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Kazemian clarified that itâs mostly fiat stablecoins bearing the brunt of regulatory scrutiny.
Stablecoins, or crypto assets that are pegged 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 money abroad, and pay for everyday consumer transactions without risk of fluctuation. A recent estimate from the Bank for International Settlements put the total stablecoin supply at roughly $150 billion.
As issuers of traditional fiat money around the globe, central banks do not seem to be big fans of stablecoins. A sharp increase in supply coupled with the 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 at algorithmic stablecoins, which are governed by automated expansion and contraction of the monetary supply.
In an exclusive interview with Cointelegraph, Sam Kazemian, 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 and Ampleforth. 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 a central bank issues a currency, it never says, âHey, 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.â They donât say that anymore. And so, what a central bank does, is that it targets its own currency in the open marketâs exchange rate.
If central banks peg their currency to gold, what theyâll do is look at the price of gold against their national currency. If itâs lower than what they want, theyâll buy some of the currency back. If the other side is higher than what they want, then theyâll print more of the currency. Frax takes this kind of approach. Thatâs how we developed our algorithmic stablecoin thesis, and itâs worked well. Weâve never broken our peg, even during [the major crypto market crash in] May.
Stablecoin market capitalization statistics. (Source: U.S. Treasury Stablecoin Report)
CT: Do you see a potential crackdown looming ahead in the stablecoin sector? What is Frax doing to comply with stablecoin regulations?
SK: There are two parts to this. I donât 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 donât 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 theyâre proposing is a little bit reactionary. Whatâs currently going on is that people are saying that stablecoin issuers like Circle and Tether need to have banking licenses. Thatâs the conversation. But that doesnât make sense if you think about it, because thereâs a lot of experimentation allowed in even the traditional financial space. Things like money market funds donât have a banking charter. Itâs not a bank. Itâs not FDIC [Federal Deposit Insurance Corporation]-insured. People either donât realize this or theyâre 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 theyâre currently proposing [for] stablecoins. This doesnât 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 Iâm pretty open to the belief that the regulation portion will work itself out.
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