The increasing growth in stablecoin markets has regulators on watch as many countries are requesting regulatory framework. Ever since Facebook released the Libra white-paper, policymakers have been shifting focus, addressing many of the concerns that banks and other financial institutions have. In recent developments, Germany, France, Italy, Spain, and the Netherlands have reached out to the European Commission, seeking firm regulation on stablecoin framework.
Europe And Stablecoin Framework
According to a recent report by Reuters, large European states have reached out to the European Commission, requesting strict regulation on stablecoins and other cryptocurrencies that are considered “asset-backed.” It is important to note that stablecoins are considered “asset-backed” since they tend to be digital assets backed 1:1 with fiat currencies. An example would be USDC, which is Circle’s regulated stablecoin that is backed on a 1:1 basis for US dollars. According to the report, Germany, France, Italy, Spain, and the Netherlands are the 5 regions calling on the European Commission.
Regulatory Clarity
In a push to protect consumers, the 5 countries are seeking strict guidelines that could stifle private sector operations. According to German Finance Minister, Olaf Scholz, he believes that all private sector companies working with asset backed cryptocurrencies should be banned if they do not meet certain requirements. Additionally, the 5 countries reaching out to the European Commission are requesting stablecoins to be backed 1:1 against fiat currencies, with reserve assets being denominated in the Euro and parked at approved financial institutions in the EU.
If a company plans to roll out stablecoin infrastructure, the 5 European states believe that these companies should be required to register in the EU. This could be a big blow to companies like Facebook that want to roll out a stablecoin ( Libra ) that could essentially be in the hands of people on a global scale. The EU has been following Libra developments for a while, stating last year that the project had no chance in the region unless proper rules and regulations were in place.
In the report, French Finance Minister Bruno Le Maire stated that:
“We’re waiting for the Commission to issue very strong and very clear rules to avoid the misuse of cryptocurrencies for terrorist activities or for money laundering.”
Stablecoin Growth
With stablecoin adoption growing on a global scale, regulators are fully engaged in the financial transition. According to a report by Bitstamp and Coin Metrics, the supply of stablecoins was growing at the fastest pace ever in July of this year. With traditional cryptocurrencies having high volatility, the market is transitioning to stablecoins, which lack upside potential, but use the underlying infrastructure of cryptocurrencies to carry out everyday tasks that can not withstand high volatility. Since most stablecoins are pegged 1:1 with a reserve currency, volatility tends to be stable.
We can see the exponential growth in stablecoins this year by looking at supply levels. Over the last 5 years, supply reached 6 billion. If we assess this years activities, supply had doubled to 12 billion in only 4 months. Stablecoins even exceeded their typical $1 price level this year as demand was pouring in. Top stablecoins seeing increased demand were USDC, USDT, PAX, BUSD, and HUSD.
Stablecoin Lending
Aside from low volatility, another catalyst in stablecoin growth is the lending industry. Digital asset markets have seen stablecoin lending take off this year as investors seek higher yields. With the Federal Reserve keeping traditional interest rates at near 0% levels, investors receive little to no yield from traditional banks. With emerging companies in the cryptocurrency space such as Celsius Network offering 16% APY on various stablecoins, it becomes evident why stablecoin markets are gaining so much attention.
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