Stablecoin Regulation Worldwide: Navigating the Evolving Landscape

The world of cryptocurrencies has witnessed a remarkable rise of stablecoins in recent years. These digital assets are designed to maintain a stable value, providing a reliable medium of exchange and a store of value in the often volatile cryptocurrency market.

While they have gained immense popularity, the absence of comprehensive regulation has led to incidents like depegging, raising concerns about the stability and integrity of these assets.

For investors (especially those who suffered losses in the Terra Luna collapse), the increase in stablecoin regulation is thus a welcome step in order to bring much-needed stability and transparency to the crypto industry in general. Besides guarding against depegging, robust regulatory oversight can protect investors by giving the assurance that these assets are properly backed by real-world assets or held to certain standards, ensuring more consumer protection, market stability, and transparency.

This article explores the surge in stablecoins, the evolving global regulatory landscape, and the outlook for stablecoin regulation in countries like the UAE, Singapore, the UK, and Hong Kong.

The Surge in Stablecoins

Stablecoins have gained prominence within the crypto landscape, serving as a crucial bridge between traditional fiat currencies and the cryptocurrency world. These digital assets come in various forms, such as fiat-pegged, crypto-collateralized, interest-bearing, synthetic, and algorithmic. They provide stability and a means for seamless transactions and payments across fiat and crypto ecosystems, for example, in the trading of cryptocurrencies and other forms of digital assets.

One key indicator of the stablecoin’s ascent is its impressive market capitalization. As of August 2023, the total market value of stablecoins is around $125 billion, with Tether (USDT) leading the pack at $85 billion, followed by USD Coin (USDC) at $24 billion, as per CoinGecko data.

While stablecoins offer an excellent alternative for crypto traders and users, their rapid rise has raised regulatory concerns, as their opacity and collateralization methods often lack transparency. Regulatory agencies have increasingly focused on addressing these issues, prompting the need for a comprehensive global regulatory framework.

However, the absence of a coherent global framework has exposed stablecoins to depegging vulnerabilities such as the one involving USDC and DAI, occurred due to the failure of US banks, including Silicon Valley Bank (SVB), Signature Bank, and Silvergate Bank. This led to USDC depegging by 13%, causing significant disruptions in the market. Such events highlight the need for tighter regulation and supervision.

A Look at How Stablecoin Regulations Are Evolving

The growing regulatory scrutiny surrounding stablecoins is a testament to their increased market dominance. Concerns around transparency and collateralization have prompted regulators to step up their efforts in crafting a regulatory framework that ensures the stability and security of these digital assets.

The Financial Stability Board (FSB), an international body overseeing the global financial system, has noted that regulatory implementation for global stablecoins is still in its early stages. International cooperation is considered vital to overcome regulatory arbitrage and maintain financial stability. The FSB also highlights that the emergence of global stablecoins poses more significant risks to financial stability than their predecessors underscoring the importance of appropriate regulation and oversight to avoid potential gaps.

In response to the regulatory challenges, the FSB and other global regulatory bodies are working on crafting standards for stablecoins. Stablecoins have gained attention not only for their role as a means of payment but also as assets that can impact macroeconomic stability and monetary policies, particularly in emerging economies.

The United States, for instance, has been at the forefront of discussions on stablecoin regulation. The President’s Working Group on Financial Markets is expected to issue recommendations for stablecoin regulation in the near future.

In contrast, emerging economies, represented by the G20, express concerns about stablecoin use, as it poses a relatively greater threat to monetary policy. Differences in regulatory approaches between advanced and emerging economies could potentially hinder the development of a universal standard for stablecoin regulation.

Global Regulatory Outlook for Stablecoins

To have a deeper understanding of the evolving regulatory landscape, let’s look at the regulatory policies in three key countries: the UAE, Singapore and the UK. The regulatory outlook in these three countries reflects a global trend towards increased oversight and regulation of digital assets, including stablecoins.

• United Kingdom (UK):

On October 30, 2023, the UK government published its final rules for the crypto ecosystem, which include phased regulation for stablecoins. It seeks to regulate activities of stablecoins in two ways: firstly, by regulating the use of fiat-backed stablecoins in payment chains; secondly, by regulating the activities of issuance and custody of fiat-backed stablecoins when issued in or from the UK irrespective of their uses. The relevant legislation is set to be introduced early next year, with other crypto areas, like algorithmic stablecoins, coming under conventional financial regulation. The rules aim to bring relevant activities under the purview of the Financial Conduct Authority (FCA).

The government’s objective is to make the UK a hub for crypto-assets, and it plans to consult on an authorization regime for crypto companies. The government has also indicated that it does not intend to ban decentralized finance (DeFi) at this stage. However, these regulatory plans have faced some controversy, with concerns raised about potentially lulling users into a false sense of security and negative feedback from the crypto industry.

• Singapore:

The Monetary Authority of Singapore (MAS) has introduced a regulatory framework for stablecoins in August 2023. This framework aims to ensure value stability for stablecoins regulated in Singapore. Key requirements include holding reserves in low-risk and highly liquid assets equal to or exceeding the stablecoin’s value in circulation, returning the par value of the stablecoin to holders within five business days upon redemption, and providing appropriate disclosures, including audit results of reserves.

This framework applies to single-currency stablecoins pegged to the Singapore Dollar or G10 currencies issued in Singapore. Stablecoin issuers that meet the framework’s requirements can apply to MAS for recognition as “MAS-regulated stablecoins.”

• United Arab Emirates (Dubai):

Dubai’s Virtual Assets Regulatory Authority (VARA) has introduced regulations for fiat referenced virtual assets (FRVAs), which are stablecoins designed to maintain a stable value in relation to a fiat currency. The rules categorize virtual assets into two categories, with varying levels of regulation. FRVAs, in the category of “category 1” assets, require authorization and licensing from VARA and compliance with its regulations.

VARA’s goal is to provide certainty for stablecoin issuance, management, and redemption. These regulations aim to address the limited regulatory oversight of stablecoins in the global market.

The regulatory landscape for stablecoins continues to evolve, with more jurisdictions considering similar measures to provide regulatory clarity in the crypto industry.