Blockchain technology has disrupted nearly every industry out there. The technology has proven to have plenty of emerging use cases, including building a secure, transparent, decentralized and fast payments system.
However, despite the fact that digital currencies have evolved and birthed an entirely new and better economy, governments around the world are not very fond of them.
Historically, ever since the advent of blockchain technology and cryptocurrencies, governments have been at odds with them. There have even been outright bans in some countries. If we take a look at China, despite being the hub for mining cryptocurrencies, China has time and time again harshly regulated the sector over the years.
Similarly, during the bull run of bitcoin (BTC) around 2017 and 2018, there has been a concerted effort to outlaw cryptocurrencies. With central banks and governments leading the charge of controlling the prevalence of cryptocurrencies in global economies.
Despite the popularity of these coins in recent years, some governments are still considering prohibiting them. In this article, we’ll explore why some countries have banned cryptocurrencies, why governments have instituted regulations against cryptocurrencies, and why the United States is preparing a framework for Stablecoins.
Most recently, Turkey’s central bank banned the use of cryptocurrency payments. In any case, this wasn’t a surprise, as the country recently tightened cryptocurrency exchange restrictions.
There is no centralized authority and no regulation for the coins in Turkey, which is why they are banned. Investors cannot recover their losses from this, which they perceive as a risk.
The Indian government is currently drafting laws to combat cryptocurrency trading.The Indian parliament is drafting a proposal to ban private cryptocurrencies. They believe they fund illegal activities.
Digital currencies aren’t entirely opposed by the government. Additionally, they are exploring the idea of the central bank’s digital currency, the digital rupee.
As of February 2021, Nigeria is still banning cryptocurrencies. Until 2017, banks and financial institutions found it illegal to provide on and off-ramp services to Africa’s largest cryptocurrency market.
A threat was also made that bank accounts used on cryptocurrency exchanges would be closed.
In 2014, the central bank of Bolivia banned all cryptocurrencies decentralized from the country. However, the government-generated ones were permitted. The rule served to protect government assets as well as investors.
The only country in South America to have an outright ban on cryptos at that time was Bolivia.
The Ban on Decentralized Currencies was also implemented by Ecuador in 2014, shortly after Bolivia.
Government lawmakers recently amended monetary and financial laws to allow transactions using “electronic money” while preventing payments using non-state-controlled coins.
The examples shown above illustrate how governments have imposed regulations against the digital currency in general. In some cases, governments have banned cryptocurrencies outright, while in other cases, they have merely imposed rules and restrictions on them. However, recently the US introduced a framework that highlights the use of stablecoins. Since stablecoins are cryptocurrencies pegged to more stable fiat currencies, The US government believes that it’s best to highlight and promote a more stable digital currency instead of an unregulated, volatile, speculative, and highly unpredictable assets like most cryptocurrencies in the market.
Essentially, stablecoins are cryptocurrency assets linked to a more stable asset like the US dollar. Simply put, stablecoins are cryptocurrencies collateralized or backed by an asset that has value in the real world. Stablecoins can be pegged to nearly anything, they can be linked to fiat currencies, stocks, companies, real estate, commodities, or even other cryptocurrencies.
The majority of stablecoins currently in service are pegged to the dollar, though most also use other government fiat currencies like the euro and yen as benchmarks. Since the underlying asset that stablecoins are linked to tend to be very stable, they fluctuate very little, unlike other cryptocurrencies that tend to fluctuate a lot like Ethereum and Bitcoin.
The first stablecoin was launched in 2014; many others are modeled after it. Every dollar a user deposits yields one token. At any moment, it is theoretically possible to convert the tokens back into the original currency for the same amount of money that was originally invested in the tokens.
According to the most recent market capitalization of stablecoins worldwide, popular stablecoins had a market capitalization of US$68 billion at the time of writing.
Why governments are interested in regulating Stablecoins
As a result of the lack of access to traditional banking, stablecoins were traditionally used to purchase other cryptocurrencies such as bitcoin. Compared to national currencies, they are more helpful since they may be used anywhere in the globe, at any time of the day or night, seven days a week, without the need for a bank. Payments can be made in seconds.
Another benefit of stablecoins is that they are compatible with blockchain-based smart contracts that require no legal authority to execute, unlike conventional contracts. In the code of software, agreement terms are determined and the means and timing of money transfers are automatically determined. Dollars, on the other hand, cannot be programmed in this manner.
Stablecoins may soon be used in seamless trading, lending, payments, insurance, prediction markets and decentralized autonomous organizations, which can operate without human intervention.
Fiat currency is slower, more expensive, and harder to integrate into software than stablecoins.
Which is why observers assert that financial systems are at risk because of a lack of regulation. Gary B. Gorton and Jeffery Zhang relate the current economic position to that of the mid-nineteenth century, when banks created private currencies to supplement the national currency. During that time period, there were many bank runs because individuals could not agree on the value of privately created currencies. They believe stablecoins could cause the same issues.
However, despite the uncertainty, regulators have shown considerable interest in stablecoins in recent months, for fear that they may pose financial system risks.
As part of its efforts to strengthen regulatory oversight on cryptocurrencies, the Biden administration is focusing on stablecoins as it prepares the ground for a more stringent approach to cryptocurrencies.
In addition to ensuring the stability of national currencies such as the dollar, stablecoins offer the potential to make instantaneous transactions, similar to bitcoin.
The issuers say stablecoins are backed by Treasuries, which will make them easier to redeem for dollars and maintain a tight link to the dollar. Bitcoin, on the other hand, isn’t backed by assets, so its value can fluctuate wildly.
Stablecoins, according to regulators and former regulators, are susceptible to a bank run-style event if large numbers of investors rush to redeem them suddenly, causing the sponsors to sell assets at fire-sale prices and potentially straining the financial system. In 2008, some money-market mutual funds, long regarded as safe as cash in a bank, were wiped out by the financial crisis. A second government move was taken in March 2020 in an effort to stabilize markets shaken by the Coronavirus outbreak.
The companies issuing stablecoins invest in assets that make them significant players on the capital markets. To guarantee stabilization of those assets, however, there are no clear rules.
Federal Reserve officials are working on a paper which has been described by some officials as a blueprint for “the future of money,” which will include stablecoins. Fed officials appear to be divided on the question of issuing its own stablecoin, which would likely compete with digital currency.
Powered by the same blockchain technology as bitcoin, stablecoins represent a relatively small but fast-growing portion of the $2 trillion crypto industry. About a year ago, the value of the three largest coins was about $11 billion. Now their combined value is about $110 billion.
Currently, stablecoins are mainly used by investors to purchase crypto assets on exchanges like Coinbase that process trades 24/7. Many derivatives contracts are also settled in stablecoins, including those for the acquisition or sale of securities with a specified price.
There is no way governments around the world can deny the emergence of blockchain technology as it continues to dish out new, better, and more optimized financial products that could potentially threaten existing financial systems. While countries like El Salvador show their love for cryptocurrencies by accepting Bitcoin as their legal tender; however, it doesn’t stop larger powers like China to assert their dominance and meddle with the market, which is why there’s an utmost importance for regulations instead of prohibition.
Stablecoins are the perfect medium for governments to start embracing blockchain technology and digitize their economies. The United States Government is thinking ahead of most countries as it prepares a solid framework for cryptocurrencies via Stablecoins in the country.