Stablecoins may be able to help crypto’s hot potato problem, but they aren’t going to stop investors from getting burned.
Which is why it’s time for a far tougher and more stringent set of regulations governing how they are backed and how they are used, David Evans, chairman of Global Economics Group, told PYMNTS recently.
The hot potato part is fairly straightforward, he said. Cryptocurrencies like bitcoin, ether and the thousands of others available on exchanges are far too volatile to be used for payments.
Indeed, even the providers who allow consumers to spend their crypto at checkout or the point of sale convert it to fiat and give that to the merchant, Evans pointed out in an article to be published in Competition Policy International’s TechREG Chronicle later this month.
“You may have the value double the next day, but on the other hand, if you’re worried about putting food on your table or meeting your payroll, you don’t want to face the risk that it’s only going to be worth half as much,” he told PYMNTS. “I don’t think anyone is really thinking that cryptocurrency is going to be a payment system anymore.”
Stablecoins do solve that, whether it’s briefly while you’re in the process of trading cryptocurrencies on an exchange or over months — or even years — if you’re locking funds into a self-executing smart contract on the Ethereum blockchain, Evans said.
See also: DeFi Series: What Is a Smart Contract?
You don’t want to find yourself saying, “When I entered into this contract, I thought I was dealing with the equivalent of $100,000 of value, but holy moly, it’s only $25,000,” he added. However, stablecoins “don’t make bitcoin or ether or anything else less volatile. They simply solve some of the problems that result from that for the ecosystem.”
Learning From M-PESA
That isn’t a problem in and of itself, but stablecoins also bring substantial risks of their own. They can also facilitate bad behavior on the part of the scammers preying on crypto investors, and the exchanges that encourage them to make bets that are riskier than many crypto investors understand, he said.
As for stablecoins’ own risks, you don’t have to look further than the $48 billion collapse of the Terra/LUNA stablecoin ecosystem during a weeklong run in May. That was followed by the failure of a hedge fund that had borrowed heavily, and then by a number of crypto lenders which had loaned it hundreds of millions of dollars collected from small investors.
Read more: How a Stablecoin’s $48B Collapse Rippled Across Crypto
To deal with that risk, Evans said he looked to Kenya’s highly successful M-PESA mobile money system. When it launched in the mid-2000s, mobile money was something new, an unknown quantity with which no one — regulators in particular — had any experience.
“If you’re a bank regulator, you might have some concerns because you’re basically getting people to stick cash, in effect, into the mobile phone and hoping that someone is going to get cash out at the other end,” Evans said. “You have these guys who are talking about innovation. You don’t know whether that’s true, but it’s at least possible.”
What Kenya’s regulators did was take a “light touch” regulatory approach, but with a couple of important safeguards, he said.
First, they required the well-established and dominant telecom proposing M-PESA, Safaricom, to keep all of that money in cash, in a bank, and under the control of an independent trustee. That money belonged to the consumer, not Safaricom, and it couldn’t be lent out.
They also kept a close eye on M-PESA in a regulatory sandbox. What they did not do is follow banks’ suggestions for tough regulations that could impede a potential competitor and let an innovative new payments system fail.
“I’m proposing the same regulatory regime for stablecoins,” Evans said. “The money has to go into a regulated bank, and there has to be a trusted third party situated over those funds so that there can’t be any shenanigans. That part isn’t really any different than M-PESA. Those are just sensible banking-type regulations to have, given the possibility of bank runs — the equivalent of bank runs — and contagion.”
And, he would do that for the same reason, he said.
“Regulators cannot discount the possibility that overly onerous crypto regulations could prevent the realization of valuable innovations,” Evans argued. “Crypto is a vast, heavily funded enterprise. It could lead to disruptive innovation that would be socially valuable.”
Bigger Problems, Tougher Solutions
“Where I go a step farther is, I think we need to recognize — because we have just seen it — there is a lot of bad stuff going on in the crypto ecosystem, including things that are now being facilitated by stablecoins,” he said
That includes things like the promise of 20% returns for investing your stablecoins — “which is five times, six times as much as you could get anywhere else,” Evans said. “Somehow there’s a free lunch there. You know there are no free lunches. If you’re getting 20%, something funny is up.”
Then there’s the advertising he sees from crypto exchanges — which, he noted, have been very clear that they make money when crypto is at its most volatile and the most trading occurs.
Most notably, there’s FTX’s campaigns with legendary quarterback Tom Brady and his wife, supermodel Gisele Bündchen, especially the “In On” Crypto campaign featuring Bündchen and FTX CEO Sam Bankman-Fried telling viewers that “they should get in on the vision,” Evans said.
While there’s nothing wrong with speculation in and of itself, the problem, in Evans’ opinion, is that what they are selling has a future that is at best “distant, uncertain and vague,” and that no “killer app” for public blockchains has emerged.
What has emerged are vague claims about an even vaguer Web3 decentralized Big Tech-free internet, or a “financial nirvana” in which intermediaries are eliminated, he said.
Related: Web3: Is There Any ‘There’ There? And if so, Where Is It?
“The fact of the matter is the major use case for cryptocurrencies today is speculation,” Evans said. “And that speculation is increasingly hype-driven, celebrity-driven. And it’s a problem.”
Because of that, Evans suggested something he compared to the process of getting an app approved for Apple’s App Store and Google Play.
There would be “some set of regulations that limit the use of stablecoins to ‘healthy’ applications,” he said. “The idea is, sure, we’ll allow stablecoins, but let’s limit them so that they can only be used for applications that have some kind of Good Housekeeping seal of approval” from regulators or regulated stablecoin issuers that provide users with some kind of assurance that the platform they are considering investing in is not a scam.
“Retail investors really need to think seriously about whether they want to engage in gambling, which is what this is, or whether they want to be serious investors,” Evans said. “But they shouldn’t have the exchanges hyping things in the way that they’ve been currently doing, in my humble view.”
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