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This key baseline issue could undermine public confidence in crypto stablecoins

This key baseline issue could undermine public confidence in crypto stablecoins

Photo by Josh Appel on Unsplash

Stablecoins account for a rapidly growing sector of the crypto industry and have viewed by many industry-advocates as tools that will ultimately help bridge mainstream finance with the nascent and highly volatile crypto market.

The adoption of these tokens, however, has been met with multiple roadblocks, with notable projects including Facebook’s Libra initiative facing multiple legal and regulatory hurdles that have slowed its progress and stunted its adoption.

The Senior Counsel to the Federal Reserve Board is now noting that having a sound legal basis to back stablecoins is imperative for their long-term adoption within a real-world environment, with a lack of regulatory clarity potentially providing to be a fatal blow to the technology’s adoption.

Federal Reserve Board Senior Counsel: Sound legal basis vital to stablecoin growth

In a recent article published in the Berkeley Business Law Journal, Jess Cheng – the current Senior Counsel at the Federal Reserve Board, who is working to build the FedNow payment system – explained that despite having tremendous promise, stablecoins must surmount some key hurdles before seeing widespread adoption.

One such hurdle that she points to is there not being a sound, universal, legal basis underpinning the crypto technology, with this being imperative to it garnering widespread adoption from the general public. Cheng explains:

“Key is the need to demonstrate a sound legal basis that supports the stablecoin arrangement, providing legal clarity to market stakeholders and users.   In the view of the G7, such legal clarity is ‘an absolute prerequisite.’”

She also goes on to note that in order for crypto stablecoins to play a larger role in global commercial and retail payments, there needs to be legal certainty backing their value – as fiat currencies have.

“At a minimum, issuers of stablecoins must give legal certainty as to the nature of the commitment they are making to the holders of their coins, including the coin’s relation to the underlying assets, the obligations of the issuer as to those assets’ safekeeping and possession, and the terms of redemption for the stablecoin.”

Confidence in redemption value of crypto tokens a key trust factor

The largest and most popular stablecoin currently used by crypto investors, traders, and others is Tether (USDT) – which currently boasts a market cap of over $6.3 billion.

The crypto token – which is supposedly backed 1:1 by assets denominated in USD – has long been the center of significant controversy amongst cryptocurrency investors, who note that Tether has been largely unable to prove that the tokens it frequently issues are actually fully backed by liquid assets.

This controversy is exactly what Cheng’s aforementioned point drives at – in order for any stablecoin to garner both trust and adoption, there has to be a strict legal framework that allows users to resolve disputes and ensure full auditability of the crypto token’s supposed backing.

Posted In: , Stablecoins

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