Centralized stablecoins can be doomed to fail

In recent years, central banks and governments have seen great interest in the stable coin market. The reason for this lies in the development of central bank digital currencies (CBDCs).

The idea of ​​issuing a digital alternative to cash is a big motivator for central banks. This gives them more control over the transition and processing of cashless transactions that are currently indirectly monitored by private payment processors and banks.

Connected: Did CBDCs affect the crypto space in 2020 and what’s next in 2021? Experts answer

There have been a number of CBDC pilots and initiatives launched by several central banks and more are about to begin. It is important to note, however, that CBDC has nothing to do with cryptocurrency or known stable coins in the crypto community – they are not meant to be heavily used in trading. Some of them aren’t even exchanged for crypto. CBDCs are a purely digital alternative to cash that is completely controlled by the central banks.

Connected: Central bank digital currencies are dead in the water

CBDCs and stablecoins

A reasonable question arises: if CBDCs and centralized stablecoins solve different market demands, why can’t they coexist? In principle they could, but at a very high price for the latter.

When it comes to exercising control over money in any form, the central banks are pretty strict and straightforward – if you want a piece of it you have to be heavily regulated. When central banks enter the world of digital currencies, they will apply the same principles to every existing market participant.

A good example of this approach is a bill that was presented to the US Congress in late November 2020 and is known as the Stablecoin Classification and Regulation Act of 2020.

  • A stablecoin can only be issued by an insured depository that is a member of the Federal Reserve System.
  • Written approval from the responsible Bundesbank and the Federal Reserve System is required for the issue of stablecoins or the provision of services in connection with stablecoin.

In summary, the bill aims to apply banking regulations to centralized stablecoin issuers, which could have a huge impact on the stablecoins currently on the market. Some of them are not regulated at all, others. However, they are not as strong as the bill suggests.

Without going into the specifics of each jurisdiction or the future of individual legislative initiatives, it’s pretty clear that regulators outside of the United States could take a similar approach.

Should decentralized stable coins replace the old ones?

It is also clear that the modern cryptocurrency industry is inconceivable without stable coins and the possible disappearance of centralized stable coins could immediately have irreversible effects on the market. However, this impact could be mitigated by transferring liquidity to decentralized stablecoins, which are a competitive alternative and at the same time may not fall within the scope of central bank rules.

The main problem with decentralized stable coins is conceptual: the lack of an issuer automatically leads to a lack of stability, guarantees, legal responsibilities and governance. There are currently a variety of decentralized protocols designed to solve this problem by delegating governance to the community and ensuring full transparency and control over collateral represented by cryptocurrency or other stable coins.

Related topics: You can’t talk about blockchain and can’t call CBDCs and stablecoins

Despite solving part of the problem, the stability problem remains in the air. Using cryptocurrency as security is the most obvious solution for decentralized protocols in terms of transparency, but it can barely compete with the stable coins pegged to US dollars in terms of stability (yes, DAI, we’re looking at you now).

So it seems that a perfect solution could be a community-managed decentralized stablecoin tied to real assets of stable value – currency, debt obligations, or other. The emergence of such solutions could have a significant impact on the current stablecoin industry, providing traders with a stable and transparent alternative to the currently centralized stablecoins, which are on the verge of elimination under pressure from regulators and central banks.

The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Artem Tolkachev is the founder and CEO of Tokenomica. He has been a lawyer and entrepreneur specializing in intellectual property and information technology since 2011. In 2016, Artem founded and led the Deloitte CIS Blockchain Lab. As part of this initiative, he led a number of innovative projects that included the implementation of blockchain solutions for businesses, the tokenization of real assets, the tax and legal structuring of security token offerings, the development of cryptocurrency and blockchain legislation.