancillary asset will be executed as part of an arrangement in an investment contract.
This definition of ancillary asset summarizes the stablecoins. It, therefore, seeks to treat stablecoins as ancillary assets and treat them similarly to other commodities as soon as the bill is passed into law.
The RFIA bill will exclude stablecoins from the purview of the Security and Exchange Commission (SEC). It also adds that digital assets from mining or staking will be excluded from taxpayers’ gross income. The bill, when implemented, will direct the Government Accountability Officer (GAO) to study the opportunities and risks of retirement when you invest in digital assets.
Asides from the overall stablecoin regulation in the United States, there are state-level regulations of stablecoins in the United States. Of significance is the Wyoming State that introduced digital assets regulation as far back as 2018.
It is important to know that Wyoming has a law that sets aside a legal foundation for smart contracts and clarifies how the law will treat digital assets. The Wyoming legal framework makes it easy for entrepreneurs to set up limited liability companies and help investors from other states of the US store their digital assets.
The city, unarguably the most crypto-friendly in America, passed another legislation in April 2021. This legislation granted legal status to Decentralized Autonomous Organizations (DAOs) in Wyoming. The legislation allowed banks in Wyoming, USA, to serve as custodians for digital assets. The arrangement is that banks will serve as the custodians while institutional investors will continue to retain direct ownership of their holdings.
Not to underestimate the strides of New York, Colorado, California and Ohio, which have adopted several crypto-friendly approaches. They have also introduced regulations covering various aspects of the cryptocurrency ecosystem that includes crypto mining, consumer protection, crypto businesses and other related ventures.
Is This The Best Time To Invest In Stablecoin In The United States?
Probably not!
This is 2022, and if you are considering investing in the stablecoin, you should understand that there are more than enough tokens in the market. In fact, day by day, token issuers and developers are rolling out new stablecoins. However, it is important to know that many have crashed or failed. Industry players attribute the crashes to several reasons.
It is on this premise that legislators in the United States want a clear and strict legal framework that deals directly with stablecoins. This call for clear legislation comes in the aftermath of the Terra USD collapse.
It is worthy of note that these stablecoins operate “shady deals” and give false disclosures of their fiat reserves and backings. For instance, the Commodity Futures Trading Commission (CFTC) sanctioned Tether Holdings Limited alongside its affiliates— Tether Limited, Tether Operations Limited and Tether International Limited. These stablecoin issuers were penalized with a fine of $41 million for the false claim that USDT was 100% backed by cash.
Findings showed that Tether actually had just 76% of its reserves in cash equivalent, while the remaining 24% were held in the form of corporate debt, precious metals and secured loans.
Our Verdict
For those following this article from the beginning, you would have identified what stablecoins are and the several types of stablecoins. Similarly, you would have understood how the US Government seeks to regulate the stablecoin and cryptocurrency ecosystem.
Using Stablecoins in the United States is not different from using stablecoins in other parts of the world. Albeit, the Joe Biden administration seems to prioritize Investors’ interests. Little wonder he signed an executive order in March 2022 for all relevant agencies— the CFTC and SEC to formulate a regulatory framework for digital currencies.
Furthermore, the US President's working group researched and reported that Stablecoins have high risks. Similarly, they have a negative impact on the stability of the financial market.
It is, therefore, advisable to steer clear of Stablecoins if you do not know how the price stability is maintained. To be on the safer side, it is important to invest in stablecoins that are backed by fiat, such as Dollars. Finally, always invest what you can afford to lose!
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
