Major Banks Explore Stablecoins Amid Regulatory Clarity

Traditional financial institutions are increasingly exploring the potential of stablecoins, with major players like Bank of America and Standard Chartered considering the launch of their own stablecoins. This move follows JPMorgan's introduction of JPM Coin, now rebranded as Kinexys Digital Payments, which facilitates transactions for institutional clients on the Kinexys blockchain platform. Mastercard is also joining forces with Bleap Finance to enable direct spending of stablecoins onchain, integrating blockchain assets with Mastercard’s global payment infrastructure. Visa has joined the Global Dollar Network (USDG) stablecoin consortium, becoming the first traditional finance player to do so. Intercontinental Exchange (ICE), the parent company of NYSE, is investigating the use of USDC and US Yield Coin within its derivatives exchanges and other markets.

This renewed interest in stablecoins is driven by regulatory clarity and acceptance. In the United States, Congress is considering legislation to establish formal standards for stablecoins, while the European Union’s Markets in Crypto-Assets regulation requires stablecoin issuers to adhere to specific financial standards. The UK is also planning consultations to draft rules governing stablecoin use. The Trump administration's executive order 14067 supports the development of lawful and legitimate dollar-backed stablecoins, further signaling the era of stablecoins pegged to the USD. The launch of USD1 by Trump’s World Liberty Financial company underscores this trend.

The stablecoin landscape is dominated by two major players: Tether’s USDt (USDT) and USDC, which together capture 93% of the stablecoin market cap. These stablecoins are centralized and fiat-collateralized, meaning a centralized company maintains reserves of the assets and issues tokens representing a claim on the underlying asset. USDe, a relatively new stablecoin, holds about 2% of the market cap and uses an unconventional mechanism based on derivatives in the crypto market. There are three primary mechanisms for stablecoins: centralized fiat-collateralized, decentralized cryptocurrency-collateralized, and decentralized uncollateralized.

Stablecoins are designed to overcome the volatility of cryptocurrencies by being pegged to stable assets and following mechanisms that sustain the peg. However, stablecoins pegged to volatile assets like gold or electricity may not be suitable for those seeking a no-risk asset. USDe maintains a peg to the USD through delta hedging, generating a 27% yield annually, but this comes with inherent risks due to its reliance on derivatives. The collapse of TerraUSD (UST) was not due to a reserve problem or mechanism but rather the actions of fraudsters and manipulators. The Terra blockchain offered a 19.5% yield on staking through the Anchor protocol, which was unsustainable and allegedly a Ponzi scheme. Galaxy Digital reached a $200-million settlement with the New York Attorney General over claims of promoting LUNA without disclosing its interest in the token. Do Kwon, founder of Terra, was found liable for securities fraud and faces multiple charges in the US.

Most stablecoins are centralized assets collateralized by a company that could potentially misuse customers’ funds or falsely claim that reserves fully back a stablecoin. To prevent such misconduct, regulators should closely monitor these companies and set rules similar to securities laws. Centralized stablecoins run counter to the notion of blockchain and the premise of Bitcoin, which was designed to be a decentralized payment platform free of intermediaries. If a stablecoin is centralized, it should follow the regulations of any other centralized asset. Perhaps it is time to develop an algorithmic, decentralized stablecoin that is free of any control by a company, bank, or government, reviving the core notion of blockchain.