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Stablecoins present new dilemmas for regulators as mass adoption looms

Monday, 10 May 2021


Stablecoins present peculiar challenges to regulators. Although there is no single, agreed-upon definition of a stablecoin, the common denominator of the commonly used definitions is that stablecoins are designed to maintain a stable value in relation to a specified currency, asset or pool of such currencies/assets. They are contrasted with regular cryptocurrencies, which have no such stability mechanism and whose values tend to fluctuate, sometimes even substantially. 

Related: All risk, no gain? The vague definition of stablecoins is causing problems

Stablecoins do not denote a uniform category but represent a variety of crypto instruments that can vary significantly in legal, technical, functional and economic terms. Despite its name, it is important to stress that this asset does not guarantee stability, which depends on the specific design features and governance mechanisms.

Related: Algorithmic stablecoins aren’t really stable, but can the concept redeem itself?

Regulatory attention to stablecoins

Stablecoins have been on the rise since 2014, when the first stablecoin, Tether (USDT), was launched, and even though they have become an important digital asset in the blockchain ecosystem within a few years, they have not attracted much regulatory attention. This abruptly changed with the announcement of the Libra project in June 2019 by the Libra Association, of which Facebook is one of the founding companies.

Related: The way of the stablecoin: A journey toward stability, trust and decentralization

Almost immediately, many financial authorities around the world — including the Financial Stability Board, European Central Bank, Bank of England, United States Federal Reserve as well as the U.S. House of Representatives Committee on Financial Services — issued strong statements on Libra, where the collective sentiment was caution and concern, highlighting the serious potential risks.

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