About the Author: Jan van Eck He is CEO of VanEck Funds and founded his ETF business in 2006.
Sometimes the amazing technological innovations that occur in crypto are obscured by meme coin mania and
wars. But while it might be okay if your distant relatives are confused and dismissive at the Christmas table, it’s unnerving when regulators can’t find an obvious home for a new crypto invention. Stablecoins are one of those inventions. They are obviously close to mutual funds, but politicians have trouble seeing all the similarities.
stable coins they are digital assets that track another asset, often the US dollar. They operate on cryptocurrency exchanges and facilitate instant and final transactions. Stablecoins were created because movements in and out of bank accounts were too slow for traders and investors in volatile crypto markets. So when cryptocurrency investors look for cash, they deposit their money in a stablecoin. Today, there are around $150 billion worth of stablecoins. Usage is growing rapidly.
Stablecoins that track the US dollar invest their income in low-risk fixed-income securities, such as money market mutual funds. They issue shares as money comes in and reduce shares if there are outflows, just like open-ended mutual funds and ETFs. Like the funds, there are no operations other than the investment of securities.
The largest stablecoin, Tether, works like an ETF. Only registered companies can buy and sell shares in large fixed amounts. Because they trade 24/7, stablecoins don’t typically issue small amounts of shares, unlike mutual funds that only trade once a day. Like ETFs, market makers make sure that the stable coins trade at $1 and, like ETFs, prices can deviate from $1 depending on market conditions.
Unlike mutual funds and ETFs, most stablecoin issuers keep the income generated from the assets in the stablecoin. So, despite low interest rates, stablecoins are accumulating assets that grow above the $1 price they promise to hold. In response, some stablecoins now allocate a portion of their investment profits to holders. I think these stablecoins that distribute income will probably proliferate.
But even though stablecoins look a lot like funds, there is no regulatory consensus to treat them like funds. A stablecoin document issued by the US government’s President’s Task Force on Financial Markets in November reflected the regulatory confusion and made some odd recommendations.
First, the PWG had trouble defining a stablecoin. The report said that “stablecoins, or certain parts of stablecoin agreements, can be securities, commodities, and/or derivatives.” Clear?
So the PWG issued a series of recommendations.
Despite the similarity stablecoins have to money market funds, the PWG suggested that stablecoin issuers be “insured depository institutions.” Stablecoins invest in securities; They don’t lend like banks. Why does a bank have to be the stablecoin sponsor when just about anyone can sponsor a money market fund? All you need is $100,000 in starting capital!
The PWG also recommended that stablecoin issuers comply with activity restrictions that limit affiliation with commercial entities. This seems like an unnecessary extra burden with no obvious benefit. Money market mutual funds are affiliated with brokers, banks, and mutual fund giants, but have no conflict of interest operating restrictions beyond existing regulations. They must follow the money market fund regulations, which are significant enough.
I would like to propose a clearer, more elegant and forward-looking regulatory approach to stablecoins.
First, allowing a stablecoin to voluntarily submit to Securities and Exchange Commission oversight, similar to that of a fund operating under the Investment Company Act of 1940. This would mean that the SEC would oversee the custody and valuation of stablecoins. the assets of a stable coin. In practice, those that are listed would look a lot like conservative income ETFs. Treating them as ETFs addresses regulatory concern that they may be considered disguised bank accounts in need of rescue in financial crises.
There could be an acceptance approach for a trial period of perhaps four years; it would not force regulation of all stablecoins. Non-US stablecoins could operate in the United States during this trial period. Stablecoins operated from jurisdictions outside of the US would continue to operate as they have.
Hence the second recommendation: Do not impose withholding taxes on stablecoins. Most stablecoins do not currently pay dividends. However, we must envision a day when stablecoins pay interest and plan technologically and regulatory for that day.
US mutual funds and ETFs withhold income from non-US residents. This annual calculation is impractical in a world where stablecoins are traded 24/7 , abroad and at home, on multiple platforms and are used for payments. European mutual funds generally do not have this withholding tax requirement, so they dominate in jurisdictions outside of the US, such as Latin America and Asia. So, to give stablecoins a chance to demonstrate their value proposition and increase the attractiveness of the US as the main stablecoin regulatory regime, I suggest that stablecoins not be forced to create a withholding tax. Of course, US taxpayers would still have to pay taxes on their stablecoin income.
It is an understandable concern in the crypto space that digital assets (tokens) can move quickly between secure institutions with anti-money laundering protections and the unregulated offshore world. But adding the regulatory burden of banking regulation to the PWG will not solve this problem; it will simply deepen the divide between the regulated and offshore worlds. It seems much more prudent to have widely available stablecoins where assets are verified, audited and regulated (but available offshore) than a bifurcated market where some stablecoins are regulated and others are offshore (without regulatory oversight of assets).
The primary systemic risk associated with stablecoins it is the value of the underlying securities, similar to the assets within money market funds that collapsed during the global financial crisis of 2007-2008. Stablecoin regulation should not be asked to address soundness and money laundering concerns at the same time. Anti-money laundering protections are best applied to banks and brokers, as they currently are, rather than the vehicles, such as funds, that are traded. Even regulated US funds are not directly subject to US money laundering regulations, because they often do not know the names of their underlying owners. In short, offshore stablecoins will continue to prosper, leading to market fragmentation.
It is possible that no stablecoin issuer will opt for this better designed regulatory model where they are subject to SEC oversight but not withholding tax. And regulation carries costs; the average money market fund charges just over 0.2%. But my proposal would allow the market to determine the value of this additional oversight. And it’s better than creating regulatory requirements that treat them like banks when they’re not.
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