Anika Begay
“Ensuring that a stablecoin maintains its peg even under stressed market conditions is a solvable problem,” Catalini says. In an optimal scenario, he says, reserves would consist exclusively of “high-quality liquid assets,” such as short-term U.S. Treasuries, and providers would maintain an “adequate capital buffer.”
In the two years since Celsius filed for bankruptcy, Tether has voluntarily increased the size of its USDT reserve buffer and slightly reduced the portion of its reserve that is collateralized loans, from 6.76 percent to 5.55 percent. But Tether “doesn’t operate under a framework that would limit what the directors of the company can and can’t do,” Catalini says. “That’s where regulation is needed.”
There have been some attempts to regulate the stablecoin industry in mainstream markets. Earlier this year, rules for stablecoin issuers came into force in the EU under the Markets in Crypto Assets (MiCA), including requirements regarding the amount of cash a stablecoin issuer must hold, the types of assets that can constitute a stablecoin reserve, the safe custody of reserve assets, and more.
In April, U.S. Senators Cynthia Lummis and Kirsten Gillibrand proposed a bill that would bar stablecoin issuers from lending reserve assets. The bill is unlikely to pass Congress before the next presidential election, Cooper says, but “both sides recognize that some level of regulation is necessary.”
But stablecoin companies have generally been left to figure out how to police themselves. “We’re dealing with a new asset class that’s currently being run by a bunch of people who are looking for guidance on what’s allowed and what’s not, and they’re not getting it,” Cooper says. “In an industry that thrives on risk-taking, and there’s a lot of that in cryptocurrency, it’s not surprising that some companies are pushing the envelope.”
The challenge for the first handful of regulators to establish stablecoin regimes will be to limit the threat of de-pegging without alienating issuers. Risk appetite among stablecoin providers, whose profitability is tied to some extent to the risks they are allowed to take on reserve assets, could lead them to withdraw from jurisdictions that impose the most stringent restrictions. “The problem of regulatory arbitrage is as old as time,” Cooper adds.
Since MiCA’s introduction, Tether has reportedly yet to apply for a license to operate in the EU. In an interview with WIRED earlier this month, Tether CEO Ardoino said the company is still “formalizing our strategy for the European market,” but expressed doubts about some of MiCA’s reserve requirements, which he described as insecure.
Meanwhile, while Ardoino sees stablecoins as a potential threat to traditional banks, he balked in the interview at the prospect of Tether being asked to comply with a similarly stringent set of regulations, citing banks’ freedom to lend out the majority of deposits they receive, unlike a stablecoin company.
But the window for regulatory arbitrage, whatever the motivation, will close, Catalini says, as an international consensus forms on the appropriate controls to impose on stablecoin issuers. “Regulatory arbitrage is a temporary phenomenon,” he says. “It’s only a matter of time before any stablecoin of significant size is required to comply.”
