This article reviews the current state of stablecoins, including the characteristics of major stablecoins such as USDT, USDC, and DAI, as well as regulatory discussions in Singapore, the EU, and Japan.
Written by: DeSpread Research
1. Introduction
Stablecoins play a vital role in the cryptocurrency market due to their low volatility and high versatility. They are widely used in P2P remittances, exchanges, and DeFi applications. In addition to their importance in the cryptocurrency market, the potential impact of stablecoins on traditional financial markets such as banking, securities, payments, international remittances, and trade has also attracted much attention.
The stablecoin market is developing rapidly and the number of users is increasing. Therefore, the demand for countries to clearly define stablecoins continues to increase, from establishing a regulatory framework and implementing relevant policies to preventing potential problems from occurring. Following the announcement of the Monetary Authority of Singapore's stablecoin regulatory framework in 2023, it is expected that countries will issue and implement their own stablecoin regulations in 2024.
European Union (MiCA): The EU’s Markets in Crypto-Assets Regulation (MiCA) was published in March 2022, passed with overwhelming support in April 2023, and will come into effect in December 2024. In addition, the EU has drafted technical standards for stablecoins backed by multiple fiat currencies or assets, which will come into effect in the summer of 2024.
Hong Kong: A stablecoin regulatory proposal is expected to be released in early 2024, and a stablecoin sandbox is currently being prepared.
United States: Federal Reserve Chairman Jerome Powell emphasized the need for a stablecoin bill to House Democrats, and Representative Maxine Waters said in an interview that "the passage of the stablecoin bill is very close," raising market expectations for stablecoin regulation.
United Kingdom: UK Finance Minister Bim Afolami announced at a Coinbase-hosted event in February 2024 that he plans to pass a stablecoin bill within six months, with legislation expected to be introduced in 2024.
The issuance of stablecoins pegged to different national currencies not only facilitates new capital inflows, but also suggests the possibility of creating an on-chain foreign exchange market for the exchange of stablecoins in different national currencies, similar to the traditional foreign exchange market. This article will explore the current state of the stablecoin market, the characteristics of several major stablecoins, and ongoing regulatory developments. In the second part, we will delve deeper into the development of stablecoin regulations in various countries and examine the characteristics of emerging stablecoins.
2. Current status of the stablecoin market
Stablecoin supply, source: The Block
Supply of Euro-based stablecoins. Source: The Block
Market Trends: According to data from The Block, the total supply of stablecoins has been growing steadily since 2020, reaching a peak of $180.4 billion on March 30, 2022. Although the supply decreased due to the cryptocurrency market downturn, it began to rise again since September 2023. As of March 12, 2024, the total supply of stablecoins is approximately $153.6 billion.
USD-based stablecoin market share: USDT has a supply of $108.13 billion, accounting for 70.5% of the market share; USDC has a supply of $31.38 billion, accounting for 20.5% of the market share. Together, these two stablecoins account for 91% of the total supply of USD stablecoins, which is about $153 billion. The total supply of EUR stablecoins is about $600 million, indicating that USD stablecoins account for 99% of the stablecoin market. This dominant position shows that the size of this market has the potential to exceed that of the traditional foreign exchange market.
3. Current status of major projects
3.1. USDT
Issuer: Tether Limited
Pegging mechanism: 1:1 pegged to fiat currency, fully backed by Tether reserves
Collateral Details:
Cash and cash equivalents: 84.58%
U.S. Treasury: 76.87%
Overnight reverse repurchase agreements: 11.4%
Institutional Reverse Repurchase Agreement: 0.99%
Money market funds: 10.16%
Cash and bank deposits: 0.48%
Non-U.S. government bonds: 0.08%
Corporate bonds: 0.05%
Precious metals: 3.62%
Bitcoin: 2.91
Other investments: 3.89%
Secured loans: 4.95%
USDT collateral composition, source: Tether
Verification method: Audit report from accounting firm (BDO Italia will provide quarterly audit reports starting from the second quarter of 2022)
Fees and deposit and withdrawal policies:
Minimum deposit/withdrawal amount: $100,000
Legal deposit fee: 0.1%
Withdrawal fee: $1,000 or 0.1%
Issuance qualification: Only verified members
3.1.1. Recent Updates
Income status:
According to BDO's fourth quarter report for 2023, Tether's net profit was approximately $2.9 billion and its operating profit was approximately $1 billion. The main sources of income were interest income from holding U.S. Treasury bonds and profits from the appreciation of Bitcoin and gold held. Bank of America's net profit for the same period was $3.1 billion, which shows the scale of Tether's profits.
Trust issues:
Tether has faced audit requests since 2017, with initial rejections leading to suspicion that the company was issuing USDT and manipulating Bitcoin prices without sufficient U.S. dollar reserves. Although Tether indirectly proved its reserves through legal and bank balance confirmations in mid-2018 after the U.S. Commodity Futures Trading Commission (CFTC) subpoenaed Tether, the lack of a formal audit process limited the market’s recovery of trust in Tether.
Implementation of formal audit:
Three and a half years later, in March 2021, Tether began to provide quarterly audit reports through an accounting firm, which alleviated investors' concerns to some extent. However, unlike its competitor Circle (USDC issuer), which publishes audit reports monthly, Tether's quarterly reports pose regulatory risks. Both the EU MiCA and the New York Department of Financial Services require monthly asset disclosures.
USDT supply by blockchain, source: The Block
USDT issued by blockchain:
USDT is mainly used as a trading currency pair on centralized exchanges. Due to its low transaction fees, the transfer volume on the Tron blockchain is huge. As a result, the issuance of USDT on Tron has also increased rapidly, surpassing the previous leading issuance platform Ethereum. Currently, about 50% of USDT is issued on Tron, while about 44.79% of USDT is issued on Ethereum.
3.2. USDC
Publisher: Circle
Pegging: 1:1 with fiat currency, fully backed by Circle reserves
Collateral composition (as of March 7, 2024): Cash 12.28%, Circle Reserve Fund 87.72%
Circle Reserve Fund (ticker: USDXX): Held at BNY Mellon and managed by BlackRock, consists of 58.01% U.S. Treasury repurchase agreements and 41.99% U.S. Treasury bonds (as of March 11, 2024).
USDC collateral composition, source: Circle
Verification method: Monthly audit report from one of the Big Four accounting firms (currently Deloitte)
Compared with USDT, monthly reports issued by a well-known accounting firm and transparent fund management make USDC more reliable.
Charging policy: Free
Issuance qualification: Only verified members
3.2.1. Recent Updates
Income status:
Circle's revenue in the first half of 2023 was approximately $779 million. In order to expand its market share, Circle implemented a zero-fee policy, resulting in lower revenue than USDT. However, its conservative fund management and compliance efforts are expected to attract more institutional demand.
Decoupling events:
In March 2023, after the collapse of Silicon Valley Bank (SVB), it was revealed that $3.3 billion (about 8-9%) of Circle’s $40 billion reserves were in SVB, causing the USDC price to fall to $0.86. The U.S. government’s full guarantee of SVB deposits resolved the incident without causing any loss of reserves.
USDC supply by blockchain. Source: The Block
Release Status:
USDC is primarily issued on the Ethereum blockchain, accounting for 80% of the total supply. Unlike USDT, Circle does not issue USDC on the Tron blockchain. In February 2024, Circle decided to stop supporting Tron in accordance with its risk management framework, allowing customers to transfer Tron-based USDC to other chains until February 2025.
Compared to centralized exchanges, USDC is more widely used in the DeFi ecosystem. As DeFi on Solana grows, the issuance of USDC on the Solana chain is also increasing.
3.3. FROM
Issuer: MakerDAO
Hooking mechanism: Collateralized through Maker Vault in an overcollateralized mode.
Collateral Composition: Cryptocurrency and Real Assets (RWA)
Spark dApp Collateral: $1.19 billion (~26%)
USDC: $757 million (about 16.55%)
ETH: $676 million (about 14.77%)
WSTETH: $515 million (about 11.25%)
RWA007 (Real World Assets): $446 million (about 9.75%)
Others: US$990 million (approximately 21.64%)
DAI collateral, source: Makerburn
Verification method: On-chain data
Fee policy: Varies depending on vault liquidity
Eligibility: Anyone can participate
3.3.1. Recent Updates
Income status:
MakerDAO's revenue in 2023 was $75.5 million and its net profit was $21.7 million, an increase of 15.6% compared to 2022. The proportion of RWA assets in its collateral increased by 281.5%, indicating a change in the collateral composition.
MakerDAO 2023 Financial Report, Source: MakerDAO
Release Status:
DAI is used on various blockchains, with 90% of its issuance concentrated on Ethereum. This concentration is because Spark, the main dApp that generates DAI, currently only supports Ethereum and Gnosis Chain.
DAI supply by blockchain. Source: Deflama
Features:
Unlike centralized stablecoins such as USDT and USDC, which are pegged to fiat currencies and backed by regular audit reports, decentralized DAI is transparently backed by on-chain collateral and anyone can participate in its issuance.
However, DAI also faces some challenges, such as reduced efficiency due to over-collateralization, difficult to manage fluctuations in collateral value, and irregular fees.
4. Failure of stablecoins
Existing stablecoins, such as DAI, have struggled to gain widespread adoption due to the capital inefficiencies inherent in the over-collateralized model and the lack of scalability. To address these issues, many projects have received significant investment to try innovative approaches, but have ultimately been thwarted by unclear regulations and structural limitations.
Famous failures include the Basis, Terra, and Diem (formerly Libra) projects. The Basis project was halted due to regulatory issues despite receiving $133 million in investment. Terra suffered a decoupling attack, resulting in a loss of approximately 59 trillion won. Similarly, the Facebook-led Diem project was indefinitely postponed and ultimately terminated due to regulatory opposition.
These failures highlight the need for a clear regulatory framework and the need for technical solutions that can ensure the success of stablecoins. The following is a detailed explanation of these failures:
Basis
Objective: Basis aims to solve the capital efficiency problem of stablecoins.
Funding: $133 million in 2018 from major investors including Andreessen Horowitz, Polychain Capital, and Meta Stable.
Failure: Regulatory concerns suggested that the token could become subject to U.S. securities regulation, which would significantly reduce its liquidity and ability to resist censorship. As a result, Basis returned capital to investors and terminated the project.
Earth
Objective: Terra attempts to solve the capital efficiency problem using an algorithmic stablecoin model.
Mechanism: Utilizing the LUNA and UST dual token system, UST is pegged to the US dollar through LUNA.
Failure: In May 2022, a massive decoupling attack caused UST to lose its peg to the U.S. dollar, leading to hyperinflation and system collapse in LUNA. Losses were estimated at about 59 trillion won, causing widespread repercussions on the market.
Diem (formerly Libra)
Goal: Diem, led by Facebook, aims to launch a global stablecoin backed by multiple currencies, including the U.S. dollar and the euro.
Participation: 28 companies are participating, including Mastercard, Visa and Uber, with plans to expand to 100 companies.
Failure: Faced strong regulatory resistance from the EU and G7 countries, leading to indefinite delays and partner withdrawals. The project was renamed Diem and scaled back to a stablecoin pegged to the US dollar, but ultimately failed to resolve regulatory ambiguities and was terminated.
These cases highlight global concerns about the impact of stablecoin monetary policy, as well as large-scale losses such as the Terra incident, prompting the need for sound stablecoin regulations and guidelines. The success of stablecoin projects requires not only technical solutions, but also the establishment of clear regulatory standards.
5. Definition and regulatory status of stablecoins in various countries
5.1. Singapore (MAS)
Stablecoin definition:
A digital payment token that is pegged to the value of one or more specific fiat currencies.
applicability:
Applicable to single-currency stablecoins (SCS) pegged to the Singapore dollar or a G10 currency issued in Singapore.
Main requirements:
Value stability: The composition, valuation, custody and audit requirements of reserve assets must be met.
Capital requirements: Minimum base capital and liquid assets must be maintained.
Redemption at par: Must be redeemed at par within five business days of receipt of request.
Disclosure obligations: Information such as value stabilization mechanisms, holder rights, and audit results must be disclosed.
Stablecoin certification regulated by the Monetary Authority of Singapore:
If the above requirements are met, the issuer can apply for certification as a "stablecoin regulated by the Monetary Authority of Singapore". Only certified stablecoins can be labeled.
5.2. Europe (MiCA)
Stablecoin definition:
In Europe, stablecoins are classified according to their backing mechanism:
E-money tokens: issued at a 1:1 ratio with fiat currency, providing holders with redemption rights.
Asset-referenced tokens: Stabilized by a basket of assets, including fiat currencies, commodities, cryptocurrencies, etc.
Utility Tokens: are not considered stablecoins because they stabilize value algorithmically.
Only e-money tokens and asset-referenced tokens are included in the stablecoin category, and the regulation varies depending on the purpose of issuance and the supporting assets.
Regulatory types of stablecoins:
The regulations governing the issuance and operation of e-money tokens and asset-referenced tokens differ significantly.
Source: Regulations on Markets in Crypto-Assets (MiCA) (2022.10.09.) (Korean translation from the Bank of Korea)
Regulations for the issuance and operation of electronic currency tokens:
Issuer Qualifications:
Limited to banks and electronic money institutions, which need to be licensed under the Directive on the Business of Electronic Money Institutions (Directive 2009/110/EC).
Main obligations:
Comply with the operational requirements for electronic money institutions, including minimum capital requirements.
Token holders are guaranteed to redeem their tokens at par value at any time with minimal fees.
Payment of interest on token holdings is prohibited.
Secure fund management, ensuring that funds are invested in assets in the same currency to avoid exchange rate risks, and securely managing funds through custodian services.
Influence:
Strict eligibility and obligation regulations promote the robustness of e-money token issuance and operation, but there is also criticism that the central role of traditional financial institutions has led to limited innovation.
Asset reference token issuance and operation regulations:
Approval and rejection rules:
Issuance requires prior approval from EU authorities, which have the power to refuse approval if the business model poses a serious threat to financial stability, monetary policy or monetary sovereignty. European regulators must be consulted before approval or refusal.
Investor Protection Regulations:
Issuers must provide holders with clear, fair, and non-misleading information, including detailed information in the white paper on the value stabilization mechanism, reserve asset policy, and holder rights. A conflict of interest management policy must be developed and disclosed. The value and composition of circulating and reserve assets must be disclosed monthly, along with mandatory disclosure of major events and the provision of redemption rights to holders.
Reserve Asset Management Regulations:
The issuer must maintain and conservatively manage the reserve assets on an ongoing basis, including policies on composition, allocation, risk assessment, creation and destruction procedures, and appropriate custody policies to protect the reserve assets. The reserve assets must be deposited with an authorized credit institution, a professional investment firm, or a licensed crypto asset service provider, and be liable for the loss of the reserve assets. Payment of interest for holding tokens is prohibited.
Potential uses of stablecoins:
The MiCA regulation clarifies the definition and issuance requirements of stablecoins, increasing the possibility of stablecoins being issued and used in Europe.
Large firms such as Galaxy Digital, DWS and Flow Traders are issuing euro-based stablecoins, while fintechs such as Spain’s Monetae are conducting experiments under the supervision of banks.
Given the high proportion of the euro in the foreign exchange market, it is expected that under MiCA supervision, there will be more diverse and active attempts in the euro-based stablecoin market, thereby increasing the potential for the use of stablecoins.
5.3. Japan (PSA)
Japan established the definition and system of stablecoins through the Payment Services Act (PSA), which was revised for the third time in June 2022, which regulates remittances and payments.
Stablecoin definition:
The Japan Financial Services Agency (JFSA) defines it as a "digital currency-type" stablecoin pegged 1:1 to fiat currency and a "crypto asset-type" stablecoin pegged to cryptocurrency, the latter of which is further classified as a crypto asset or security in the PSA.
Digital Currency Stablecoin Regulations:
To be classified as an electronic payment instrument, it has three basic characteristics:
Goods/services may be transferred to unspecified persons.
Transferable via electronic payment systems.
The value of property can be exchanged with unspecified persons.
Four types of electronic payment instruments:
The property value of goods/services transferable to an unspecified person.
Same exchangeable property value as Category 1.
Beneficial rights in a specific monetary trust.
Designated by the Financial Services Authority (FSA).
Banks and digital currency issuers fall under Category 1, and digital currency issuers fall under Category 3 as designated by the Financial Services Authority.
Crypto asset types can be classified into Type 4.
Category 1 and 2 electronic payment instruments require a banking or remittance business license, making them difficult to enter. Category 3 only requires a trust company license, making it relatively easy to enter.
The revised PSA also includes regulations for intermediaries of electronic payment instruments, divided into dealer and processing business licenses.
Trader Business License
Must be held when engaging in the following activities:
Trading or exchanging electronic payment instruments.
Intermediary electronic payment instrument transactions.
Managing electronic payment instruments on behalf of others.
Manage funds received from users on behalf of money transfer businesses.
A dealer license allows the processing of domestically issued and foreign-issued electronic payment instruments if the following conditions are met:
Issued by an entity licensed under a law equivalent to the PSA or the Banking Act.
A thorough audit of reserve assets is conducted by a reliable organization.
Take appropriate action if electronic payment instruments are involved in criminal activities.
Processing business license:
Intermediaries are required to provide intermediary services for electronic payment instruments issued by banks, involving the management of funds related to bank accounts and foreign exchange transactions.
In summary, an intermediary must obtain a processing license for instruments issued by a bank and a dealer license for instruments issued by a money transfer company or trust company. Both types of licenses are required for the intermediation of both types of instruments.
Potential uses of stablecoins:
After the PSA revision, large companies such as DeCurret, ENF, Jasmy, and GMO Group are actively issuing yen-based stablecoins.
Notable developments include MUFG’s collaboration with Ginko on corporate cryptocurrency payment systems and trade finance, and JPYC’s collaboration with Promat on trust-based JPYC issuance.
MUFG expects the use of stablecoins to accelerate after it obtains a dealer operating license in June 2024.
The regulatory foundation is expected to promote the issuance and use of stablecoins in Japan, marking 2024 as a key year for the Japanese stablecoin market.
5.4. New York Department of Financial Services (NYDFS)
In June 2022, New York became the first state in the United States to issue "Virtual Currency Guidelines", which included specific regulations on stablecoins.
Stablecoin Guide
Redemption of stablecoins: At the end of each business day, there must be reserves backed by the value of stablecoins issued on the market.
These reserves must be segregated from the issuer’s own assets and held in a state- or federally chartered depository institution insured by the Federal Deposit Insurance Corporation (FDIC), or in a custodian approved in writing by DFS.
Stablecoin reserves: The reserves must be composed of the following assets
U.S. Treasury securities with maturities of three months or less purchased by issuing institutions.
Reverse repurchase agreements collateralized by U.S. Treasury bills, notes, or certain longer-term Treasury securities, subject to overcollateralization conditions approved by DFS.
These reverse repurchase agreements must be tri-party or bilateral agreements with counterparties whose creditworthiness can be verified. Information on the identity and credit rating of the counterparties must be submitted to the Department of Financial Services at least 14 days before entering into the agreement.
Government money market funds (MMFs) with minimum allocations in direct U.S. government obligations and subject to DFS-approved asset ratio limits and fund disciplines.
Deposit accounts at a state or federally chartered depository institution, subject to reserve ratio or absolute limits approved by the Department of Financial Services and based on the risk characteristics of the institution.
These deposit accounts should also contain amounts reasonably necessary to meet anticipated redemption demands.
Auditing of Stablecoin Reserves
Issuers must have their reserve disclosures audited at least monthly by an independent certified public accountant (CPA) licensed in the United States, in accordance with the guidance.
These audits must comply with the auditing standards of the American Institute of Certified Public Accountants (AICPA), and the CPA’s information and audit protocols must be approved in advance in writing by DFS.
During each month of the audit, the auditor must randomly select at least one business day from the audited period and the last business day of that period to verify the issuer's reserve disclosures.
Currently, stablecoins such as Circle’s USDC and PAXOS’s PYUSD, USDP, and BUSD are issued in compliance with the guidelines of the New York Department of Financial Services (DFS). Therefore, these guidelines are expected to have a significant impact on future US stablecoin regulations.
If this effect becomes a reality, Tether's USDT may need to undergo significant changes to comply with the regulatory environment. Compared to Circle, which publishes audit reports monthly, Tether publishes reports quarterly and holds collateral such as Bitcoin that is not included in the reserve asset requirements. These differences may pose challenges for new regulations and may lead to significant changes in the stablecoin market. Therefore, it is critical to pay attention to the stablecoin regulatory environment in the United States, the largest stablecoin market.
6. Conclusion
This article reviews the current state of stablecoins, including the characteristics of major stablecoins such as USDT, USDC, and DAI, as well as regulatory discussions in Singapore, the European Union, and Japan. As stablecoin regulation becomes clearer, various attempts continue to emerge, and projects facing operational difficulties may also increase, highlighting the significant influence of regulation. Monitoring the progress of regulatory implementation is crucial to understanding market trends.
In the next article, we will examine the progress of countries preparing to introduce stablecoin regulation, compare existing regulatory policies, and explore new stablecoin projects to understand the diversification potential of the stablecoin market. Finally, we will compare the stablecoin market with the traditional foreign exchange market and explore its future development potential.
References>
Translation of Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937, Bank of Korea
Theblock Stablecoin Data
Transparency Report, Tether
Transparency & Stability, Circle
MakerDAO 2023 Annual Report
MakerBurn
DeFiLlama
MAS Finalises Stablecoin Regulatory Framework
A Look at Japan’s Stablecoin Regulations, Declan Kim
CBDCs and Stablecoins: Insights from the Bank of Korea, Circle, and Paxos, Hashed Open Research
NYFDS Virtual Currency Guidance
