crypto regulation against stablecoin- The Cryptonomist

The various states, in no particular order, continue to take initiatives regarding the regulation of crypto, and in particular stablecoins.

The latest initiative in this regard is by the Canadian Securities Administrators (CSA), which is the equivalent of the SEC in Canada.

The CSA’s scope is quite broad, as it also includes that of the National Registration Database (NRD), the System for Electronic Disclosure by Insiders (SEDI), and the System for Electronic Document Analysis and Retrieval (SEDAR).

Yesterday, the CSA issued a lengthy memo describing a change in their attitude toward crypto trading platforms (CTPs, crypto asset

trading platforms) operating in Canada.

The note cites the recent failures of some CTPs, including FTX, Celsius, BlockFi, Voyager Digital, and Genesis Global, stating that it is introducing important new provisions to protect investors.

The measures of the new crypto anti stablecoin algorithmic regulations in Canada

The new provisions first address increased requirements regarding the safekeeping of funds and segregation of cryptocurrencies held on behalf of Canadian clients, including prohibiting their use at CTPs (exchanges).

The offering of margin trading, credit or other forms of leverage to

any type of customer in connection with the trading of crypto contracts or assets on exchange platforms.

Furthermore, in the chapter on stablecoins, referred to as Value-Referenced Crypto Assets, they state that they consider cryptocurrencies backed by fiat currencies generally to be security or derivatives.

In this regard, they prohibit CTPs, or exchanges, from allowing the deposit or purchase of stablecoins without the prior written consent of the CSA itself. The problem is that obtaining this consent means meeting numerous due diligence requirements, including ensuring that stablecoins are backed by fiat currencies.

In fact, they explicitly write in the memo that they do not expect to provide consent to stablecoins that are not fully backed by appropriate reserves, i.e., those that retain their value through an algorithm.

This is in effect a ban on crypto exchanges that intend to provide their services to Canadian customers from making algorithmic stablecoins available to them. Therefore, Canadian users who wish to use crypto exchanges authorized to operate in Canada by the authorities will only be able to use stablecoins that are fully collateralized in fiat currency.

Finally, the CSA requires that stablecoins listed on exchanges and made available to Canadian customers have only reserves consisting of “highly liquid assets” such as cash or cash equivalents, which must be held with qualified custodians, with monthly public reviews conducted by independent auditors.

Stablecoins already in compliance

Of the major stablecoins already in existence, the only one that already appears to be in compliance with respect to this new regulation is USD Coin (USDC), issued by Circle.

In fact, BUSD right now is managed by a company that no longer has an interest in managing it, and USDT (Tether) only does quarterly reviews. However, it shouldn’t be a problem for Tether to triple the audits by doing one per month, although this would result in a significant increase in audit costs.

The fourth major stablecoin, DAI, is algorithmic, so it would not be in compliance.

It should be noted that this new regulation applies only to Canada for now, but it also applies to all exchanges, including foreign ones, that want to offer their services to Canadian customers while complying with the rules.

It is not at all unlikely that other states will also opt for similar solutions, especially after the disaster caused last year by the implosion of Terra’s UST algorithmic stablecoin collateralized in Luna.

For example, the US SEC would already now like to consider BUSD a security, so it seems quite aligned with the positions of the Canadian CSA.

But it remains very interesting that in this memo the CSA recognizes specific use cases for stablecoins, such as payments and hedging against volatility.

Algorithmic stablecoins

Algorithmic stablecoins, such as DAI, USDD, or the failed UST, are actually used primarily in the DeFi environment, because on common centralized exchanges USDT, USDC, and BUSD are used primarily, although the latter seems destined to be marginalized by the other two.

The fact is that while a stablecoin fully collateralized can in theory always be traded at par with the respective underlying, this does not apply at all to algorithmic stablecoins.

That is, for the former it is sufficient to make sure that there are sufficient reserves, so much so that their value at that point fluctuates in the markets in tandem with that of the stablecoin tokens, whereas this logic does not apply to stablecoins collateralized in assets that are not the underlying to whose value they are pegged.

UST was collateralized in Luna, the cryptocurrency native to the Terra ecosystem, and as soon as Luna’s market value collapsed, so did UST.

DAI, for example, is collateralized largely in ETH, so if the value of ETH collapses, there is a risk that DAI will also collapse.

In contrast, for USDT, USDC, and BUSD in the event of a collapse of the underlying, i.e., the US dollar, there would be no problem in redeeming them at par with USD, because for every token issued there must be $1 returnable to the user who asks for its redemption.