The OCC’s Stablecoin Statement Is a Seed of Financial Innovation – CoinDesk

This is not a surprise, as banks have been doing so for some time. But they have been doing so under a cloud of regulatory uncertainty. The statement gives the first sign of official clarity on the idea that stablecoins are legitimate representations of value.

To start with, it signals a growing regulatory acceptance of stablecoins. While fiat-backed blockchain-based tokens have been often talked about in the halls of power, especially after Facebook’s stablecoin project Libra was announced last year, they had not been recognized in an official statement as an acceptable result of financial innovation – until now. 

The issue was becoming urgent, given the explosive increase in stablecoin demand. The total value of stablecoins has now surpassed $18 billion, up from $10 billion just four months ago. Much of this growth has been driven by international demand for dollars as well as the increasingly sophisticated financial tools being built on top of public blockchain technology. USDC, the leading U.S.-based stablecoin, has seen its market cap almost quadruple so far this year, to over $2 billion.

And since one of the main use cases today for U.S.-based stablecoin USDC (the second largest stablecoin by market cap) is extracting yield from decentralized finance (DeFi) platforms, this could be the incentive needed for traditional finance to start to take an open-minded look at the innovations going on in blockchain-based financial applications. New clients could be courted with new types of savings products, which could in turn accelerate the transformation of traditional banking.

It could also embolden new types of stablecoin issuers to come forward with further innovations. To those of us working in the industry, it may seem like stablecoin issuers are everywhere. Looking in from the outside, however, most of them are either small, offshore or both. Other than the members of USDC issuer CENTRE Consortium, founded by Coinbase and Circle in 2018, there are few large U.S.-based corporations commercially active in the space.

Blockchain-based tokens to represent internal transfers is a relatively straightforward application, and just the tip of what’s possible. An as-yet unexplored option is that of programmable monetary instruments, such as stablecoins that have embedded KYC, or stablecoins that could be distributed amongst certain communities for specific uses limited by code. The OCC statement is likely to give momentum to collaboration between corporations and their banks on creative payments and engagement tools.

The fine line between securities and stablecoins with features is no doubt a factor holding back many private projects. There seems to be regulatory progress there, too. The U.S. Securities and Exchange Commission said this week that they are open to discussions with stablecoin issuers as to whether or not their token would classify as a security – which implies that some would not. While not exactly clarity, it does open the regulatory door to more conversations about innovation at the highest levels, as well as case-by-case decisions that, while slow, would at least give a more solid foundation for development. 

The infrastructure is still young, and although it is growing rapidly in both scope and scalability, the public blockchains on which most current stablecoins run have scalability issues which at times can push up fees to uncomfortable levels. And, given recent progress in payments infrastructure, stablecoin payments may end up being slower than paying by some more traditional methods.
Stablecoin settlement is also still an issue. The U.S. Uniform Commercial Code (UCC) covers settlement finality (a legal construct that defines the point after which a transaction cannot be reversed) for private systems, but does not address the issue of blockchain settlement finality. With proof-of-work blockchains, settlement is probabilistic, not definite, until a certain number of blocks have passed. And even then, time just makes it increasingly unlikely that a transaction can be reversed. At what stage does a blockchain-based transaction become totally irrevocable? This is understandably an important issue for market participants.

In the end, the best I could come up with was a seed that becomes a tree that is so impressive it encourages planters in other regions to plant their own. This image is lacking in oomph and sparkle, but finance moves slowly. And even a forest of new trees would not convey the scale of innovation that we could be on the verge of seeing. It is hopefully a reminder, though, that meaningful and long-lasting change starts small. 

The University of Cambridge’s latest industry survey is out, with no shortage of surprising findings. This is their third edition, and compiles data from 280 entities from 59 countries, across four market segments: exchange, payments, custody and mining. It’s an insightful overview into how crypto businesses are faring around the world, and highlights some interesting trends.

One of my favorite parts of the report was this chart, which color-codes the importance crypto service providers assign to various trends emerging in the industry. Stablecoins win, not surprisingly. Staking and security tokens got less interest than I expected. And the relative lack of interest in non-fungible tokens hints that the recent market buzz around the concept may be short-lived. 

This week’s sell off in equity markets felt different from previous half-hearted declines. The scope, combined with the intensifying concern in various media around the likelihood of a contested U.S. election, a disappointing vaccine and repeated lockdowns, feels more like a change of sentiment that could, in the absence of generous stimulus checks, snowball into genuine worry about the state of the global economy. 

Related to this, I’ve spent some time recently wondering what will drive the stock markets after the pandemic is over. Rebuilding? Infrastrtucture hasn’t been damaged. Consumption? Many spending habits will have permanently changed. And what of all the companies that can’t support employee costs once federal aid is not on the table?

Now, the concept is spreading to other blockchains: BitGo will enable wBTC on the Tron blockchain, with the aim of boosting its decentralized finance ecosystem. Tron currently has much lower fees than Ethereum – but the persistent popularity of stablecoins on Ethereum vs. Tron shows that the market on the whole doesn’t seem to mind. 

The Digital Commodity Exchange Act of 2020, introduced this week by Rep. Michael Conaway (R-Texas), seeks to create a federal definition of “digital commodity exchanges,” putting them in their own legal category and charging the Commodity Futures Trading Commission (CFTC) with oversight. TAKEAWAY: If passed, this would finally establish a regulator for cryptocurrencies. So far, they’ve been languishing in no-man’s land, which has hindered market infrastructure development. Many U.S.-based institutions cannot transact on an unregulated exchange, which puts crypto exchanges out of bounds: They may be licensed, but without a regulator, they are unregulated. Federal regulation would also ease many of the burdens U.S.-based crypto exchanges face, such as the need to go state by state for permission to transact.