“Ensuring that a stablecoin maintains its peg even under stressed market conditions is a solvable problem,” Catalini says. In an optimal scenario, he says, reserves would consist exclusively of “high-quality, liquid assets” such as short-term U.S. Treasuries, and providers would maintain an “adequate capital buffer.”
In the two years since Celsius filed for bankruptcy, Tether has voluntarily both increased the size of its USDT reserve buffer and slightly reduced the portion of the reserve that is made up of secured loans, from 6.76 percent to 5.55 percent. But Tether “is not operating within a framework that would limit what the company’s executives can and cannot do,” Catalini said. “This is where regulation is needed.”
There have been a handful of attempts to regulate the stablecoin industry in major markets. Earlier this year, rules for stablecoin issuers came into effect in the EU under the Markets in Crypto Assets (MiCA) Act, including requirements regarding the amount of cash a stablecoin issuer must hold, the types of assets that can constitute a stablecoin reserve, the safekeeping of reserve assets, and more.
In April, U.S. Senators Cynthia Lummis and Kirsten Gillibrand introduced a bill that would ban stablecoin issuers from lending reserve assets. The bill is unlikely to pass Congress before the next presidential election, Cooper said, but “there is recognition on both sides of the aisle that some level of regulation is necessary.”
In general, though, stablecoin companies are left to figure out how to police themselves. “We’re dealing with a new asset class that, right now, is run by a group of people who are looking for guidance on what’s allowed and what’s not, and they’re not getting it,” Cooper says. “In an industry that thrives on risk-taking, and there’s a lot of that in crypto, it’s not surprising that some companies are pushing the boundaries.”
The difficulty for the first handful of regulators to establish stablecoin regimes will be to contain the threat of a de-peg without chasing away issuers. Risk appetite among stablecoin providers, whose profitability is to some extent tied to the risks they are allowed to take with reserve assets, could lead them to pull out of jurisdictions that impose the strictest restrictions. “The problem of regulatory arbitrage is as old as time itself,” Cooper adds.
Since MiCA’s introduction, Tether has reportedly not applied for a license to operate in the EU. In an interview with WIRED earlier this month, Tether CEO Ardoino said the company is still “formalizing our strategy for the European market,” but expressed reservations about some of the reserve requirements imposed under MiCA, which he described as unsafe.
While Ardoino sees stablecoins as a potential threat to traditional banks, in the interview he pushed back against the idea of Tether being subject to similarly strict regulations, citing the freedom of banks to lend out the majority of deposits they receive, unlike a stablecoin company.
But the window for regulatory arbitrage, whatever the motivation, will close, Catalini says, as an international consensus emerges on the appropriate controls that should be imposed on stablecoin issuers. “Regulatory arbitrage is a temporary phenomenon,” he says. “It’s only a matter of time before a stablecoin of significant size will be required to comply.”
