Stablecoins & Regulation: Quo vadis? (July 2022)

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Foreword: METI Advisory wrote this report for SEBA Bank AG. The fallout of algorithmic stablecoin TerraUSD (UST) and its twin cryptoasset Luna in May 2022 has far-reaching consequences. On the regulatory side, asset-backed stablecoins will be increasingly subject to bank-like compliance/operating requirements. Algorithmic stablecoins will be marginalised and disincentivised. Potential private/public collaborations centred around Central Bank Digital Currencies (CBDCs) may develop, as suggested recently by the Bank for International Settlements (BIS). On the business side, the use cases for stablecoins emerge as strong as ever. These include the liquidity-provision function to cryptomarkets of coins such as Tether, but also the opportunity to improve the slow, expensive, opaque, and insufficiently inclusive fiat (cross-border) payment system (first tackled by Libra, while the general case was made a priority by the G20 in 2020). Over time, business success will become the prerogative of stablecoins designed, developed, and operating in full compliance with the applicable financial regulations and relevant regulatory expectations.