The problem with stablecoins as UK government opens the door to Tether et al.

Rick Steves

“It’s not without irony that the greatest critics of a ‘Central Bank Establishment’ that blame the US Fed for unpegging the US dollar from gold or central banks in general for their currency monopolies do not have similar concerns with Tether.”

The UK government aims to turn the jurisdiction into a global crypto-asset technology hub, according to UK Treasury Secretary Rishi Sunak, who pointed toward regulation paving the use of stablecoins in the United Kingdom as a recognised form of payment.

At the same time, the Financial Conduct Authority announced that it wants to increase its enforcement options against problem companies as the regulator increases its focus on investor and consumer protection more than ever.

What will have been perceived as positive news by the majority of people, may have come as a blowback for the supporters of ultra-loose crypto regulation, said Alpay Soytürk, Chief Regulatory Officer at Spectrum Markets.

The irony of unknown or insufficient reserves in stablecoins

“Stablecoins, that the Chancellor of the Exchequer intends to make a legal tender, are under some criticism. According to (upcoming) EU regulation, stablecoins are asset-referenced tokens or crypto-assets that are intended to serve as a medium of exchange and for which a stable value is assumed by referencing fiat currencies, commodities or other crypto values. And the most prominent example of a stablecoin is “Tether” which promises a fixed exchange rate of 1:1 to the US dollar and can be exchanged for other cryptocurrencies. Being exchangeable for, e.g., Bitcoin and pegging the value to the US dollar means that investors can enter into and out of Tether at any time to protect against fluctuations of volatile cryptocurrencies. This option has made Tether the most-traded crypto asset worldwide and by far the largest pair currency for exchanging Bitcoin”, Spectrum’s Soytürk continued.

“The problem with stablecoins is their – unknown or insufficient or both – reserves. It’s not without irony that the greatest critics of a ‘Central Bank Establishment’ that blame the US Fed for unpegging the US dollar from gold or central banks in general for their currency monopolies do not have similar concerns with Tether. As most of us remember well from the Lehman collapse in 2008 – and its ramifications – it’s not the size of an asset class that is important for the potential impact on financial market stability and integrity but rather its interconnectedness. Given the increasing number of private households engaging in crypto-assets, this should be given some consideration.”

“In summary, discussions on the potential of the distributed ledger technology remind me a bit of Tesla. Publicly, it seems that there are just polarising camps of believers or haters while a quiet majority just makes decisions based on reason and preferences. This majority enjoys the protection of prudent regulation and in that context, I expressly welcome the FCA’s recent statements.”

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