Frax co-founder Sam Kazemian believes stablecoin regulations are currently too harsh

He clarified that it’s mostly fiat money stablecoins that bear the brunt of this regulatory scrutiny.

Stablecoins, or crypto assets which peg their value to less volatile fiat money, are useful tools for a variety of reasons. They can be used to cash out crypto investments, send or receive stable money abroad, and to pay for everyday consumer transactions without fear of fluctuation. A recent estimate from the Bank for International Settlements, or BIS, put the total stablecoin supply at roughly $150 billion.

But central banks, the issuers of traditional fiat money around the globe, do not seem to be big fans of stablecoins. A sharp increase in supply coupled with a lack of relevant regulations has led to concerns that these stable blockchain assets could threaten the current financial order. Fiat money stablecoins, such as those created by Circle (USDC) and Tether (USDT), may require banking licenses in the future to operate. Thus far however, regulators have not been keen to take aim on algorithmic stablecoins, which are governed by automated expansion and contraction of the monetary supply.

In an exclusive interview with Cointelegraph, Sam Kazemian, the co-founder of the Frax stablecoin protocol, discussed the regulatory outlook for the sector and algorithmic stablecoins in detail.

Growth in cryptocurrency activities | Source: BIS 

Cointelegraph: There are many algorithmic stablecoins out there, such as Terra USD, Ampleforth, etc. In your opinion, what makes Frax unique?

Sam Kazemian: What makes Frax unique is that we have a system where our protocol expands and contracts supply in various places across blockchain protocols, and targets the exchange rates of the Frax stablecoin out in the open market. We like to compare it to a central bank. When it issues a currency, it never says ‘hey, you can come to redeem it for this amount of gold, or you can come and redeem it at the central bank for something dollar-pegged.’ They don’t say that anymore. And so, what a central bank does, is that it targets their currency in the open market’s exchange rate.

If a central bank pegs their currency to gold, what they’ll do is look at the price of gold against their national currency. If it’s lower than what they want, they’ll buy some of the currency back. If the other side is higher than what they want, then they’ll print more of the currency. Frax takes this kind of approach. That’s how we developed our algorithmic stablecoin thesis, and it’s worked well. We’ve never broken our peg, even during [the major market crash in] May.

Stablecoin market capitalization statistics | Source: U.S. Treasury Stablecoin Report

CT: Do you see a potential crackdown looming in stablecoin the sector? And what is Frax doing to comply with relevant stablecoin regulations?

SK: There are two parts to this. I don’t know if I would call it a crackdown, but I do see a lot of regulation coming for at least the fiat coins, which have traditional financial assets that back them; like cash equivalents, or actual cash in depository accounts. I don’t know that this affects truly decentralized stablecoins though. I believe that Frax is not only compliant, but it will keep complying with all requirements just by existing and being fully decentralized.

The second part to your question is interesting because I think the current stablecoin regulation they’re proposing is a little bit reactionary. What’s currently going on is that people are saying that stablecoin issuers like a Circle and Tether need to have banking licenses. That’s the conversation. But that doesn’t make sense if you think about it, because there’s a lot of experimentation allowed in even the traditional financial space. Things like money market funds don’t have a banking charter. It’s not a bank. It’s not FDIC [Federal Deposit Insurance Corporation] insured. People either don’t realize this or they’re not informed.

Money market funds are regulated in the sense that you need to have [and disclose] cash equivalents. But they are not regulated with the same harshness that they’re currently proposing [for] stablecoins. This doesn’t apply to fully decentralized ones like Frax that have absolutely no claims on real-world assets, or even advertise any form of redeemability. The whole point of Frax is that our protocol works by targeting the open market exchange. I think I’m pretty open to the belief that the regulation portion will work itself out.

$11 Billion Added to Stablecoin Economy in 10 Days, UST and OUSD Issuance Swells

During the last week of November, the stablecoin economy had crossed the $150 billion mark for the first time with tether and usd coin dominating the pack. In a mere ten days, the stablecoin economy gathered another $11 billion in value with origin dollar and terra usd swelling significantly during the last 30 days.

$11 Billion Added to the Fiat-Pegged Token Economy

Stablecoins are definitely a prominent part of the crypto industry whether people like them or not. In ten days’ time, the entire stablecoin economy has grown 7.33% larger from $150 billion to today’s $161.2 billion.

Month after month, stablecoin markets have swelled, and the token tether (USDT) is the largest stablecoin in terms of market valuation. Statistics indicate that USDT has a market valuation of around $77.3 billion and its market cap grew 6.1% during the last month.

Usd coin (USDC) is the second-largest stablecoin today with a market valuation of around $41 billion. USDC’s market cap grew by a sizable 19.5% during the last 30 days. The aggregate of USDT and USDC combined is 4.75% of the entire crypto economy.

In terms of the stablecoin economy alone, the two tokens USDT and USDC command 73.21% of the aggregate $161 billion in fiat-pegged tokens. While tether captures most of the trade volume, USDC commands the third-largest stablecoin trade volume below BUSD.

Terra and Origin Stablecoin Issuance Balloons Over the Last Month

Terra’s stablecoin UST has seen the largest increase in the top ten stablecoin markets during the last 30 days, with its market cap growing by 190%. A month ago, Terra’s UST market cap was only $2.88 billion.

The algorithmic stablecoin UST has a valuation of around $8.3 billion today and $178 million in global trade volume. UST’s market capitalization is just below DAI’s $8.95 billion valuation. The Terra-issued algorithmic stablecoin is also above Abracadabra.money’s magic internet money (MIM) and its $3.7 billion market.

The yield-earning stablecoin origin dollar (OUSD) issued by Origin Protocol (OGN) has risen a whopping 721% during the last 30 days. OUSD has an overall market valuation of around $226.5 million and $2.7 million in trade volume. The stablecoin commands the 15th largest dollar-pegged digital asset valuation today.

Other stablecoins that saw notable 30-day movements include frax, pax dollar, and liquity usd. In addition to fiat-pegged tokens tied to the value of USD, a slew of stablecoins based on different fiat currencies, like the euro and Turkish lira, have seen significant 30-day growth as well.

What do you think about the stablecoin economy over the last ten days and UST and OUSD growth this past month? Let us know what you think about this subject in the comments section below.

Japan to Propose Restricting Stablecoin Issuers to Banks and Wire Transfer Companies

Japan to Propose Restricting Stablecoin Issuers to Banks and Wire Transfer Companies

Japan’s top financial regulator, the Financial Services Agency (FSA), is reportedly planning to propose legislation to restrict stablecoin issuance to banks and wire transfer companies. Crypto service providers involved in stablecoin transactions, including wallets, will also be brought under the financial regulator’s oversight.

Japan to Tighten Stablecoin Regulation

Japan’s Financial Services Agency (FSA) is planning to tighten the regulation of stablecoins by imposing strict rules on their issuers, Nikkei reported Monday, stating:

The Financial Services Agency seeks to propose legislation in 2022 to restrict issuance of stablecoins to banks and wire transfer companies.

The FSA will also tighten regulations related to the prevention of money laundering, the publication added, noting that crypto service providers involved in stablecoin transactions, including wallets, will also be brought under the financial regulator’s oversight.

In addition, stablecoin issuers will be required to comply with Japan’s law on preventing transfers of criminal proceeds. This includes verifying user identities and reporting suspicious transactions.

The total market capitalization of all stablecoins at the time of writing is nearly $160 billion. Tether (USDT), the biggest stablecoin in circulation, currently has a market cap of $76.58 billion based on data from Bitcoin.com Markets.

While Japan currently does not have a law regulating stablecoins, the FSA has established a panel to study how to best ensure consumer protection and address money laundering concerns in this area. In September, Yuri Okina, a member of the panel, said: “It’s important that stable coin is backed by secure, liquid assets. But it’s questionable whether setting blanket rules as strong as those currently applied to banks is the right approach.”

Japan is not the only country planning to impose strict rules on stablecoin issuers. In July, Treasury Secretary Janet Yellen asked regulators overseeing crypto assets in the U.S. to “act quickly” to regulate stablecoins. The President’s Working Group on Financial Markets (PWG) subsequently recommended imposing bank-like regulation on stablecoin issuers.

However, not everyone agrees with this regulatory approach. In November, Federal Reserve Board Governor Christopher Waller argued against the PWG’s recommendation. He explained that he is fine with letting banks issue stablecoins but disagrees that only banks should be allowed to issue them.

What do you think about Japan planning to allow only banks and wire transfer companies to issue stablecoins? Let us know in the comments section below.

Bitcoin and altcoins took a hit, but derivatives data reflects a calmer market

BTC and altcoins took a beating over the weekend, but data shows a market with healthier trading conditions, even if prices consolidate for the foreseeable future.

Looking at the winners and losers of the past week clearly shows that traders endured some serious heat as the total crypto market capitalization dropped by 12.7% when Bitcoin fell to $41,000. This sharp downside move knocked the figure from $2.37 trillion to $1.92 trillion on Dec. 3 and a total of $2 billion long future contracts were liquidated.

Top winners and losers from top 80 coins. Source: Nomics

Bitcoin (BTC) price retraced 14.6% over the past week, effectively underperforming the broader altcoin market. Part of this unusual movement can be explained by the performance seen in decentralized applications which held up better than most of the market. Data shows Ether (ETH) traded down 6.0%, Binance Coin (BNB) lost 7.3% and Solana (SOL) dropped by 7.8%.

This week’s top gainers include OKEx’s OKB token (OKB) and Bitfinex’s UNUS (LEO). Perhaps these benefited from not having a United States entity because the regulatory uncertainties in the region continue to increase. Moreover, scaling solutions Polygon (MATIC) and Algorand (ALGO) benefited from Ethereum’s $40 or higher network transaction fees.

Terra (LUNA) featured on last week’s top performers after its built-in token burn mechanism significantly reduced the supply. Meanwhile, Stacks (STX), previously known as Blockstacks, pumped after D’Cent wallet included support for SIP010 tokens.

Sharing solutions had a disappointing week

Among the worst performers were three decentralized sharing solutions: Theta Network (THETA), Filecoin (FILE), and Internet Computer (ICP). They were not alone, as some of the sectors’ altcoins below the top-80 also crashed. Siacoin (S.C.) endured a 34% drawdown and Ankr Network (ANKR) dropped by 31.8%.

Chiliz (CHZ) suffered direct competition after Binance successfully launched an independent soccer fan token called SANTOS. Initially, Chiliz’ platform was created to host exclusive promos, services and voting for their fan tokens and more recently the project ventured into the non-fungible NFT market. However, that initiative also lost impact after soccer player Neymar launched a collection with NFTStar.

Despite being among the bottom performers, decentralized exchange aggregator 1inch Network (1INCH) concluded a $175 million Series B investment round and these funds will be used to expand the protocol’s utility.

Tether’s premium and the futures’ perpetual premium held up well

The OKEx Tether (USDT) premium measures the difference between China-based peer-to-peer (P2P) trades and the official U.S. dollar currency, and in the past week it decreased slightly.

OKEx USDT peer-to-peer premium vs. USD. Source: OKEx

Currently the indicator has a 98% reading, which is slightly bearish, signaling weak demand from crypto traders to convert cash into stablecoins. Even at its best moment over the past two months, it failed to surpass 99%, so Chinese players have not been excited about the general market.

The overall impact of last week’s correction was a drop in the total futures open interest, down 28% to $16.7 billion. Nevertheless, the move was expected since the total market cap retraced and some $3.9 billion worth of liquidations took place during the week.

More importantly, the funding rates on Bitcoin and Ethereum futures quickly recovered from Dec. 3 price crash. Even though longs (buyers) and shorts (sellers) are matched at all times in any futures contract, their leverage varies.

Consequently, to balance their risk, exchanges will charge a funding rate to whichever side is using more leverage and this fee is paid to the opposing side.

BTC and ETH perpetual futures 8-hour funding rates. Source: Coinglass.com

Data reveals that a modest bearish trend occurred on Dec. 3 and 4 as the 8-hour funding rate went below zero. A negative funding rate shows that shorts (seller) were the ones paying the fees, but the movement faded as soon as BTC and ETH prices bounced 15% from their lows.

The above data might not sound encouraging, but considering that Bitcoin suffered considerable losses this week, the overall market structure held nicely. If the situation was worse, one would definitively not expect a 99% Tether premium or a positive perpetual funding rate.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.