Stablecoins have surged in the "crypto winter” as it has now come to be called. Stablecoins gained prominence first with the mishandling of Tether, a dollar-backed stablecoin floated by Bitfinex and then when less than a year old startup Basis launched a massive $100M from some of the biggest VC firms in the valley. However, in recent weeks, there have been three new stablecoins launched by regulated exchanges Gemini, Paxos and now Coinbase in ties with Circle. However, the underlying use case for stablecoins has still not crystallized. The hypothesis that this will open opportunities for distressed economies (Venezuela, Argentina) exposure to dollar outside the regular financial system is untested for tail condition events. There have been other hypothesis around how using the dollar is the best way to increase adoption of cryptocurrencies at merchants but we don’t see the added benefit in going from Dollar-Stablecoin-Starbucks over Dollar-Starbucks. BitGo recently started accepting stablecoins in its merchant services to spur transaction volume in crypto.
This trend in stablecoins is perhaps only poised to grow further stablecoins backed by major sovereign currencies begin to rise. However, the use case for these coins in spurring exchange activity, increasing consumer adoption and others would be interesting to observe. In our opinion these might also give rise to HFT traders who trade in stablecoins since the Tether fiasco and the 20% premium with which the Gemini “stablecoin” traded at in the past week are ripe for profit seeking enterprising individuals. Economists, however, are hard pressed to believe that any algorithmic monetary policy will work efficiently during unexpected tail condition events.
Last week, the SEC launched a “Strategic Hub for Innovation and Technology” or “FinHub” to provide fintech companies with a portal for direct engagement with SEC staff. This announcement comes just a few weeks after several members of Congress wrote a letter to the SEC demanding that the agency provide more clarity on cryptocurrency and distributed ledger technology. Ever since the SEC entered the crypto world, it has chosen to only provide regulatory clarity through enforcement actions instead of providing clear guidance or rules for companies to follow. This has led to a great deal of confusion as to whether the federal securities laws apply to certain tokens. This turn to direct engagement with the blockchain community is a change in the right direction and may be an avenue that companies can take to obtain much needed guidance.
China’s Internet Censorship Agency has released draft blockchain regulations for public comment. These regulations would effectively eliminate the pseudo-anonymity blockchain provides by requiring users’ names and national identity card numbers upon registration. Companies would also need to obtain a license to operate in certain fields like news reporting and education. Since the advent of blockchain technology, Chinese citizens have been using the technology to get around the stringent Chinese censorship laws, for example by attaching prohibited messages to ethereum transactions, which cannot be altered by censorship authorities. Although masked as a way to help blockchain startups develop, these regulations are clearly an attempt to control and censor the information Chinese citizens can access. The immutability of information on distributed ledger technology is in clear conflict with how the Chinese government prefers to control and filter information to its citizenry. This hostile regulation from the Chinese government comes as no surprise, as China has already banned all ICOs and any exchange of fiat currency for cryptocurrency.
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