Crypto, especially stablecoins, is in an odd place lately. On the one hand, there has been some price action that has pushed Bitcoin and other cryptos up and down at various times, often without an apparent reason. On the other hand, there is a lot of news lurking in the background and waiting to break that has not yet developed. It’s a precarious time for the crypto space. Perhaps the most concerning piece of news is the increasing level of scrutiny that the US government is bringing to bear on crypto. It is not yet clear what this will lead to, so there is a lot of regulatory uncertainty.
Increased Regulatory Scrutiny of Stablecoins
The Tether situation has been an ongoing source of worry for crypto investors. While investigations into Tether itself are not creating any new public news, elements of the US government are now becoming aware that stablecoins are a potential source of instability. As a result, in the last months, the SEC, the Treasury, and other entities in the US have indicated that they plan to start drafting new regulations that will specifically govern stablecoins. In addition, foreign governments are also showing signs of scrutinizing stablecoins.
What are Stablecoins Used For?
Stablecoins have always existed in a strange place in the market. They were initially devised to help manage liquidity concerns for transferring various coins between exchanges and providing a pegged coin for stable holdings. However, the actual use case for transferring cryptos using stablecoins is not popular, and the stablecoins themselves are often subject to speculative transactions. The case of Tether is the most apparent, but others like Circle have similar problems. The outsize role of stablecoins in crypto volume means there are a considerable number of transactions happening with primarily speculative or market-making motivations.
Uncertain Factors that Affect the Crypto Market
On top of that, much of the stablecoin crop is opaque. Tether and USDC have both had problems with showing that they have enough reserves to back the issuance of their currency. There is a growing sense that Tether may print new Tethers to affect Bitcoin prices, not because a customer or institution has purchased them with dollars. The ultimate impact of Tether on Bitcoin’s price is not clear, but it is true that Tether activity has only grown as BTC has become more common.
The market as a whole does not appear to be reacting to the information that stablecoins may not be backed with reserves. However, this is one more potential reason for regulators to step into the space and devise new rules and oversight.
Is Crypto No Longer Able to Self Regulate?
For many industries, the most significant players are given some leeway to “self-regulate” by coming up with trade organizations, rules for quality and standardization, and other approaches. This has mixed success, but it’s often the first step for a new industry because the government is willing to give them a chance at managing themselves. If self-regulation doesn’t lead to good outcomes, then the federal government steps in to pass more stringent and explicit regulations, and state governments often follow suit.
The same pattern may be developing with crypto. Bitcoin and other currencies have been around for long enough that they are no longer a young, new industry. The continued proliferation of scam coins and faked projects, along with the instability of crypto as a security, means that it is increasingly likely that the government will take a more active role in the near future. Even if Tether and other headline issues weren’t causing problems, the industry as a whole hasn’t developed consistent internal standards of operation or oversight, and transparency is lacking. When it comes to financial products, especially ones sold directly to consumers, this is a red flag for regulators.
IRS, SEC, and Other Regulatory Bodies
Crypto had enjoyed a long period of time when regulations in the US were lax or even nonexistent. The most that investors and developers had to worry about was tracking how the IRS was treating crypto purchases for taxation. Unfortunately, that status quo is not likely to last. There are more and more signs that the IRS, SEC, Treasury, and other branches of the government are preparing a more comprehensive regulatory strategy. Everyone connected to the crypto space needs to get ready for this eventuality.
It is likely that the authorities would have taken an interest in crypto eventually, but the poor state of the industry as a whole has not helped. As a result, the regulations are likely to be tighter and more binding than they would have been otherwise. It will take some time for each element of government to decide on what approach to take, but it is a matter of not if but when.