Syllabus:
GS3: Awareness in the fields of IT, Space, Computers, robotics, Nano-technology, bio-technology and issues relating to intellectual property rights.
Context:
Recently, the US Senate passed the GENIUS Act, a legislation that gives American banks and even large companies like Amazon and Walmart the legal green light to issue digital dollars known as stablecoins on public blockchains.
More on the News
- The Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act places oversight of stablecoins, or reserve backed cryptocurrency under the purview of the Office of the Comptroller the Currency in the US, similar to the GENIUS Act.
- However, STABLE Act differs from the GENIUS Act in terms of limiting reserve backing requirements to a clutch of assets such as US Treasuries apart from restricting who can issue stablecoins.
- Similarly, the Digital Asset Basic Act bill was introduced in South Korea’s National Assembly. Under this bill, domestic firms can issue their own stablecoins pegged to the South Korean currency Won.
- Also, Hong Kong ‘s Legislative Council passed a stablecoin legislation to establish a licensing regime for local ‘fiat-referenced stablecoins’ issuers.
- For this, the Bank for International Settlements (BIS) warned that stablecoins, though asset-backed, are not true money and could threaten financial stability if their use expands.
- New laws backing stablecoins underscore the need to ensure the protection of the general public and compliance with anti-money laundering requirements, among others.
- According to the BIS, while stablecoins display “some attributes of money”, they were “unsound money, with real societal cost that fail the triple test of singleness, elasticity and integrity.”
- It also pointed out that there is an “inherent tension between stablecoin issuers’ ability to fully uphold their promise of stability and their pursuit of a profitable business model.”
About Stablecoins
- A stablecoin is a digital currency whose value is pegged to a ‘stable’ asset, such as the U.S. dollar or gold.
- The best-known stablecoin in the crypto ecosystem today is arguably Tether (USDT).
- It means a bank in the US would be able to issue a digital version of the dollar, backed by government bonds, and it can be used for payments across the world.
- This brings together the trust of government securities and the speed and transparency of blockchain technology.
Significance
- De-dollarisation with an idea of National Currency push: Despite the warnings, lawmakers in the West as well as the East are moving ahead with frameworks for the issuance of private stablecoins.
- Their objective may not necessarily be so much about boosting crypto and digital ecosystems but looking to push demand for their respective national currencies, such as the Korean won and the Chinese yuan.
- Stability: Stablecoins are tied to reserve assets, helping them maintain steady value and avoid the volatility common in other cryptocurrencies.
- Boosting Financial Inclusion and Cross-Border Payments: Stablecoins offer faster, low-cost international transactions and can expand financial access to over a billion unbanked people globally.
Concerns
- Continuing American dollar dominance: A weakening US dollar has prompted the US administration to back stablecoins, viewing them as tools to sustain dollar dominance and reduce borrowing costs, part of Digital Diplomacy of USA.
- As more stablecoins circulate globally, demand for US debt increases, borrowing costs go down, and the dollar’s dominance is reinforced in the digital era.
- Regulatory Uncertainty: The global regulatory environment continues to evolve, thus creating uncertainties for stablecoin protocols. The stablecoin industry faces limitations because government authorities enforce rules and requirements upon issuers of these coins that subsequently influence user activity.
- Smart Contract Vulnerabilities: Stablecoins that depend on cryptocurrency or algorithms have built-in code that remains susceptible to program errors unless it undergoes complete third-party reviews.
Way forward
- Robust regulation: The risks within the stablecoin ecosystem are very high. And now, as regulators step in, the market is expected to make traders more fearful.
- Interoperability with Existing Financial Systems: Design stablecoins to work seamlessly with existing banking and payment infrastructure, avoiding fragmentation and improving usability.
- Cybersecurity and Operational Resilience: Implement stringent cybersecurity protocols and contingency planning to guard against hacks, fraud, and technical failures.