Regulation bolsters the growth of stablecoins, yet questions remain about whether it provides adequate security.
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In a significant move towards embracing digital assets, emerging regulations in the European Union and the United States are accommodating the transferability of stablecoins. This development is set to facilitate seamless cross-border transactions and integrate stablecoins into traditional finance systems.
On September 1st, the Eurosystem is set to discuss the next steps in wholesale settlement, potentially paving the way for stablecoin integration. However, regulators must tread carefully to avoid creating a regulatory gap for stablecoins. The principle of same risk, same activity, same regulation should be adhered to, ensuring that stablecoins are subject to the same rules as traditional financial instruments.
The proposed clearing arrangement for stablecoins mirrors the one used by banks, where participants accept each other's liabilities, aiming to simplify stablecoin transfers. This approach, similar to how cheques work, could foster a level playing field, provided the rules for issuing and transferring money are consistent across all models.
Regulatory harmonization in the stablecoin industry is expected to promote compliance, reduce legal and operational uncertainty, and foster market trust. However, it may also lead to market consolidation, favouring well-capitalized, regulated entities with existing infrastructure, such as banks and major fintech firms.
The GENIUS Act, a U.S. legislation, aligns domestic stablecoin rules with global frameworks like Singapore’s and the EU’s MiCA. It requires issuers to maintain 1:1 reserves and operate through licensed entities, which experts predict will consolidate stablecoin market share among established players.
However, non-intermediated stablecoin transfers (peer-to-peer transactions without a regulated intermediary) pose significant challenges for anti-money laundering (AML) and combating terrorism financing (CTF) regulations. These transfers are difficult to trace and monitor, increasing the risks of illicit use. The GENIUS Act addresses this by imposing obligations on digital asset service providers to ensure they do not support or facilitate noncompliant stablecoins and to maintain counterparty due diligence.
For countries still considering stablecoin regulation, a better approach would be to map stablecoins into existing regulation or ask stablecoin issuers to elect any of the existing regulatory models. This approach would maintain a level playing field while ensuring compliance with AML and CTF regulations.
In most jurisdictions, entities issuing money have a choice between being a bank, an e-money institution, or an asset manager. Compliance frameworks exist to ensure money is transferred only upon certain checks to avert money laundering and terrorism financing and observe sanctions.
The use of blockchain as a payment processing platform offers tamper-evident records and advanced functionalities, making stablecoins an attractive option for digital transactions. However, the easy transferability of stablecoins creates new challenges for compliance.
Ousmène Mandeng, Senior Adviser at Accenture and Visiting Fellow at the London School of Economics and Political Science, emphasizes the need for harmonized regulation to enable borderless and frictionless transfers. The use of permissionless blockchains offers important economies of scale, but it also presents regulatory challenges due to the anonymity they provide.
In conclusion, regulatory harmonization promotes compliance and can intensify competition among compliant stablecoin issuers while potentially raising barriers for smaller or unlicensed operators, driving consolidation. Meanwhile, non-intermediated transfers strain AML and CTF frameworks by limiting transparency and control, compelling regulators to rely on intermediaries for enforcement and compliance oversight.
- The digitalisation of the finance industry, including the use of AI and data, amplifies the need for harmonized regulations, especially in the emerging stablecoin market.
- The seamless integration of stablecoins into traditional finance systems highlights the risk of creating a regulatory gap, necessitating careful regulation to ensure same risk, same activity, same regulation.
- The potential market consolidation in the stablecoin industry, favoring well-capitalized entities, underscores the importance of public finance and business collaboration to maintain a level playing field.
- As stablecoins offer advantages for digital transactions, the ease of their transferability presents new challenges for anti-money laundering and combating terrorism financing regulations.
- Economies of scale from the use of permissionless blockchains in stablecoin transfers necessitate addressing regulatory challenges, ensuring AML and CTF compliance.
- Regulatory harmonization will enable borderless and frictionless transfers, intensifying competition among compliant stablecoin issuers, while potentially raising barriers for smaller or unlicensed operators and driving consolidation.
