Preface
As the financial world becomes increasingly digital, digital currencies have taken center stage in finance.
However, one of the biggest challenges facing digital or cryptocurrencies is their volatility. Acceptance of crypto-assets by a wider population will only be possible if volatility is reduced. There are many reasons for volatility, including changing public perceptions, emerging markets, static monetary policies and unregulated markets. In order to solve the problem of volatility, stablecoins came into being.
Stablecoins have gained significant attention in recent years due to their ability to combine the advantages of digital currencies and traditional fiat currencies. Stablecoins bridge the worlds of digital and fiat currencies by maintaining a 1:1 peg to a reserve asset or algorithm.
In this report, we cover everything from the rise of stablecoins, four major types, market status, application scale, emerging stablecoin models and stablecoin regulations and supervision.
1. The Rise of Stablecoins
1.1 What is a stablecoin?
Stablecoin is a digital currency linked to reserve assets such as legal currency and gold. It is also a free-circulating, extended-chain cryptocurrency linked to reserve assets.
Stablecoins are designed to reduce price volatility. Stablecoins stand in stark contrast to other cryptocurrencies, including Bitcoin, because they have no built-in mechanism to reduce volatility. Stablecoins resist violent fluctuations by imitating currencies such as the U.S. dollar, euro, yuan, and Swiss franc.
In 2014, the first stable currency Tether (also known as USDT, Tether) was born, pioneering parity with the US dollar. For example, 1 Tether should be equal to 1 USD. Tether is now frequently traded in the cryptocurrency field, and its trend has proven that its original design was sound.
In addition to the U.S. dollar, there are other currencies that can be used to measure the value of stablecoins, including fiat currencies (such as the euro), fiat currency combinations (such as the IMF's Special Drawing Rights), commodities or other physical assets (such as gold, real estate), or economic indicators ( such as inflation rate).
Stablecoins have four key characteristics:
(1) Certification: The certification report is an important part of the stablecoin system and is completed by a certification professional service agency. It confirms the existence of the underlying assets supporting the stablecoin;
(2) Nature of reserve assets: A series of high-quality, highly liquid assets are required to ensure the normal operation of well-designed stablecoins;
(3) Regulation and registration: Stablecoins and the legal entities responsible for their operations must be supervised by a strong regulatory agency, which must be established in a jurisdiction with mature laws and good governance to reduce the risk of financial crime;
(4) Technology: The effectiveness of stablecoins depends on the degree of integration of its basic technology with traditional non-blockchain technology.
1.2 Classification of Stablecoins
According to different stabilization mechanisms, the common stablecoins currently on the market can be roughly divided into four categories: (1) legal currency-collateralized stablecoins; (2) crypto-collateralized stablecoins; (3) algorithmic stablecoins; (4) and commodity-backed stablecoins. Stablecoin.
1.2.1 Legal currency collateralized stablecoin
The most popular stablecoins are backed by fiat currency at a 1:1 ratio. The central issuer or custodian holds legal collateral. It must be proportional to the number of stablecoin tokens in circulation. Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) are the largest fiat-collateralized stablecoins by market capitalization.
This type of stablecoin has the following characteristics:
First, the centralized issuing institution is usually a private company.
Second, it is linked to legal currency (mostly US dollars), the exchange ratio is generally 1:1, and the issuance mechanism is simple and clear.
Third, implement a reserve proof mechanism. Every time a stable currency is issued, one legal currency reserve must be added.
1.2.2 Crypto-collateralized stablecoins
Crypto-collateralized stablecoins are backed by another cryptocurrency as collateral. Rather than using a custodian to hold the collateral, crypto-collateralized stablecoins use smart contracts. The issuance process of stablecoins occurs on-chain, using smart contracts rather than relying on a central issuer for execution. When it comes to purchasing (minting) these stablecoins, you lock the cryptocurrency in a smart contract to receive an equal amount of tokens. Then, you put the stablecoin back into the corresponding smart contract and you can withdraw the mortgage amount you previously locked. DAI, a crypto-collateralized stablecoin, is the most prominent stablecoin in this category.
Cryptocurrency-backed stablecoins need to be overcollateralized to buffer against price fluctuations in the required crypto-backed assets. For example, if you wanted to purchase $100 worth of DAI stablecoin, you would need to deposit $180 worth of ETH, which equates to a collateralization ratio of 180%. If the market price of ETH falls but remains above the set liquidation threshold, DAI's price is also kept stable due to the excess collateral. However, if the ETH price drops below a set threshold (for example, by 100%, ETH that was originally worth $180 is now only worth $90). Then according to the smart contract, the collateral will be forcibly sold for liquidation.
1.2.3 Algorithmic Stablecoin
Algorithmic stablecoins attempt to maintain a peg to assets such as the U.S. dollar by dynamically expanding and contracting the token supply. Algorithmic stablecoins do not use fiat currencies or cryptocurrencies as collateral. Instead, their price stability comes from using specialized algorithms and smart contracts to manage the supply of tokens in circulation. An algorithmic stablecoin system will reduce the number of tokens in circulation when the market price falls below the price of the fiat currency it tracks. Alternatively, if the price of a token exceeds the price of the fiat currency it tracks, new tokens enter circulation, adjusting the value of the stablecoin downward.
However, algorithmic stablecoins need to rely on particularly strong algorithms. The USTC involved in Luna is an algorithmic stablecoin. However, because their internal algorithm did not take into account some extreme situations, black swans or emergencies occurred, and eventually the currency collapsed.
Algorithmic stablecoins have the following characteristics:
1. No collateral
2. Mortgage partially or completely backed by native assets
3. Floating and stable
1.2.4 Commodity-backed stablecoins
Commodity-backed stablecoins use commodities such as precious metals, oil, and real estate for collateral. Gold is the most popular collateral commodity, with Tether Gold (XAUT) and PAX Gold (PAXG) being the top gold-backed stablecoins. Commodity-backed assets allow investment in assets that may be far away from home and inject liquidity into illiquid asset classes.
2. Current status of the stablecoin market
2.1 Overview of the Cryptocurrency Market
Global Cryptocurrency Chart (2017-2023)
Total cryptocurrency market capitalization (2021-2023)
Crypto market conditions in 2021:
The cryptocurrency industry continues to climb new heights in 2021, continuing the momentum of 2020. The market value of the entire industry increased more than 3 times in 2021 to approximately US$2.4 trillion, and the market value of the entire industry briefly reached mid-year. reached a peak of US$3 trillion.
Crypto market situation in 2022:
The total cryptocurrency market capitalization for the entire year of 2022 is approximately $830.0 million, a 64% decrease from the beginning of the year.
The cryptocurrency market has had a bumpy start to 2022, with the first quarter experiencing high inflation, conflicts between Russia and Ukraine, and the Federal Reserve raising interest rates. The total market value at the end of the first quarter of 2022 is approximately US$2.2 trillion. Compared with the prosperity in the first quarter of 2021, traders in the first quarter of 2022 are generally in a wait-and-see attitude. The trading volume of the entire market has shrunk significantly, and the trading volume has declined year-on-year. down 23%.
The third quarter of 2022 was a relatively calm quarter, but also a quarter of regulatory turmoil. The market was largely consolidating, with the total cryptocurrency market cap briefly hitting $1.2 trillion. U.S. OFAC sanctions against Tornado Cash have sent shockwaves throughout the industry and reignited significant concerns and discussions about government censorship. There are also multiple cryptocurrency legislation making their way through Congress, and the CFTC’s enforcement action against a DAO is particularly noteworthy. As policymakers and regulators continue to engage with the industry, one can only hope for greater regulatory clarity in the future. Given global geopolitical tensions and macroeconomic turmoil, the near-term outlook for cryptocurrencies may still look challenging, to say the least.
The final blow to the market came in 2022 with the collapse of FTX and Alameda Research, which cost millions and the entire industry is still reeling from the ripple effects it brought.
Crypto market situation in 2023:
The Crypto market is emerging from the bear market. The first half of the first quarter of 2023 was relatively quiet as traders speculated on the direction of the Fed's stance. While overall liquidity is relatively low, the market is also driven by some short-lived narratives. Such as Hong Kong concept, brc20, Al plate, etc.
Crypto’s regulatory challenges cannot obscure the larger turmoil in traditional banking: Doubts surrounding Silvergate Bank, which led to its entry into bankruptcy on March 8, 2023, triggered contagion effects across the U.S. banking industry. In the same week, Silicon Valley Bank and Sianature Bank were taken over by the FDIC, which subsequently led to CreditSuisse Bank being acquired by UBS a week later with the support of government funding. Incidents such as this expose the fragility of investor trust and confidence in traditional finance.
2.2 Overview of Stablecoin Market
2.2.1 Total market value of stablecoins
As one of the core assets of the entire crypto market, stablecoins have experienced very substantial growth in recent years. As of May 12, 2023, the total market capitalization of stablecoins is approximately $131.8 billion.
Stablecoin market situation in 2021:
Stablecoins rebounded to new highs and reached a market cap of $105.1 billion (+76%) in Q2 2021, but volumes fell to $7.36 billion (-35%). This may be because traders seek safety during the 20% market downturn.
In the third quarter of 2021, the overall market value of the top five stablecoins grew steadily at a rate of 17%. At the end of the quarter, the overall market capitalization of stablecoins reached $123 billion. Except for USDT, the growth rates of the top five stablecoins are all over 20%, which means that in the face of strong regulation, investors choose to use other stablecoins as alternatives to USDT.
Stablecoin market situation in 2022:
Stablecoins were not immune to net asset outflows in 2022, with a cumulative outflow of $27.3 billion (about 17%). Much of this loss occurred during the Terra collapse, and the sector has performed relatively well since then, despite periodic “black rumors” of a possible unanchoring.
The uncertainty of the general environment in the first quarter of 2022 made most investors prefer stablecoins, and the market value of stablecoins increased significantly this quarter (+USD 23 billion). Unlike other digital currencies on the market, the top five stablecoin markets grew by 13% in the first quarter of 2022.
What is noteworthy in the second quarter of 2022 is that stablecoins have improved significantly during this period, and BUSD, which was previously ranked 13th, has reached 6th place. However, the slight decline in stablecoin market share (excluding USTC) indicates that a certain amount of funds have completely withdrawn from the cryptocurrency ecosystem. In contrast, investors in the last quarter may still be in the midst of market uncertainty. In order to reduce risks, enter the stablecoin market.
The market value of USDT, the largest stablecoin, fell by 16% in 2022 to approximately $12 billion. On the contrary, USDC and BUSD each have a certain increase, each about 2 billion US dollars. The leading decentralized stablecoins DAI (-43%) and FRAX (-44%) suffered similar losses, but in absolute terms, DAI’s $4 billion loss was almost five times that of FRAX.
Stablecoin market situation in 2023:
In the first quarter of 2023, the market value of the Top 15 stablecoins decreased by approximately 4.5%, or $6.2 billion. This is due to panic in the stablecoin market after the U.S. Securities and Exchange Commission (SEC) investigated the decoupling of BUSD and USDC.
The largest decline in USDC market share occurred in the first quarter of 2023 (-2.7%), which may be due to the decoupling of stablecoins during the banking crisis and unease among holders.
BUSD's market capitalization ranking dropped significantly from 7th to 12th after Paxos decided to stop issuing the stablecoin.
Due to decoupling and regulatory concerns, USDC and BUSD experienced large outflows, while USDT and TUSD became the biggest beneficiaries.
There is panic in the stablecoin market after the U.S. Securities and Exchange Commission (SEC) investigated the decoupling of BUSD and USDC. USDT, the largest stablecoin by market capitalization (+20.5% or $13.6 billion), grew the most in absolute terms, while USDC and BUSD lost 26.9% and 54.5% respectively. The growth of TUSD has been largely caused by massive new minting on Binance (~$130 million) and Tron (~$750 million).
2.2.2 Market share of stablecoins
As of May 12, 2023, there are 24,071 encrypted digital currencies in the world, with a total market value of US$1,117 billion. The total market value of stable coins is approximately US$131.8 billion, accounting for approximately 11.84% of the encrypted digital currency market share.
As of May 2023, the market share of centralized stablecoins reached 94%, while the market share of decentralized stablecoins was only about 6%. The market share of decentralized stablecoins increased significantly between 2019 and 2022. But after the collapse of Terra, UST quickly returned to zero, and the share of decentralized stablecoins also gradually decreased.
As can be seen from the figure above, in the stablecoin market, the top nine stablecoins by market capitalization account for more than 97% of the market share. The top five stablecoins account for more than 96%, namely Tether USDT, USD Coin USDC, Binance USD BUSD, DAI and TrueUSD TUSD. The above three stablecoins account for more than 90% of the entire stablecoin market. From the perspective of the types of stablecoins, USDT, USDC, and BUSD are all centralized stablecoins, which are all issued with real asset mortgages; in addition , there are also decentralized stablecoins, such as the well-known DAI issued by MarkerDAO, which has a market value of US$4.86 billion, accounting for only 3.73%.
2.2.3 Comparison of existing major stablecoins
3. Classification and Application of Stablecoins
3.1 Centralized Stablecoin
The total market value of centralized stablecoins exceeds US$129.4 billion, of which USDT and USDC are the two largest centralized stablecoins. Both use US$1 as the peg target, and their reserve assets are US dollar cash, Treasury bonds or other commercial paper. USDT, USDC, BUSD, TUSD, USDP, and GUSD are the six most popular centralized stablecoins and are also stablecoins backed by asset reserves.
3.1.1 Tether USDT：
In October 2014, Tether (a subsidiary of iFinex) launched USDT. USDT is currently the largest stablecoin on the market, with a market capitalization of over $82.7 billion.
USDT operating mechanism:
As can be seen from the above figure, the USDT issuance and circulation process can be divided into the following steps:
Step 1: The user deposits U.S. dollars into the Tether company’s bank account.
Step 2: Tether creates their own Tether account for users and puts the digital currency corresponding to the US dollars they deposit into the account.
Step 3: Users can trade USDT through exchanges or over-the-counter markets.
Step 4: The user returns the USDT to the Tether company and redeems the legal currency.
Step 5: Tether destroys the USDT and returns the USD to the user’s bank account. In addition, when USDT enters circulation, any investor can purchase and trade USDT from other investors or exchanges. This forms a complete circular chain of issuance, trading, circulation and recycling.
USDT operation status:
Price analysis:
At the time of issuance, investors need to exchange one U.S. dollar for one USDT; in the secondary market, investors can use other encrypted digital currencies to exchange for USDT, or use legal currency to purchase USDT. When the actual price of USDT exceeds one dollar, a large number of investors will purchase USDT from Tether and then sell it in the secondary market; when the actual price of USDT is less than one dollar, a large number of investors will purchase USDT from the secondary market and then sell it to Tether company redeems USD. No matter which scenario occurs, the price of USDT will theoretically gradually return to one dollar, or fluctuate slightly above or below one dollar.
USDT has always been "infamous" for "not having enough reserves", but even if the market thinks so, USDT still maintains the number one share in the market, and the price can remain around 1 US dollar most of the time.
The most serious de-anchoring of USDT price occurred on October 15, 2018, when the price of Bitcoin was around $6,000. USDT price dropped to as low as $0.88 due to market panic. But since then, even if market rumors continue, the price of USDT has always remained stable.
OFAC's sanctions have caused some damage to the status of USDC. The overall stablecoin market performed mediocre in the third quarter of 2022, and USDT increased slightly (possibly absorbing some of the selling of USDC). In the first quarter of 2023, there was panic in the stablecoin market after the U.S. Securities and Exchange Commission (SEC) investigated the decoupling of BUSD and USDC, with USDT, the largest stablecoin by market capitalization (+20.5% or $13.6 billion) growing the most in absolute terms.
USDT reserve asset status:
Tether’s USDT whitepaper clearly mentions that Tether tokens are called stablecoins because they provide price stability when pegged to fiat currencies. This provides traders, merchants and funds with a low-volatility solution when exiting market payments. All Tether tokens are pegged 1 to 1 to matching fiat currency and are 100% backed by Tether’s reserves.
But there are two prerequisites for this mechanism to be effective:
First, the company strictly implements USDT and USD 1:1 reserves.
Second, the company conducts regular audits and makes the audit results public. The reserve proof mechanism is the core mechanism to ensure the relative stability of stablecoin prices. However, if the company cannot realize the 1:1 reserve commitment, the anchoring relationship between stablecoins and legal currencies will be challenged.
Tether's official website provides the current balance sheet of the USDT project. As can be seen from the figure below, Tether's total assets (Total Assets) represent the company's U.S. dollars, euros (EUR), offshore RMB (CNH), and gold (XAU). and Mexican Peso (MXN); Total Liabilities represent how much money investors use to purchase this stable currency after the company issues USDT, which are approximately US$82.8 billion, 36.38 million Euros (EUR), and 20.5 million offshore RMB ( CNH), 20,000 XAU and 19.56 million Mexican Pesos (MXN). Judging from the project balance sheet, the shareholder equity (Shareholder Equity) is all positive, which means that the company has increased its legal currency reserves by one dollar for every USDT issued.
Tether announced the audit results of the accounting firm: (as of March 31, 2023)
3.1.2 USD Coin（USDC）
In July 2018, USDC was a U.S. dollar stable currency issued by Circle and Coinbase Exchange. From the background, it seems that USDC should be a more stable and transparent stablecoin. The market has always had great trust in USDC. The current market capitalization of USDC is approximately US$30.1 billion, ranking second in the stablecoin market, and its size is approximately half that of USDT. The market capitalization of USDC exceeded US$56 billion at its peak on July 1, 2022, and at that time it was close to USDT's level of US$66 billion.
USDC operating mechanism:
Customers who join through a stablecoin portal (such as a web application created and maintained by a licensed CENTER token issuer member) can transfer fiat funds to that CENTER issuer’s account. Issuers use the CENTER network to execute a series of commands to validate, mint and authenticate fiat tokens pegged to the value of these deposited funds. Customers can then transfer these tokens elsewhere to use them.
Redemptions follow the reverse order: fiat tokens are destroyed when a client accesses an exit, such as a web application maintained by a licensed CENTER issuing member. Upon successful verification and verification, funds from the underlying fiat reserve are transferred to the client's external bank.
USDC operation status:
Coinbase and DeFi protocols have always been much friendlier to USDC than USDT, which is one of the reasons why USDC will expand rapidly after 2021.
USDC’s market capitalization decreased by $8.8 billion in the third quarter of 2022, accounting for 16% of its market capitalization. This is due to regulatory turmoil. The U.S. OFAC's sanctions against Tornado Cash have had an impact on the entire industry and have rekindled major concerns and discussions about the government's audit system. OFAC's sanctions have also caused certain damage to the status of USDC. .
The first quarter of 2023 saw the largest decline in USDC market share (-2.7%), possibly due to holders becoming uneasy as stablecoins decoupled during the banking crisis, and USDC lost 26.9% due to the SEC ( After the SEC) investigated the decoupling of USDC, there was panic in the stablecoin market. The price of USDC fell to a low of around $0.8 on March 11, 2023. This was due to the bankruptcy of Silicon Bank and the reserve of USDC was questioned.
USDC reserve assets:
Circle is required to maintain a full fiat reserve for all issued USDC. Third parties report these holdings monthly according to standards established by the American Institute of Certified Public Accountants (AICPA).
Circle announced the audit results of the accounting firm (as of March 6, 2023):
3.1.3 Binance USD（BUSD）
In September 2019, Paxos (the issuer) cooperated with Binance to launch BUSD. BUSD is a stable currency backed by legal currency pegged to the US dollar. It can be purchased and redeemed at the exchange rate of 1 BUSD to 1 US dollar. It is currently the seventh largest by market capitalization. Cryptocurrency and third largest stablecoin.
BUSD is a centralized stablecoin with a higher degree of centralization than any stablecoin. You want to fully understand why. We need to first clarify that there are two types of BUSD on the market:
1. BUSD issued by Paxos on Ethereum is regulated by NYDFS, the New York Department of Financial Services;
2. Binance-Peg BUSD issued by Binance itself on other chains (BNB chain). This category of BUSD is not subject to any supervision. Binance holds BUSD on Ethereum and then issues its own Binance-Peg BUSD.
BUSD operating mechanism:
To maintain its value of $1, Paxos holds an amount of dollars equal to the total supply of BUSD. BUSD and USD can be redeemed via Paxos at any time.
1. The user sends USD to Paxos’s bank reserve account.
2. The issuer (Paxos) creates an equal amount of BUSD on Ethereum.
3. The newly minted BUSD is delivered to users, while the US dollars are stored in bank reserve accounts.
4. The mechanism also always works in reverse. Users can use Paxos to destroy BUSD and receive $1 in return.
By using smart contracts to burn/mint BUSD, this mechanism keeps the ratio of supply and reserves at a constant 1:1.
BUSD operations:
Everything is going very well regarding the development of BUSD, especially starting from the 2021 market and the frenzy of BNB chain.
In September 2022, Binance announced that user balances and newly recharged USDC, USDP and TUSD will be automatically converted into BUSD. Circle CEO says this is a good thing.
In 2023, Circle reported problems with BUSD’s reserves to the New York Department of Financial Services:
In January Binance admitted that BUSD had experienced reserve management flaws.
In February, BUSD issuer Paxos was investigated by the New York Department of Financial Services, and BUSD began to experience capital outflows. Subsequently, the SEC planned to sue Paxos, claiming that BUSD was an unregistered security. On the 13th, BUSD was announced to stop issuance.
On February 13, Binance CEO Zhao Longpeng stated that BUSD will no longer be the main trading currency on Binance.
On February 28, Coinbase announced that it would stop BUSD transactions starting from March 13.
In March, AAVE DAO voted to remove BUSD from its lending platform.
Despite starting from a lower starting point, BUSD’s circulating supply increased by approximately 250% in the first quarter of 2021 respectively. This is most likely caused by the rise of BSC and Terra public chains.
The situation of BUSD went from bad to worse in the first quarter of 2023, especially after the SEC sent a Wells Notice to Paxos regarding the issuance of BUSD in mid-February, and Paxos finally decided to stop issuing BUSD. Aggressive enforcement actions by U.S. regulators have made it more challenging for the crypto industry to thrive in an opaque regulatory environment, while also prompting greater calls for regulatory transparency. BUSD’s market capitalization ranking dropped significantly from 7th to 12th after Paxos decided to stop issuing the stablecoin. After the U.S. Securities and Exchange Commission (SEC) investigated the decoupling of BUSD and USDC, the stablecoin market panicked, with BUSD losing 54.5%.
Since the announcement to cease operations in February 2022, the market value has fallen rapidly as users continue to cash out. BUSD lost 47.3% or $6.8 billion in market capitalization in the first quarter of 2023 and is down 67.6% from its peak in November 2022. As of mid-May 2023, there are still $5.7 billion worth of BUSD in circulation.
BUSD reserve assets:
Each Paxos Standard bank account is overseen by US audit firm Withum, and Paxos publishes its BUSD monthly reserve report.
3.1.4 TrueUSD（TUSD）
In March 2018, Archblock (the issuer) launched TrueUSD and listed it on the Bittrex exchange. TrueUSD (TUSD) is a fully collateralized, legally protected and transparently verified ERC-20 token. It is pegged to the U.S. dollar at a 1:1 ratio. Additionally, it is the first crypto asset built on the TrustToken platform. It aims to be a simple, transparent and reliable stablecoin. Therefore, it does not use hidden bank accounts or any special algorithms.
TUSD operating mechanism:
TrueUSD’s U.S. dollar holdings are spread across various bank accounts belonging to different trust companies. The parties involved have signed an agreement to publish the mortgage assets daily and conduct monthly audits. The token uses multiple escrow accounts to reduce counterparty risk and provide holders with legal protection against theft.
TrustToken uses publicly audited smart contracts to restrict itself from issuing tokens. The money never even touched the hands of the TrustToken team. New TUSD will be automatically generated when U.S. dollars are received in the escrow account. Whenever a user redeems USD, an equivalent amount of TUSD is immediately destroyed. In this way, TrustToken ensures a 1:1 USD to TUSD ratio between funds in escrow accounts and TUSD in circulation.
TrueUSD has the following features:
1. Legal protection: The company regularly issues certificates, which are protected by strong legal protection provided by escrow accounts.
2. Convertible to U.S. dollars: Any individual or organization that passes the AML/KYC check on the TrustToken platform can convert TUSD into U.S. dollars. However, the minimum withdrawal amount is $10,000.
3. Trustworthy Fund Management: The TrueUSD system is set up in a way that allows you to exchange U.S. dollars directly with an escrow account by design, rather than sending money through the TUSD network.
4. Full collateral: A single TUSD token is always collateralized by U.S. dollars held by the custodial account company. New tokens are minted and burned by publicly audited smart contracts.
5. Periodic Certification: All holdings in custody accounts are subject to publicly released periodic certification.
The key to the proper functioning of every TrustToken tokenized asset is a third-party escrow account. Everyone who passes the KYC and AML requirements can buy/redeem TrueUSD using their app.
TUSD operations:
As of October 7, 2022, TUSD has been granted legal status in the Commonwealth of Dominica as an authorized digital currency and medium of exchange.
Growth in TUSD (+169.3%) in Q1 2023 (exceeding FRAX +2.6%). TUSD’s growth has been largely caused by massive new minting by Binance (~$130 million) and Tron (~$750 million).
TUSD reserve assets:
Through a partnership with Armanino, a leading US accounting firm, TrueUSD holders can view a real-time dashboard of their TrueUSD accounts, a great example of a high level of transparency.
3.2 Decentralized Stablecoin
Decentralized stablecoins are governed by a designated community and stabilized by a computing protocol. There are four types of decentralized stablecoins, namely over-collateralized stablecoins, algorithmic stablecoins, fractional stablecoins and non-pegged stablecoins.
One thing decentralized stablecoins have in common is that they are guided by multiple points of control, rather than a single body as seen in centralized stablecoins. The issuance and distribution of centralized stablecoins is controlled by a central authority, with the coin’s peg maintained by actual fiat currency or other commodities such as gold, oil and real estate.
Decentralized stablecoins differ in two aspects: governance and peg system. The governance systems of different types of decentralized stablecoins are similar, and therefore, decentralized stablecoins are grouped according to their minting and peg maintenance schemes. Here are two popular decentralized stablecoins:
3.2.1 MakerDAO (DAI)
In December 2017, MakerDAO launched DAI. Unlike USTD, DAI exists entirely on the blockchain, avoiding the credit risks that may arise from third-party trust intermediaries.
DAI operating mechanism:
The threshold for generating, accessing and using DAI is very low. Users generate DAI by using the Maker protocol to create a smart contract called a "Maker Vault" and deposit assets (approved collateral). This process is not only the process of DAI entering the circulation field, but also the process of users obtaining liquidity. In addition, users can also purchase DAI from intermediaries or exchanges.
You can think of MakerDao as a pawnshop. You can mortgage your digital assets (currently only MKR is supported) on the MakerDao system to obtain a certain amount of DAI. You can imagine that this mortgage contract is the function of this system contract. This important feature is called: Vault (called CDP before the multi-collateral system migration) smart contract. This contract allows you to borrow DAI in the MakerDao system, and the loan can be reinvested (leveraged), international remittances, etc. What needs to be noted is: when the digital currency you mortgage depreciates rapidly and you are unable to repay the DAI loan, your digital currency will be forcibly auctioned off and turned into DAI to repay the loan. This is what we commonly call liquidation.
DAI stability mechanism:
The initial goal of DAI is to maintain a 1:1 anchor with the US dollar, but since market behavior will cause a certain price difference, relevant mechanisms are needed to stabilize the price of DAI. The price stabilization mechanism mainly relies on interest rate adjustments and liquidation. Interest rate adjustments are carried out using governance voting, including stable interest rate adjustments and DAI Saving Rate (DSR) adjustments; liquidation is mainly an emergency shutdown method to control risks.
1. Stable interest rate adjustment: refers to the annualized interest rate that users need to pay when mortgaging assets to generate DAI, which is essentially loan interest. When the price of DAI is higher than 1 USD, users are encouraged to create Vaults to generate DAI by lowering the stable interest rate (i.e. lowering loan interest); when the market price of DAI is lower than 1 USD, then increasing the stable interest rate (i.e. increasing loan interest) This will stimulate users to close Vault, destroy DAI, and reduce the market supply of DAI.
2. DAI deposit interest rate (DSR) adjustment: Users can lock DAI into the DSR contract of the Maker protocol to automatically obtain savings income. DSR determines the amount of income that DAI holders can obtain based on their deposits. DAI deposit interest is paid by borrowing interest, which means that the deposit interest is guaranteed by the stability fee. For the Maker protocol, if the income from stability fees cannot make up for the total expenditure on DAI deposit interest, then the difference is a system bad debt, which will be made up by issuing additional MKR, which means that MKR holders are the risk bearers of this part.
3. Emergency shutdown: The last resort used to ensure that DAI holders can redeem their target price in an emergency. Once an emergency shutdown occurs, users will no longer be able to create new Vaults or operate already created Vaults or feed prices. Mechanics will also be frozen.
DAI operation status:
In the first quarter of 2022, the growth rate of DAI also slowed down a lot due to similar competition; in the second quarter of 2022, the market value of DAI fell by 32%, which may be caused by their negative correlation with algorithmic stable coins; in the first quarter of 2023, DAI Basically remain stable.
3.2.2 FRAX
In December 2020, Frax Finance launched FRAX, which is the first and only stablecoin project whose supply is partially supported by collateral and partially supported by algorithms. FRAX is a dual-type seigniorage model, and its stablecoin FRAX is backed by two types of collateral, namely a collateral-backed stablecoin (USDC) and FRAX Share (FXS).
FRAX operation stability mechanism:
In the initial state, FRAX is in the 100% collateral stage, which means that you only need to place collateral in the minting contract to mint FRAX, and 100% of the value put into the system to create FRAX is collateral. As the protocol enters the mixing phase, part of the value entering the system during the minting process becomes FXS (and then burned in circulation). For example, at a 98% collateral ratio, each minted FRAX requires $0.98 in collateral and burns $0.02 worth of FXS. At a 97% collateral ratio, each minted FRAX requires $0.97 in collateral and burns $0.03 worth of FXS, and so on.
While the FRAX Protocol is designed to accept any type of cryptocurrency as collateral, implementations of the FRAX Protocol will primarily accept on-chain stablecoins as collateral to remove volatility from the collateral, allowing FRAX to smoothly transition to more algorithmic ratios .
FRAX's redemption process is seamless, easy to understand, cost-effective and reliable. At the 100% mortgage stage, it’s very simple. During the hybrid algorithm phase, when FRAX is created, FXS is burned. When FRAX is redeemed, FXS is minted. As long as there is demand for FRAX, redeeming it as collateral plus FXS will start minting a similar amount of FRAX into circulation on the other end (burning the same amount of FXS).
At the beginning, the FRAX protocol adjusted the mortgage rate every hour by 0.25%. The function decreases the collateral ratio every hour when the FRAX price is at or above $1, and increases the collateral ratio every hour when the FRAX price is below $1. This means that if the FRAX price spends most of a period at or above $1, the net change in the collateral ratio will be reduced. If the FRAX price is below $1 most of the time, then the collateral ratio will grow towards 100% on average.
Comparing FRAX with UST (unanchored on 2022.2.9, Terra collapsed) has the following characteristics:
1. Flexible mortgage rate, FRAX automatically achieves the mortgage rate through a Proportional Integral Derivative (PID) controller, FRAX redeploys collateral elsewhere to earn income, which helps bring in external income and operates through its algorithmic market The controller keeps the protocol floating.
2. Transfer speculation on FRAX to FXS. Due to the destruction/buyback mechanism of FRAX, its price volatility has been transferred to FXS.
3. Reliable collateral. Part of FRAX’s collateral is USDC (reserved with US dollar cash reserves), which injects changes in growth rates.
4. FXS provides value beyond governance, such as minting requirements and protocol fees, thereby incentivizing users to purchase FXS.
FRAX operations:
FRAX has grown rapidly in 2021, with a market capitalization exceeding $100 million. This also reflects the market’s increasing acceptance of algorithmic stablecoins. In the second quarter of 2022, the market value of FRAX fell by 48%, which may be caused by their negative correlation with algorithmic stable coins; in the first quarter of 2023, FRAX basically remained stable.
3.3 New Stablecoins
According to Sam Kazemian’s “DeFi Trinity” theory, in order to achieve DeFi dominance, a project needs its own stablecoin, decentralized exchange (DEX) and lending protocol.
Some of the largest protocols are already starting to build in this direction, developing their own DEX and lending protocols alongside stablecoins. As expected, FRAX has taken the first steps by introducing Fraxswap and Fraxlend to complement its own stablecoins, and other protocols are quickly catching up. Ongoing issues surrounding centralized stablecoins, such as the risk of regulatory scrutiny—particularly the recent close of BUSD—have only accelerated efforts to build a truly decentralized stablecoin model.
The market is eagerly awaiting the launch of protocol-native stablecoins from the two largest DeFi protocols, Curve’s crvUSD, and AAVE’s launch of GHO in 2023. Both will have their own novel designs based on their respective underlying protocols, and more importantly, they will have features that enhance their respective flywheels.
In addition to the protocol’s native stable, other stablecoin models are still being experimented with. USDD (USDD) continues to represent an endogenously collateralized stablecoin, backed by multiple tokens including BTC, USDT, and USDC. Projects like Rai and Olympus are trying to create a stablecoin that is not actually pegged to fiat currencies. Ampleforth is probably the most interesting – a pure rebasing stablecoin with no collateral.
4. Growth potential and use cases of stablecoins
4.1 The growth potential of stablecoins
1. Solve the problem of digital currency price fluctuations
Stablecoin is a digital currency issued with assets as collateral, and its price is more stable than other digital currencies. Therefore, stablecoins can be used to solve the problem of price fluctuations of digital currencies. For example, when you use Bitcoin to purchase goods, due to the large fluctuations in the price of Bitcoin, the price you need to pay when purchasing may increase or decrease due to price fluctuations, which increases the uncertainty of the transaction. But if you trade with stablecoins, you can avoid this situation because their prices are relatively stable.
2. Can undertake financial functions
Stablecoins have all the functions of general digital currencies, such as payment, storage, etc., and can also undertake some financial functions, such as paying fees, serving as an exchange rate conversion medium, etc.
3. More transparent market transactions
Stablecoins are usually issued by institutions, and the preparation process of collateral also needs to be audited, which increases the transparency of market transactions and provides more protection.
4.2 Use cases of stablecoins
Legal currency exchange channels
It can be seen from the issuance and circulation process of USDT that investors can buy USDT from Tether or from other investors. When investors want to exchange for legal currency, they can redeem it from Tether.
Act as a medium of exchange
Many digital currencies also have obstacles in the process of exchanging them with mainstream digital currencies such as Bitcoin. Therefore, users can first convert other digital currencies into USDT, and then convert them into Bitcoin for transactions.
Act as a safe haven asset
USDT promises that users can convert USDT into legal currency at any time. Therefore, when the digital currency market price fluctuates violently, investors can first exchange the digital currency they hold into USDT to preserve the value of their assets, and then exchange it back for other numbers after the market price stabilizes. currency.
used for fund payment
USDT can be used as a means of fund payment, especially in cross-border payment scenarios. Currently, global cross-border payments use the SWIFT system, and international transfers take 3-7 days and are more expensive.
5. Regulations and Global Supervision of Stablecoins
5.1 Stablecoin Regulations
After major setbacks such as the Terra/UST crash and the FTX crash, many investors suffered significant losses and governments and regulators were forced to take action. While legislative and regulatory efforts were already underway before, widespread contagion has increased the urgency and speed of these efforts. Specifically, stablecoins have been an area of particular focus.
International standard-setting bodies such as the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BSBC) have developed initial regulatory standards for digital assets in an attempt to promote consistent regulation globally. On the other hand, the Bank for International Settlements (BIS) has been conducting oversight and oversight, deploying a project that would allow central banks to effectively monitor stablecoin balance sheets.
The U.S. Congress has proposed a stable currency bill, and individual countries are also working with the United States and other countries to address this issue. How the Monetary Authority of Singapore (MAS) lets industry players develop an overall regulatory framework for stablecoins, the Hong Kong Monetary Authority (HKMA) released a regulatory framework that requires stablecoin issuers to obtain operating licenses and may even ban the regulation of algorithmic stablecoins will become more common.
5.2 Are stablecoins subject to regulation?
Stablecoins have attracted the interest of regulators around the world due to their unique combination of fiat currencies and cryptocurrencies. Because they are designed to maintain stable prices, they can be used for reasons other than speculation and can facilitate low-cost international high-speed transactions. Some countries are even trying to create their own stablecoins. Issuing stablecoins with fiat reserves may also require regulatory approval and may be subject to the same regulations as cryptocurrencies in local jurisdictions.
5.3 The latest development of stable currency supervision in major countries around the world
Currently, major countries and regions around the world have different regulatory stances on crypto-assets (including stablecoins), and the corresponding regulatory frameworks and legislation are also at different stages. The following is a brief introduction to the latest developments in Hong Kong, Mainland China, the United States, Singapore and the European Union. We hope to provide readers with some general reference and guidance on the supervision of the following countries and regions.
5.3.1 Hong Kong, China
On January 12, 2022, the Hong Kong Monetary Authority released a discussion paper on extending Hong Kong’s regulatory framework to stablecoins, inviting the industry and the public to provide opinions on the regulatory model for cryptoassets and stablecoins. The discussion paper sets out the Hong Kong Monetary Authority’s vision for a regulatory model for crypto-assets, particularly stablecoins used for payment purposes. The Hong Kong Monetary Authority is expected to draw up plans by July 2023 with a view to enacting the new regulatory regime by 2023/2024.
The Hong Kong Monetary Authority believes that stablecoins are increasingly regarded as a widely accepted payment method, and the fact that their usage is growing increases the potential for stablecoins to be integrated into the mainstream financial system. In the view of the Hong Kong Monetary Authority, this will trigger broader monetary and financial stability impacts, making stablecoins a regulatory focus of the Hong Kong Monetary Authority.
The Hong Kong Monetary Authority promulgated the "Consultation Conclusions on Crypto-Assets and Stablecoins Discussion Paper" in January 2023, summarizing the industry's feedback on the Hong Kong Monetary Authority's solicitation of opinions on the Stablecoin Consultation from all walks of life a year ago and the HKMA's corresponding position. The main contents of the consultation conclusions are as follows:
1. Key regulatory scope
The Hong Kong Monetary Authority stated that it will give priority to regulating stablecoins that claim to be anchored to legal currencies. Regardless of whether it is anchored to legal currency through algorithms or arbitrage mechanisms, or whether the stablecoin is mainly used for retail, wholesale or crypto-asset transactions, any stablecoin that claims to be anchored to legal currency will be included in the regulatory focus.
2. Stable currency jurisdiction
In the conclusion of the Hong Kong Monetary Authority, the Hong Kong Monetary Authority pointed out that the mandatory licensing system for stable currency activities may have some overlap with the current virtual asset service provider licensing system managed by the Hong Kong Securities and Futures Commission, and stated that it will further consult other regulatory agencies for their opinions. , consider how to avoid regulatory arbitrage in the future.
3. License application
In its conclusion, the Hong Kong Monetary Authority clarified the mandatory licensing requirements for engaging in various types of stablecoin-related activities, and stated that licenses are issued based on different types of stablecoin activities, including (1) governance: establishing and maintaining rules for regulated stablecoins, For example, the ownership structure and operating arrangements of stablecoins; (2) Issuance: issuing, creating or destroying regulated stablecoins; (3) Stability: making arrangements for the stability and reserve assets of regulated stablecoins (regardless of the Whether such arrangements are provided by the issuer itself), including maintaining the value of the stablecoin in an effective manner; (4) Wallet: Provides services to store users’ private keys, allowing users to use and manage the regulated stablecoins they hold .
It is worth noting that the same entity needs to obtain different licenses for different types of stablecoin activities. For stablecoin issuance activities, the Hong Kong Monetary Authority recognizes both banks and non-bank institutions as stablecoin issuers.
4. Algorithmic Stablecoin
The Hong Kong Monetary Authority stated that regardless of whether it is a stablecoin anchored to legal currency through algorithms or arbitrage mechanisms, and regardless of whether the stablecoin is mainly used for retail, wholesale or crypto asset transactions, as long as it is a stablecoin that claims to be anchored to legal currency, it will be included. Regulatory focus. One of the conditions listed in the Hong Kong Monetary Authority’s conclusion for issuing a stablecoin license is that the reserve value of the relevant stablecoin should always match the number of issued stablecoins, and the reserve assets should be of high quality and high fluidity. Algorithmic stablecoins do not meet the above requirements. Therefore, entities engaged in algorithmic stablecoin-related activities do not meet the licensing conditions of the Hong Kong Monetary Authority. After the stablecoin license system is officially introduced, how entities that have provided algorithmic stablecoin-related services should respond, such as whether they need to gradually close or adjust their services to Hong Kong, and whether existing Hong Kong users can continue to use algorithmic stablecoins, etc. deserve further attention.
5. Localization requirements for license applicants, and whether stablecoins linked to non-domestic/regional legal currencies are allowed
In the Hong Kong Monetary Authority’s conclusion, the Hong Kong Monetary Authority believes that requiring licensed entities to “establish a company in Hong Kong” is conducive to the supervision of licensed entities and the enforcement of regulatory requirements. This requirement enables assets relating to the regulated business to be segregated from the assets and liabilities of other entities within the licensed entity group and to facilitate the collection of their assets where necessary. Nonetheless, the Hong Kong Monetary Authority also stated in its conclusion that it will refer to regulatory developments in other countries or regions and the opinions of the industry to further evaluate whether it can adopt other measures to replace the "in Hong Kong" while ensuring the robustness and effectiveness of regulatory measures. "Incorporation of a Company" requirement. Whether entities established outside Hong Kong can obtain stablecoin business-related licenses in Hong Kong remains to be further clarified by the Hong Kong Monetary Authority.
6. Key points of regulatory provisions
(1) Comprehensive regulatory framework: Regulatory requirements should cover a wide range of issues, including but not limited to ownership, governance and management, financial requirements, risk management, AML/CFT, user protection, and regular audit and disclosure requirements.
(2) Fully backed and redeemed at face value: The value of the reserve assets of a stablecoin arrangement should always match the value of the stablecoins in circulation. Reserve assets should be of high quality and highly liquid. Stablecoins that derive value based on arbitrage or algorithms will not be accepted. Stablecoin holders should be able to exchange their stablecoins at face value into a reference fiat currency within a reasonable period of time.
(3) Main business restrictions: Regulated entities shall not engage in activities that are different from the main business permitted by their relevant licenses. For example, wallet operators should not engage in lending activities.
In addition, according to Hong Kong's Securities and Futures Ordinance, unless there are specific exemptions, conducting regulated activities related to "securities" (such as securities trading, providing services for securities trading, providing advice on securities, etc.) requires a Hong Kong license in advance. License issued by the Securities and Futures Commission. Therefore, before carrying out stablecoin-related business, a specific analysis and judgment should be made as to whether the stablecoin involved falls within the scope of “securities” under the regulations. If the stablecoin involved constitutes the scope of "securities" under the Securities and Futures Ordinance, carrying out business related to the stablecoin will be deemed to be conducting regulated activities, and it is necessary to obtain the corresponding license issued by the Hong Kong Securities and Futures Commission in advance.
4.3.2 Mainland China
Mainland China’s regulatory policy on crypto assets began with the “Notice on Preventing Bitcoin Risks” issued by the People’s Bank of China and other five ministries on December 5, 2013. On September 4, 2017, the People's Bank of China and seven other ministries and commissions issued the "Announcement on Preventing Financing Risks of Token Issuance", known as the 94 Ban. The announcement clearly stipulates that no organization or individual shall illegally engage in the exchange business between legal currency and tokens or "virtual currencies", shall not buy or sell tokens or "virtual currencies" as a central counterparty, and shall not be a token or "virtual currency". "Virtual Currency" provides pricing, information intermediary and other services.
On September 24, 2021, the People's Bank of China and ten other ministries and commissions issued the "Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Transactions", known as the 924 Notice. Compared with the 94 ban, the 924 Notice clearly states that the "related business activities" of the following five types of virtual currencies are "illegal financial activities": (1) Carrying out legal currency and virtual currency exchange business, and exchange business between virtual currencies; (2) Act as a central counterparty to buy and sell virtual currencies; (3) provide information intermediary and pricing services for virtual currency transactions; (4) token issuance financing; and (5) virtual currency derivatives transactions, etc.
In view of the fact that the stablecoins issued by some commercial institutions discussed in this article are a type of virtual currency defined in the 924 Notice, currently, if the "related business activities" related to stablecoins are carried out, they fall within the scope of "illegal financial activities" and are notified by the 924 Notice. prohibited.
4.3.3 United States
In November 2021, the U.S. President’s Working Group on Financial Markets, the U.S. Federal Deposit Insurance Corporation, and the U.S. Office of the General Comptroller of the Currency jointly released a report on stablecoins. To address the risks of payment-based stablecoins, the report recommends that the U.S. Congress quickly legislate to ensure that payment-based stablecoins and their related arrangements are regulated under a unified and comprehensive federal framework to fill the gap between current stablecoins in terms of market integrity, investor protection, and Legislative gaps in areas such as illegal financing, and will work to address the following important concerns:
(1) To prevent stablecoin runs, legislation should stipulate that all stablecoin issuers need to be insured depository institutions and subject to appropriate supervision at the level of depository institutions and holding companies;
(2) To mitigate payment system risks, legislation should be implemented to subject custodial wallet providers to appropriate federal regulation;
(3) In order to deal with systemic risks and risks of concentration of economic power, legislation should be required to require stablecoins to comply with activity restrictions that limit affiliation with commercial entities.
Regulators should have the power to enforce standards to promote interoperability between different stablecoins. Additionally, the US Congress is considering additional standards for custodial wallet providers, such as limiting their affiliations with commercial entities or users’ transaction data.
On March 31, 2022, Senator Bill Hagerty introduced the Stablecoin Transparency Act in the Senate; the bill aims to improve the transparency of the stablecoin market and set reserve standards for reserve assets. The bill requires stablecoin issuers to:
(1) Government securities with a holding period of less than 12 months;
(2) A fully collateralized securities repurchase agreement;
(3) Have reserves backed by U.S. dollars or other non-digital currencies, and are required to publish a third-party audited reserve asset report on the stablecoin issuer’s holdings on its website every month.
On April 6, 2022, U.S. Senate Banking Committee member Pat Toomey released a discussion draft of the Stablecoin Reserve Transparency and Unified Secure Transactions Act (The Stablecoin TRUST Act). The discussion draft of the bill intends to limit the issuers of payment stablecoins to the following three types of institutions:
(1) Nationally registered money transmitter;
(2) Hold a new federal license specifically designed for stablecoin issuers;
(3) Insured depository institutions and require payment stablecoin issuers to disclose their reserve assets, establish redemption policies and accept periodic certification from a certified public accounting firm.
In May 2022, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler told the House Appropriations Financial Services Subcommittee that according to the SEC’s definition, many cryptocurrency trading platforms are trading securities rather than commodities, thereby requiring lawmakers to increase The SEC’s enforcement budget to require cryptocurrency trading platforms to register with the SEC. Therefore, cryptocurrency trading platforms should also pay attention to reviewing whether stable coins will be recognized as "securities."
In April 2023, the U.S. Congress issued two versions of stablecoin legislation drafts (respectively referred to as the "U.S. Draft 2023 First Draft" and the "U.S. Draft 2023 Second Draft", collectively referred to as the "U.S. Draft"), and held two hearings on this. . The U.S. Congress has stated that it will enact a third version of the legislative draft within two months, and believes that the draft is likely to receive bipartisan support and be formally passed.
The main contents of the 2023 first draft of the US draft are as follows:
1. A detailed definition of "stable currency used for payment" is provided, that is, "(subject to certain exceptions) (1) virtual assets that are used or designated for payment or settlement, and (2) ( (its issuer) is obligated to convert, redeem or repurchase (stablecoin) for a fixed currency value; or (its issuer) claims to maintain or create reasonable expectations of: (its issuer) value relative to a fixed fiat currency amount The value will remain at a constant ratio."
2. The license is issued to the stablecoin issuer. Bank issuers only need to be approved, while non-bank issuers need to be licensed, otherwise there will be corresponding fines and penalties. No distinction is made between whether the license applicant is established in the United States or outside the United States.
3. Different types of algorithmic stablecoins are treated differently. It adopts the concept of "endogenously collateralized stablecoins", which can be roughly understood as uncollateralized stablecoins, or the value support behind the stablecoins is digital assets issued by the same issuer. Endogenously collateralized stablecoins are likely to be subject to a ban within two years after the implementation of the bill, during which no new coins can be issued, while existing algorithmic stablecoins that have been issued are not subject to this ban.
4. Asset segregation requirements focus more on protecting customers’ rights and interests from creditors’ claims. The US draft clearly prohibits the re-pledge and commingling of customer funds.
5. It stipulates that issuers must disclose the composition of reserve assets on their website every month. Not only must the attestation be provided monthly to federal regulators, but the attestor must be the issuer's CEO.
4.3.4 Singapore
The Payment Services Act promulgated by Singapore in 2019 and implemented on January 28, 2020, includes digital payment tokens (DPT) and electronic money (e-money) under supervision; according to the act, DPT services and electronic money issuance services are regulated activities under the Payment Services Act and require application for a payment service provider license.
The Monetary Authority of Singapore believes that stablecoins do not meet the characteristics of electronic money because their exchange rates with legal tender are fixed and stablecoin holders do not need to enter into a contractual relationship with the issuer of the stablecoin or open an account with the issuer. Therefore, it does not belong to electronic money under the Payment Services Act.
The Monetary Authority of Singapore further stated that it will examine the characteristics of specific stablecoins on a case-by-case basis from a technology-neutral stance to determine appropriate regulatory measures. In the view of the Monetary Authority of Singapore, based on the current characteristics, USDC and USDT should be recognized as DPT, so the provision of DPT services related to these two types of stable currencies should be subject to the "Payment Services Act" and should apply for corresponding licenses .
The Monetary Authority of Singapore issued a consultation on proposed regulatory approaches for stablecoin-related activities in October 2022, which contains more specific regulatory measures than other countries or regions, and plans to issue a summary response to the consultation in mid-2023. The main contents of the consultation case are as follows:
1. The Monetary Authority of Singapore stated that single-currency pegged stablecoins (Single-currency pegged stablecoins) have payment and clearing functions and will be the main regulatory object of the draft.
2. The licensing system of the Singapore Consultation Project targets stablecoin issuers. In addition, different regulations apply to bank and non-bank issuers.
3. The Monetary Authority of Singapore stated that the current legislative priority is the stable currency issued locally. In addition, after considering the situation where the same stable currency is issued by different issuers in different countries or regions under the premise of being homogeneous (fungible), we plan to solve the problem from two aspects: First, require Singapore issuers to submit to the Monetary Authority Annual certification to prove that other major issuers (issuing more than 5%/10% of circulating stablecoins) comply with equivalent reserve asset requirements and prudential standards; secondly, establish regulatory cooperation between relevant regulatory agencies linked to single currency stablecoins to Exchange operational information for the stablecoin.
4. According to the consultation case of the Monetary Authority of Singapore, the issuer needs to segregate the stable currency reserve assets and the issuer's own other assets in different accounts, and the customer's Monetary Authority regulations are linked to the single currency stable currency, the customer's other assets and the issuer. Your own assets also need to be segregated in different custody accounts to reduce the risk of fund commingling.
5. Regarding reserve assets and their high quality and liquidity, the Singapore Consultation stipulates specific standards. For example, if they are priced on the market, reserve assets can only be cash or equivalents, or bonds with maturity no more than three months away, and It is issued by a central bank with a stable pegged currency or a governmental international institution with a credit rating of no less than AA-, and is priced in its pegged currency. The frequency, independence and public channels of disclosure, assurance and auditing requirements are also detailed.
It is worth noting that if the stablecoin offered or issued constitutes a capital markets product under the Securities and Futures Act (such as securities or shares in a collective investment scheme), such offer or issuance will be subject to Regulations under the Securities and Futures Act; intermediaries that facilitate such offers or issuances (including platform operators that provide a platform for the offering, issuance and/or trading of such stablecoins and those that provide financial advice related to such stablecoins) Intermediaries) will accordingly be subject to licensing requirements and other compliance requirements under the Securities and Futures Act and/or the Financial Advisers Act.
4.3.5 European Union
In May 2023, the European Council, composed of government ministers from 27 EU member states, approved the Cryptoasset Market Regulation (MiCA), a draft proposed by the European Commission in 2020 and will be implemented in 2024. MiCA defines crypto-assets as “digital representations of value or rights that can be transmitted and stored electronically using distributed ledger technology or similar technologies.”
MiCA can be divided into three main frameworks:
1. Crypto-asset issuance rules: Issuers of various types of crypto-assets are required to draft a white paper (functionally similar to a prospectus) and obtain prior permission from the competent authority for utility tokens and crypto-assets. A more complex set of rules for issuance, authorization, governance and prudential requirements apply to asset reference tokens and e-money tokens.
In addition to the EU lifting its ban on algorithmic stablecoins, MiCA requires fiat-backed stablecoins to be backed by a 1:1 ratio of liquid reserves. Requirements for stablecoin issuers include:
(1) ARTs are subject to more stringent regulatory requirements than EMTs (considered to be more likely to threaten the monetary stability of the European Union). They must apply to local regulatory agencies before issuance, and after approval, they must regularly feedback trading customers to the regulatory agency. , transaction funds, reserves and other information.
(2) Protection supports held assets and reserve assets, requiring issuers to establish sufficient liquidity reserves at a certain ratio or deposit to protect consumers and avoid runs.
(3) Establish investment litigation procedures and procedures to prevent the suspension of market use and insider trading.
(4) Establish and maintain asset reserves that are isolated from other assets and managed by a third party.
2. Cryptoasset Service Provider (CASP): requires authorization from the competent authority and is applicable to financial companies under the Markets in Financial Instruments Regulation II (MiFID II);
3. Rules to prevent market abuse of crypto-assets: These rules are broadly similar to those foreseen in the Market Abuse Regulations applicable to securities, but are more concise. This last rule is intended to avoid Elon Musk-like behavior, where one statement from a well-known figure can suddenly change the value of a crypto asset.
Throughout the world, stablecoins have attracted close attention from regulatory agencies in various countries. The supervision of stablecoins in various countries is different, legislation is also at different stages, and the supervision of stablecoins is also constantly strengthening. For institutions engaged in related businesses, they should evaluate risks and applicable laws and regulations at any time, and quickly adjust their business models to comply with relevant regulations on stable coins and avoid potential compliance risks.
