Autor Cointelegraph By Uldis Teraudkalns

Stablecoins were supposed to be the boring uncle of the crypto world — safe, sensible and dull. They’re probably not what Satoshi Nakamoto had in mind, but they’re supposed to be a reassuring haven of calm and utility away from the turbulence of pure-play cryptocurrencies.With values pegged to fiat currencies, stablecoins were intended to be useful rather than to offer get-rich-quick schemes. They play an important role in the cryptocurrency ecosystem by providing a safer place to store capital without having to cash out entirely, and allowing assets to be denominated in fiat currencies rather than volatile tokens.However, events in May demonstrated that crypto stability is still elusive. With governments slow to react, Terra’s LUNA token — which has since been renamed Luna Classic (LUNC) — dropped to close to zero in value, wiping out $60 billion along the way. The obvious conclusion would be that the stablecoin experiment has failed. But I believe Terra’s fall to Earth is the precursor to a new era where stablecoins will become established, accepted and beneficial components of the global economic system. And the regulation that is only now dropping into place already looks well past its sell-by date.Not all stablecoins were born equalIf that seems unlikely right now, the failure of a few stablecoins does not write off the entire concept. Other stablecoins have been constructed on solid ground and are performing as expected.What’s happening is a clearout of the algorithmic stablecoins. These are coins that were never fit for purpose because they were built on insecure foundations. There were always critics: Some called out Terra as a Ponzi scheme and argued that it, and other algorithmics, would only hold value if more and more people bought them.Algorithmic stablecoins are unregulated and not backed by equivalent amounts of the underlying fiat currency — or by anything, for that matter. Instead, they deploy smart contracts to create or destroy the available supply of tokens to adjust the price. It’s a system that worked, backed up by an artificially high interest-paying mechanism called Anchor, while enough people believed in it. Once that trust started to evaporate in early May, the flood gates opened in a classic, old-world bank run.Related: What can other algorithmic stablecoins learn from Terra’s crash?But there are other classes of stablecoin that are backed by assets, including fiat currencies. Tether (USDT), the world’s biggest stablecoin by market capitalization, has published its asset register to demonstrate that its token is fully backed by assets held in a reserve. Tether’s value against the dollar has remained consistent, including through the current turmoil, with only a relatively minor blip on May 12 when it declined in value to $0.97.Circle CEO Jeremy Allaire wrote in his Twitter account that USD Coin (USDC), the second-largest stablecoin by value, is entirely backed with different assets. 2/ The USDC reserve is held entirely in cash and short-dated U.S. government obligations, consisting of U.S. Treasuries with maturities of 3 months or less— Jeremy Allaire (@jerallaire) May 13, 2022USDC has performed even better than Tether at its primary task: tracking the U.S. dollar.Regulators were slow to react…Regulators were stepping up their focus on stablecoins before the Terra meltdown, though perhaps a little late, given what has happened. In the United States, President Joe Biden signed his Executive Order on Ensuring Responsible Development of Digital Assets on March 9 — to an unexpected chorus of approval from the broader crypto industry.Related: Powers On… Biden accepts blockchain technology, recognizes its benefits and pushes for adoptionIn early April, the United Kingdom announced its intentions to regulate as-of-yet-unspecified stablecoins. The same month, a leading member of the U.S. Senate Banking Committee, Senator Patrick Toomey, introduced the “Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022,” dubbed the Stablecoin TRUST Act for short, addressing cryptocurrencies whose prices are pegged to the U.S. dollar or other assets.Ironically, in an interview with the Financial Times published on May 6, as Terra began its descent toward zero value, Senator Toomey called on regulators to do more to regulate stablecoins “before some bad thing happens.” However, even he seems not to have predicted how quickly things were going to unfold: “He pushed back against some of the stricter measures being promoted by Democrats, who believe stablecoins are now worth so much money that their operators should be regulated like banks.”Since then, things have started to move more quickly. Once the Terra route began, from about May 5, regulators quickly stepped up their level of vigilance. In a report issued on May 9, the U.S. Federal Reserve said stablecoins were “vulnerable to runs” and lacked transparency about their assets. And Treasury Secretary Janet Yellen recently commented on the urgent need for guardrails, saying it would be “highly appropriate” for lawmakers to enact legislation as soon as this year.Related: The United States turns its attention to stablecoin regulationElsewhere, in June, Japan became one of the first countries — and by far the largest economy — to regulate a form of non-fiat digital money when its parliament approved the regulation of yen-linked stablecoins. This was not Terra-collapse related but based on a regime first proposed by Japan’s Financial Services Agency in March 2021. The new law guarantees face-value redemption, restricts stablecoin creation to regulated institutions, and requires stricter Anti-Money Laundering measures.…and are missing the pointDespite these warnings and emerging policy steps, what seems to be missing is a clear distinction between algorithmic and asset-backed stablecoins. In my view, asset-backed fiat stablecoins should be regulated by governments and have capital adequacy rules and restrictions on what can be done with reserves.Algo stablecoins, if they survive as a class, should come with extensive health warnings about the risks that remain on consumers’ shoulders. Algos are the latest in a long line of innovations — the next won’t be long in coming, and regulators won’t be ready for it either. The reality is that people need to take care of their own assets and wealth. Any fully decentralized environment always requires that people protect their own assets closely and with vigilance.And compounding the sense that reality is outstripping regulators’ ability to keep up, the existence of fully backed coins, such as USDC, seems to remove any need for the U.S. government to develop its own central bank digital currency, or what some call the “digital dollar.”Related: US central bank digital currency commenters divided on benefits, unified in confusionDarkest before the dawnAt the time of writing, we are only a few weeks past the Terra collapse. As a result, stablecoins are under a cloud, and the long-term impact on the broader ecosystem of blockchain tokens, which remain under pressure since prices peaked in September 2021, is still unclear.Many commentators are reveling in the crypto gloom, stoking the latent skepticism many people feel about the entire crypto project unleashed by Satoshi Nakamoto.In my opinion, as far as stablecoins are concerned, it’s a case of being “darkest before the dawn.” Most people did not — and still do not — understand that all stablecoins were not born equal. Algorithmic stablecoins, as is now obvious, were a disaster waiting to happen. Fully backed stablecoins — ideally within the regulatory environment being planned or adopted in the U.S., U.K. and Japan, among others — are a perfectly sensible option with important roles to play in the hybrid crypto-fiat economies of the future. Their time has come.This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.Uldis Tēraudkalns is the CEO of NexPay, a Lithuanian fintech startup providing banking infrastructure for the digital assets industry. Uldis has more than a decade of experience working in finance and managing venture investments, and has served on the boards of different companies. Uldis holds a master’s degree in finance from the Stockholm School of Economics and is a co-host of The Pursuit of Scrappiness, a leading business and startup podcast in the Baltics.

Shortly after the Russian invasion of Ukraine began, the Ukrainian government tweeted a request for funds in the form of Bitcoin (BTC), Ether (ETH) and Tether (USDT). The total received now stands at more than $60 million, according to Michael Chobanian, founder of Kyiv-based Kuna Exchange and president of the Blockchain Association of Ukraine, who posts regular updates via his Twitter account.Unlike support being pledged by governments around the world, these funds were available to the Ukrainian military within minutes — not weeks.For individuals, cryptocurrencies can provide a potentially life-saving method of escape from crises. A computer programmer from Lviv said he had escaped the fighting thanks to Bitcoin. With cash machines heavily restricted and massive queues at the banks, he was able to transfer all his savings and cross the border to Poland, where he now volunteers to help Ukraine win the digital war by countering online propaganda and encouraging Russians to speak out.However, the same means to move large sums of money quickly is also available for Russians. With sanctions in the conventional economy biting hard, oligarchs and normal folks alike are looking to find new ways to move money around and avoid the mechanisms aimed at cutting Russia off from global finance flows. And cryptocurrencies are part of that.Related: The world has synchronized on Russian crypto sanctionsIs that just the nature of the beast? Is crypto inherently values-neutral? Or is there a way to combine the rapid digital mobility of funds under extreme conditions that cryptocurrencies offer with the ability to impose restrictions?A poisonous questionJust asking the question will be poison to a sizable chunk of the crypto community. The whole point of distributed ledger technology, they would argue, is that no central authority can be trusted to impose and maintain controls in a way that is consistent and morally acceptable to everyone. Morality — we live in a post-modern world — is relative. My morally righteous view could easily be offensive or repellant to someone else. Nobody — including the world’s greatest philosophers — has yet to come up with a satisfactory way of reconciling this ethical disconnect. As a result, we have cryptocurrencies that are as equally available to charities trying to save lives in catastrophic situations as they are to drug cartels, arms dealers and gangsters.One way of addressing the crypto values question is with closed user groups. We can create new crypto tokens and decentralized autonomous organizations to operate them that embody the values of the founders and participants. The Klima token, for example, embodies the belief that continuing carbon emissions are disastrous for society and the planet. It sets out to drive up the price of carbon offsets and permanently remove them from sale once they have been applied to a project.Related: DeFi: Who, what and how to regulate in a borderless, code-governed world?But closed user groups are easily avoided. There are plenty of other cryptocurrencies available that take a completely neutral view on the Ukraine–Russia conflict. Nothing is likely to change the founding principles of these values-neutral tokens.Crypto regulation is already having an impactI believe there is more that can and should be done. As a European-regulated financial institution, NexPay acts as an off-ramp enabling companies to exchange digital assets, such as crypto tokens, into fiat currency and send it to bank accounts. That’s because fiat is still how the vast majority of real-world transactions happen. Crypto is maturing rapidly, butthe total value of global cryptocurrency markets is about $2 trillion, versus about $1.3 quadrillion in the fiat economy. Despite its reputation as the wild west of finance, we can already see just how much crypto regulation is in place. Anyone who has tried opening a crypto account is aware that it is not straightforward, with numerous regulatory hurdles to clear.Related: Self-custody, control and identity: How regulators got it wrongAnd the regulators have not been slow to make their views plain on the use of crypto to bypass sanctions in the current conflict. In the United States, a group of Democrats on the influential Senate Banking Committee wrote to the secretary of the treasury, Janet Yellen, expressing worries that cryptocurrency could be used to evade sanctions. In the United Kingdom, the Financial Conduct Authority has “reached out to each crypto firm registered with us to ensure that they are aware of sanctions and their responsibilities” and is monitoring the situation. European Central Bank president Christine Lagarde has called on the European Union for urgent progress on its Markets in Crypto-Assets (MiCA) regulations in the wake of the Russian invasion.Regulators in some jurisdictions already have the power to add individuals, such as Russian oligarchs, to lists of sanctions-prohibited or politically exposed persons, with businesses that fail to comply exposed to large fines, substantial reputation damage and possible revocation of operating licenses.Whether it’s a result of these pressures or something from their own ethical positions, many large crypto exchanges are now enforcing sanctions. But they resist calls for a blanket ban, arguing that it would hurt ordinary Russians. And then there’s the argument that people will just find other ways of busting sanctions: “If people want to avoid sanctions there’s always multiple methods,” said Changpeng Zhao, CEO of Binance. “You can do it using cash, using diamonds, using gold. I don’t think crypto is anything special.” However, this view disregards the digital nature of cryptocurrencies, which makes them much easier and faster to move funds than any of those traditional, physical stores of value.The regulators have not won this war, not by a long shot. But they are tightening the noose on ways to circumvent crypto sanctions. And our own experience tells me that regulatory scrutiny of crypto assets is only going in one direction.Related: Is the Ukraine war intensifying regulatory pressure on crypto firms?It’s never going to create a perfect system that allows funds through to where they are needed, while preventing them from being used by bad actors. And that’s just because the world is never going to agree on who are the bad actors — take, for example, the difficulties the United Nations is having with agreeing on this. But in a case as clear-cut as the illegal invasion of an independent country, we can and must continue to leverage the power of cryptocurrencies plus suitable regulation to help refugees reestablish their lives in new homes and to hold back financial flows to countries and people who appear to have geopolitical aggression on their agenda.This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.Uldis Tēraudkalns is the CEO of NexPay, a Lithuanian fintech startup providing banking infrastructure for the digital assets industry. Uldis has more than a decade of experience working in finance and managing venture investments, where he has served on the boards of different companies. Uldis holds a Master’s Degree in Finance from the Stockholm School of Economics and is a co-host of The Pursuit of Scrappiness, a leading business and startup podcast in the Baltics.