Stablecoins are seen as the lifeblood of DeFi per this video from The Defiant (The US Treasury is Terrified of Stablecoins). It highlights a report created in the US by the Presidential Working Group on Financial Markets. the FDIC (Federal Deposit Insurance Corporation) and Office of the Comptroller of the Currency. The working group also includes the US Treasury, US Federal Reserve, the SEC (Securities and Exchange Commission) and the CFTC (Commodity Futures Trading Commission). In the report they highlight various risks in stablecoins and basically highlight the need for a CBDC (central bank digital currency) as a way to provide a stable currency without the risks of decentralised systems.
What are the risks they highlight
potential for destabilising runs
disruptions to payment systems
concentration of economic power
On the first point, they highlight the need for stablecoin issuers to be regulated just like normal banks are and how without that there could be issues if there was ever a run on the liquidity in stablecoins (e.g. like the Greek Financial Crisis leading to runs on traditional banks).
Some stablecoins are already regulated this way including Paxos (Pax), Binance (BUSD), Gemini (GUSD) but Centre (joint venture between Circle and Coinbase) which provides USDC is not.
For the second point, the recommendation is for KYC and AML for better risk management.
On the last point they want restrictions on affiliations with commercial entities which equates to a push towards CDBCs (and on the back of Facebook initially proposing their own cryptocurrency with Libra a few years ago and Diem more recently).
It's likely this Facebook/Meta move pushed governments towards more scrutiny in this space but if they did have CDBCs, they would likely be able to automate things like distribution and collection of taxes and have in-built compliance.
In China, this is live with the Digital Renminbi, DCEP (Digital Currency Electronic Payment). So far, $9.5 billion has been spent here and 10% of the population have activated their electronic wallets to enable this.
Make sure to check out more videos on YouTube from The Defiant.
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