Rather than Banning Stablecoins, Bankers Should Worry About Strengthening Their Own Currencies

Hello Defiers! Here’s what’s going on in DeFi

• Podcast with Loopring founder Daniel Wang released!
• Bankers were just advised to tighten stablecoin regulation
• DeFi Saver releases update to prevent another MakerDAO Black Thursday

and more:)

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The Defiant Podcast Episode 2: Don’t Trade Decentralized Money on Centralized Exchanges

Ever since Ethereum launched in 2015, there has been one over-arching concern hanging over developers’ heads: scalability. Loopring CEO and Founder Daniel Wang is using scaling solutions to build a protocol for non-custodial exchanges than can compete in throughput and cost with centralized exchanges. Is scaling on Ethereum solved? Listen up to what he has to say about that in The Defiant podcast’s second episode.

Bankers Advised to Tighten Stablecoin Regulations

The Financial Stability Board, which advises the G20 on vulnerabilities to the global financial system, yesterday published a document outlining 10 recommendations on how bankers should regulate stablecoins, which go from anti-money laundering sanctions to outright prohibiting these coins.

Takeways:

• Stablecoin volume and use has become significant enough to prompt this document in the first place.
• The best positioned stablecoins will be ones on the furthest end of the “decentralization spectrum”: Those that have gone to great lengths to comply with regulators, like USDC, and those that have minimized their reliance on third parties, like Dai.
• Bankers should worry about making their local currencies and the global financial system more attractive to use than trying to ban digital assets.

Image source: fsb.org

Bankers are seeing potential in stablecoins

“The use of stablecoins as a means of payment or a store of value might significantly increase in the future, possibly across multiple jurisdictions,” the document said, even if it’s “currently contained.”

The Tether stablecoin is the third-largest cryptocurrency by market capitalization and the digital asset with the most trading volume, surpassing even bitcoin’s. Stablecoins are becoming enough of a threat that bankers are taking enough notice to consider draconian measures.

Stablecoins raise the following risks, according to the FSB:

If stablecoins are used as a store of value, variations in their value “might cause significant fluctuations in users’ wealth. Such wealth effects may be sizeable enough to affect spending decisions and economic activity.”

What about variations in government backed currencies? The reason why people might seek stablecoins in the first place is the erosion of value in their local currencies.

Large-scale flows of funds into or out of global stablecoins “could test the ability of the supporting infrastructure to handle high transaction volumes and the financing conditions of the wider financial system.”

The financial system currently handles trillions of dollars in transaction volume per day. Stablecoins would be just one more FX pair among the hundreds being transacted already.

“Macrofinancial risks may arise particularly if, over time, households and businesses in some economies (e.g. EMDEs) come to hold substantial portions of their wealth in GSCs [global stablecoins], rather than in local currencies. During periods of stress, households in some countries might come to regard GSCs as a safe store of value over existing fiat currencies and exacerbate destabilising capital flows.”

If people are choosing stablecoins as a store of value or means of exchange instead of their own local currencies, that’s probably because: fiat currencies are being devalued with reckless monetary/ fiscal policies, because governments are restricting access to other safe havens such the US dollar or gold, and because the global financial system is outdated, slow, expensive and cumbersome to use.

Currency Controls Don’t Work

Governments in developed nations looking to ban digital stablecoins is equivalent to authorities in emerging countries imposing currency controls when inflation and outflows spin out of control. It’s a patch solution, which historically hasn’t worked. People will find a way to protect their savings.

Wherever there are currency controls, there’s also a black market. The same would happen with stablecoins, except their digital nature makes circumventing regulation even easier.

Instead of looking to restrict or ban stablecoin use, authorities should be thinking about ways to strengthen their currencies or financial systems. But that would be naive to expect.

Decentralization Fixes This

In this context, the more a stablecoin depends on financial institutions to custody fiat currencies backing it and on centralized entities to issue, run and trade it, the easier it is to regulate and censor it. The more decentralized a stablecoin is, the harder it will be for countries to enforce regulatory actions on them. They could very well ban them, but the tools they have to make that ban effective will be reduced.

Authorities dictating what people can and can’t do with their money is exactly why a decentralized and open financial system is being built.

DeFi Saver Updates MakerDAO Collateral Automation

DeFi Saver, which provides an automated mechanism to manage collateral on MakerDAO, updated its system to prevent the events of Black Thursday ever happening again. The new version of the system, called Automation, can better react to MakerDAO price updates and supports “flash loans” to make sure loans maintain the right collateralization ratio.

Zerion Team Launches DeFi Market Cap

The team behind DeFi portfolio tracker and manger Zerion launched DeFi Market Cap, a website ranking the market capitalizations and other metrics specific to tokens of decentralized finance platforms. Total DeFi tokens’ market cap is at $1 billion.

The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

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About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.