US and UK Governments Step Up Stablecoin Regulation Efforts

The US and the UK are rushing to get stablecoins and cryptocurrency activities regulated as quickly as possible as elections for both countries creep closer.

Senator Sherrod Brown, chair of the U.S. Senate Banking Committee, plans to advance stablecoin legislation by combining it with legislation related to marijuana businesses and clawing back compensation from bankers. Any attempts to regulate stablecoins in the U.S. have been very slow, especially with the upcoming 2024 elections. Very similarly, the UK is also moving to regulate stablecoins and other cryptocurrency activities, and plans to establish a comprehensive regulatory framework by mid-2024. Despite the regulatory uncertainty, stablecoins are increasingly being adopted for payments and cross-border transactions. The new stablecoin competitions from players like Ripple is also expected to give the industry a big boost.

Senator Brown’s Novel Approach to Pass Stablecoin Legislation

Senator Sherrod Brown, chair of the United States Senate Banking Committee, revealed plans to advance important stablecoin legislation by packaging it together with other legislative measures. These include allowing banks to handle transactions for marijuana businesses and implementing clawbacks for executives at failed financial institutions. This proposal will address some of the regulatory concerns surrounding stablecoins at the moment that have stalled in Congress despite support and industry backing.

Attempts to regulate stablecoins have seen very little progress, with legislative proposals in both the Senate and House of Representatives struggling to move forward. Notably, in the Senate, a bipartisan initiative led by Republican Cynthia Lummis and Democrat Kirsten Gillibrand has been underway, while the House saw the Clarity for Payment Stablecoins Act pass through committee in July of 2023, but this legislation has made barely any progress since then.

The challenges of pushing forward digital asset-related legislation are complicated even more by the political implications of the 2024 election year, where control of both congressional chambers and the presidency will be contested. This legislative push comes at a time when Senator Brown, known for his cautious stance on digital assets, prepares for a reelection battle in Ohio against Republican nominee Bernie Moreno. Meanwhile, Representative Patrick McHenry, the current chair of the House Financial Services Committee, announced that he will not seek reelection, adding to the shifts in leadership that could influence the future of crypto regulation.

UK Also Prepares Crypto Regulation Legislation

Senator Brown is not alone in his mission to get stablecoins regulated. The UK government is preparing to introduce comprehensive legislation for the regulation of stablecoins and other crypto activities like staking by mid-2024, according to Economic Secretary Bim Afolami. Speaking at the Innovate Finance Global Summit, Afolami reiterated that the government is very committed when it comes to establishing a regulatory framework that will, for the first time, bring crypto asset activities like exchanges and custodial services, under regulatory oversight.

This move comes after the UK passed a financial markets bill in 2023, which set the stage for treating stablecoins and broader cryptocurrency operations like regulated financial activities in the UK. Both the Financial Conduct Authority (FCA) and the Bank of England have been actively consulting on the specifics of a stablecoin regulatory regime since early last year. The Bank of England also plans to supervise major stablecoin providers that could impact the financial system, while the FCA gets ready to regulate the larger crypto market.

Back in February, Afolami announced that the government was pushing to finalize secondary stablecoin legislation in six months, reinforcing the Conservative Party-led government's ambition to position the UK as a global hub for cryptocurrency. However, with a potential election looming that might see the Conservative Party replaced, there is a sense of urgency to implement these regulations way more quickly than originally thought. The Labour Party, which is predicted to win, may have different priorities, placing the Conservative Party's crypto regulatory agenda on the back burner.

What are Stablecoins and Why are They Important?

Stablecoins are a type of cryptocurrency designed to minimize the volatility typically associated with digital currencies like Bitcoin. They do this by pegging their value to other more stable assets like fiat currencies, commodities, or other financial instruments. This stability makes them much more suitable for everyday transactions and a safer option for merchants and consumers who might otherwise be a bit wary of the scary price swings seen in cryptocurrencies like Bitcoin.

The importance of stablecoins lies in their potential to act as a reliable medium of exchange in the digital economy. Unlike highly volatile cryptocurrencies, stablecoins offer predictability and preserve purchasing power, which is crucial for both routine transactions and for investors looking to hold digital assets without the risk of drastic value changes. This stability helps bridge the gap between traditional fiat currencies and cryptocurrencies, making digital transactions more practical and appealing.

However, the growing popularity and financial importance of stablecoins have attracted regulatory attention. Concerns about their impact on the broader financial system have led bodies like the International Organization of Securities Commissions (IOSCO) to propose that important stablecoins should be regulated as part of the financial market infrastructure. Politicians and regulatory bodies are also actively advocating for measures like regular audits and bank-like regulations for stablecoin issuers to ensure their safety, stability, and reliability.

Stablecoins Push for Mainstream Adoption

The stablecoin market has seen a huge rise in adoption, especially in cross-border settlements, according to a recent report by Bernstein. Stablecoins are also being increasingly integrated into the payment systems of companies across various sectors.

The report specifically pointed out the widespread adoption of stablecoins within the cryptocurrency trading ecosystem and for cross-border payments. The annualized value of transactions that were conducted in the first quarter of 2024 reached $6.8 trillion. This figure aligns with the peak transaction value that was recorded in 2022, which clearly suggests that stablecoins are receiving robust and sustained support.

Some very well known payment firms like PayPal and Visa, along with consumer fintech platforms like Grab in Singapore and Mercado Libre in Latin America, are among those who are embracing stablecoin technology.

However, there are still some serious challenges in the scalability of blockchain technology, essential for handling the volume of transactions that stablecoin adoption might demand. Solana, a leading blockchain in terms of the value of stablecoins transferred, has become a dominant player in the industry, surpassing Ethereum in this cycle. Despite its success, Solana is faced with major scalability issues, as it currently handles about 700 transactions per second (TPS), far below the 10,000+ TPS required to match traditional payment networks like Visa.

While Solana has started pilot programs with major players like Visa and Shopify, it is still unclear if Solana can actually manage the exponential growth needed to support widespread consumer and business-to-business payments.

Healthy Competition in the Stablecoin Ecosystem

Tether CEO Paolo Ardoino recently discussed the upcoming launch of Ripple's own stablecoin, as well as the benefits of competition in the stablecoin sector during Paris Blockchain Week. Ardoino believes that a competitive landscape with a number of credible players is essential for the stablecoin ecosystem, which currently has a market capitalization of more than $130 billion. He pointed out that this competition not only validates the industry but also strengthens the position of stablecoins in regulatory discussions.

Ardoino sees Ripple’s move as a very positive development, suggesting there is ample room for more players in the market, especially considering the gigantic money supply increases by the U.S. government. Tether (USDT), with a market cap of around $108 billion, still leads the market, followed by USD Coin (USDC), which holds a $32 billion market cap.

He also pointed out that the adoption of stablecoins like USDT and USDC has been driven by rampant inflation and currency devaluation in countries like Argentina, Turkey, Venezuela, Vietnam, and Brazil. These conditions have propelled demand for alternatives to unstable national currencies. Ardoino also believes that the digital nature of stablecoins offers financial inclusivity for over 2 billion unbanked people globally, providing them a viable means to participate in the digital economy.

Lastly, Ardoino discussed Tether’s financial health, revealing that USDT is overcollateralized by 106% and highlighted Tether’s strategic shift towards maintaining 100% of its reserves in U.S. Treasury bills, with the company already holding an estimated $90 billion in Treasury bonds.