The downside of stablcoins

The report pays particular attention to the USD Coin (USDC) token issued by Circle. According to its financial statements, USDC is backed by higher-grade assets than, for example, the market’s largest stackablecoin, Tether (USDT). However, the bank’s analysts believe that USDC’s reserves could still be subject to high volatility.

Capitalisation of the largest stablcoins according to the report

All this allegedly creates “serious financial implications” in the event that traditional assets backed by stablcoin are exposed to an economic crisis. We’re talking about cash currency, commercial paper and US bonds. This is indeed the case – the rapid depreciation of assets backed by stablcoin could cause a chain reaction collapse in decentralised finance, as USDC is one of the most popular stablcoins within it.

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According to Decrypt’s sources, another problem is the fact that crypto-stablecoins have too much of a gap between them in terms of reliability. Recall that the TerraClassicUSD (USTC) algorithmic stablocoin collapsed this spring, leading to an outflow of more than $7 billion of its capitalisation between May and October. Over the same time period, USDC had inflows of $4 billion. Here’s a quote from a report on the matter.

Resilient stablecoins can increase the risk of capital outflows from less-secure projects because they are a handy tool to lock in risk in case a more unreliable stablecoin collapses.

TerraClassicUSD collapse from report data

As stablcoins grow in capitalisation, any risk to their collateral assets becomes even more important to monitor against the backdrop of a difficult macroeconomic environment. One problem to note here is that the reporting of collateral for stablcocoins rests entirely on the shoulders of their issuers. If their financial stability is threatened by something, it will affect their reputation, meaning that sometimes some issuers may be silent on the true extent of the problem, even though it is illegal.

Overall, it is the stabelcoins that are the weakest link in the entire crypto market ecosystem, according to experts.

Because stabelcoins are supposed to be the safest asset in the cryptocurrency ecosystem, problems with them pose the greatest systemic risk to digital assets.

Stablecoin compass according to the report

To mitigate this risk, regulators “should have the authority to implement standards that promote interoperability between stabelcoins.” One potential way to achieve greater interoperability is through the use of blockchain bridges, which allow tokens destined for use on one blockchain to be moved to another, expanding access to new protocols and assets. Bridges, however, can become a target for cyberattacks, which poses certain risks. Such platforms have been repeatedly attacked by hackers in the past.

Other ways to mitigate the aforementioned risks are by passing laws that "should require stablocoin issuers to comply with restrictions on activities and cooperation with commercial entities". In other words, there are two ways to go - either build infrastructure from blockchain bridges, which is risky from a cybersecurity perspective, or go for closer cooperation with financial regulators.

The topic of linking digital assets and government officials does not end there. On the eve, former Commodity Futures Trading Commission (CFTC) commissioner Brian Kintjens, in a recent interview, shared some interesting insights into the crypto industry’s relationship with financial regulators. He said he understands why digital asset owners are massively unhappy with SEC policies, but does not see the regulatory issue itself as a major problem. It’s just that crypto is now allegedly trying to fit an inappropriate regulatory framework.

How to properly regulate cryptocurrencies?

Here’s one of Kintens’ quotes, which he voiced in an interview with Decrypt reporters.

I think the crypto industry wants regulation that fits their technology and goals. That way you can allow innovation to really reach its full potential. But you can’t get that from the Securities and Exchange Commission.

Incidentally, Quintens now works as an advisory partner in the cryptocurrency team at venture capital firm Andreessen Horowitz. He continues.

They approached me after I left the CFTC because they knew that policy, regulation, legislation would be the focus of the crypto industry.

Former CFTC member Brian Quintens

According to the expert, some regulators are taking an approach to cryptocurrencies that resists innovation rather than paving the way for new technologies.

If the US Securities and Exchange Commission were serious, it could do something that would allow some sort of regulatory structure to exist without threatening the entire cryptocurrency ecosystem.

The designation of cryptocurrencies as securities, on the other hand, is causing some problems in terms of compliance with SEC rules. As a reminder, the Commission has previously hinted that transactions on the Etherium network allegedly belong in US jurisdiction and should be regulated by the relevant body of law.

Cryptocurrencies

The Commission, through its shortsightedness, has left it to the US Congress to come up with a new regulatory system, and this is one of the only ways that Quintens believes the CFTC can gain control of spot cryptocurrency trading. Part of his effort is to work with officials to educate them on the potential benefits of better regulation of the cryptosphere.

The more a member of Congress or senator is informed about cryptocurrencies, the more rational, sensible, productive and positive their stance on digital assets will be.


We can agree with this point of view: still, many members of governments lack basic education about crypto in order to rationally approach the issue of its regulation. The same situation could be with regulators - where is the guarantee that all members of the same Securities and Exchange Commission fully understand the intricacies of the crypto market world? Obviously, this is a situation that needs to be rectified.

Well, the rise in popularity of Stablecoin is also evident here. And while bank officials have voiced some concerns about this type of token, the latter is gaining traction around the world in one way or another.


Which way do you like it better? Maybe you have other suggestions? Share them in our Millionaire Crypto Chat. We will discuss other important topics there as well.