The decentralized finance ecosystem is growing quickly and is starting to attract attention from regulatory bodies. A new act in the US could spell danger for stablecoins and the entire industry.
Stablecoins are the backbone of DeFi since they provide the lion’s share of liquidity in the ever-increasing number of yield farms and lending incentives. New regulatory action could jeopardize as much as a trillion dollars’ worth of transactions in the fledgling financial sector according to new research by IntoTheBlock.
Stablecoin demand and issuance have surged in 2020. Tether alone has increased its market capitalization and supply by almost 400% since January. There is now over $20 billion circulating and regulators are starting to show concern.
Enter the Stable Act
A new bill from the American Congress called the ‘Stable Act’ proposes strict regulations for stablecoin issuers such as Tether. The most significant proposal is that all stablecoin issuers need to have a banking charter or license, and none of them currently do.
As reported in the latest Defiant newsletter, such a crackdown could pose a significant threat to the DeFi sector, which is largely powered by stablecoins such as USDT, USDC, and DAI.
The Stable Act also intends to introduce a Federal Reserve reporting and approval requirement at least six months before any new stablecoin issuance. Ongoing auditing will also be a new requirement should the bill be passed. Another proposed requirement is insurance or the storing of stablecoin reserves directly at the Federal Reserve, facilitating on-demand conversion into USD.
Should the Stable Act be passed, it will have huge ramifications for the entire crypto industry.
Trillion Dollar Transactions
According to IntoTheBlock analyst Lucas Outumuro who penned the article, transactions involving stablecoins could be illegal should these harsh regulations come into force.
“In 2020, the cumulative amount transacted thus far among USDT, USDC and DAI is over $1.04 trillion, all which would be deemed unlawful were the Stable Act to pass at this moment.”
He added that centralized stablecoins such as USDT and USDC, which now have over $3.3 billion in circulation, may be able to apply for a bank charter and satisfy the new stringent requirements, but decentralized assets such as DAI would be in trouble.
Furthermore, the bill also targets software validating stablecoins deeming it illegal unless registered as a chartered bank. This would put Ethereum in the line of fire since the majority of current stablecoins are based on the ERC-20 standard.
The European Central Bank has also warned against stablecoins and a major regulatory clampdown such as this could result in an exodus from U.S. shores for stablecoin issuers.