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Cryptoassets might have begun as an attempt to construct a trustless ecosystem that had no need for traditional financial intermediaries such as banks, payment processors, and other centralized institutions, but the reality has become a bit more nuanced. Even as bitcoin and other decentralized cryptocurrencies continue to attract individual and institutional investors, one of the primary avenues for mainstream adoption has been a more centralized option; stablecoins. Stablecoins might have begun as an offshoot of original cryptocurrencies, but have rapidly grown in both importance and the level of attention brought to bear on these instruments by regulators.

At the core of the idea stablecoins represent the best of both worlds, the stability of the fiat currencies supporting the instruments combined with the speed and transparency of blockchain-based transactions. With this potential, however, there have also been numerous questions and issues that been raised by market actors and policymakers alike that have yet to be addressed effectively. Specifically, the issues around regulatory approval, the custody of underlying assets, and how stablecoins will fit into the existing payment infrastructure are not idle concerns. Such issues can slow down innovation within the sector, and actually drive the best ideas and concepts out of U.S. markets. That is why intelligent and well thought out regulation around stablecoins is essential, and why recent activities are a positive step forward for the industry.

Recently issued by the office of Senator Toomey, the Stablecoin Transparency of Reserves and Uniform Safe Transactions (TRUST) Act represents a step in the right direction. Let’s take a look at some of the significant components and implications of this proposed regulation.

Stablecoins are not securities. One of the most pressing questions that continues to create concerns and issues for market participants is the uncertainty and ambiguity pertaining to whether or not cryptoassets are securities. The Securities and Exchange Commission (SEC) has seemingly adopted an approached of regulation-by-edit or by lawsuit, with numerous cases having been launched and settled since 2020. Despite these settlements and analyses that have resulted from these cases, official and binding guidance has yet to be issued.

Without definitive and clear guidance over which regulator oversees the cryptoasset space, the sector will continue to struggle to fully develop. One of the key provisions in the TRUST Act is that it states explicitly that payment stablecoins are not securities, and would be exempt for securities registration.

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As positive as this statement is, there is further delineation that is also included in this proposed legislation.

Refining stablecoin definitions. An additional point that is embedded within this Act is the creation of a definition for payment stablecoin, which includes defining what the core characteristics of these assets are. These include but are not limited to being a convertible virtual currency that is intended to be used as a medium of exchange, that can be redeemed for the underlying fiat asset in question, does not necessarily pay interest out to holders of this instrument, and whose transactions are recorded on a public blockchain ledger.

In addition to these specific characteristics, the Act also defines how these payment stablecoins should be reserved, including what types of assets will be considered liquid and secure enough to do so. This guidance would address some of the questions around just how some of the most widely traded stablecoins are currently reserved or supported. Reinforcing this proposed guidance, the Act also calls for stablecoins issuers to undergo annual attestations to provide a reportable and consistent set of data for external users to examine.

When combined, the clarification of stablecoin characteristics, how stablecoins are reserved, and the process by which reserves are verified, this Act could possible address several of the most significant questions facing the space.

Expanding the market. An additional key factor contained within this Act is that the types of organizations that are able to participate in the stablecoin sector has been expanded. While the Act does, and rightly so, call for oversight of stablecoin issues by the Office of the Comptroller of the Currency (OCC), it seems to indicate that ensconcing issuers within an existing federal insurance framework might not be necessary. On the surface this would seem potentially naïve and an almost guaranteed way to elevate the risk of this business model, but looking closer reveals a more complete perspective.

While insurance for any organization is clearly a good idea, if the other measures in the Act pass and are embraced by the industry, this would mitigate a significant portion of the operational risk associated with this space. For example, if a stablecoin issuer has reserves – as defined by the Act – on a 1:1 basis for every stablecoin issued, and had these reserves attested to on a consistent, transparent, and market driven basis, the issues around redemption risk would be reduced.

Regulating any fast moving industry is not an easy task, and regulators the world over face an unenviable task as the sector continues to develop and mature. Despite the periodic bursts of partisan debate the characterize politics in any country, there are signs that the crypto regulatory debate in the U.S. is (slowly) maturing and catching up with market developments. No single piece of legislation is a cure-all for the crypto space, but legislation like that contained in the TRUST Act is a sizeable step in the right direction.

Source: Forbes

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