Research-driven technology investment firm Paradigm has emphasized the importance of Stablecoins and how this type of cryptocurrency will shape the future of payments. Stablecoins can upgrade and expand the payment system, offering users a secure, competitive, and innovative ecosystem.
Stablecoins are a new form of digital money that uses public, permissionless blockchains as their underlying technology. Unlike traditional currencies, stablecoins are not subject to volatility or inflation, as they are backed by assets or algorithms that maintain their value. In addition, Stablecoins offer several advantages for the digital payments ecosystem, such as reliability, shared infrastructure, programmability, and composability.
The dollar-pegged crypto can change how we pay and save online. But, according to Paradigm, it must follow rules and standards to keep users’ trust. So, we need fair and fitting rules for Stablecoins to help them grow and be used without the problems of old financial services.
Recent U.S. Congressional proposals on Stablecoins consider issuance beyond banks, but ongoing policy discussions rely on traditional banking and securities frameworks like capital requirements and risk management for regulation.
However, Stablecoins have unique risks and use cases, making traditional models inadequate. While addressing prudential and market risks is crucial, the regulatory approach should also enable payment Stablecoins to thrive, ensuring confidence in them as money without concentration of control in a few market participants.
“If policymakers are going to seize the opportunity to craft regulation that meets the moment, they should do so by promoting openness and competition more than current banking or securities frameworks,”
Why Stablecoins Should Not Be Regulated Like MMFs
While Stablecoins and money market funds (MMFs) share some similarities, they are used for very different purposes, the company said. Stablecoins are primarily for paying the U.S. dollar leg in a crypto transaction, while MMFs are an investment option or a cash management vehicle.
Regulating Stablecoins as MMFs would strip them of their utility as a payment mechanism. Also, most Stablecoins do not pay interest to holders. MMFs are not designed for transfer between users; instead, they are bought and redeemed through brokers or banks.
Paradigm believes that it would be a mistake to force-fit stablecoins into the MMF regulatory framework. Instead, the firm believes that stablecoins should be regulated in a way that is consistent with their unique structure and purpose. This would allow this specific cryptocurrency to continue to be used as a payment mechanism and to grow the crypto economy.
Here are some additional arguments against regulating stablecoins as MMFs:
- Stablecoins are not subject to the same liquidity risks as MMFs.
- Stablecoins are not subject to the same credit risks as MMFs.
- Stablecoins are not subject to the same market risks as MMFs.
“We believe it would be a mistake to force-fit stablecoins into the MMF regulatory framework, particularly where there is an opportunity for legislation to create a framework more tailored to the risks posed by stablecoins and the actual market behaviors around them,”
the company added.
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