The crypto market reacted somewhat nervously when the announcement came that US President Biden will come up with an executive order for the regulation of the crypto market as a whole in the coming weeks. Meanwhile, under the surface, a political game has been playing out for a while now around which US institutions and companies will have power over the part of the crypto market that is seen as the biggest threat by the US government: stablecoins.

Reseach by Decrypt indicates that there are signs that the large US banks will be handed this part of the crypto market on a silver plate. Why? Because it would give the government more power over the crypto market as a whole. But the fight is far from done.

According to Decrypt, the US government's plan is not to kill off stablecoins but to bring the most well-behaved ones, such as Circle and Paxos, under the umbrella of the banking system. While making life more difficult for other stablecoin companies such as Tether. Decrypt: "Recent actions by regulators suggest the plan is already underway. The question now is whether the crypto industry can avoid being owned by the same big banks it set out to disrupt."

Why governments are most afraid of stablecoins

Why are stablecoins viewed with suspicion by governments, more so than, say, Bitcoin? Because stablecoins combine a key advantage of crypto with an advantage of traditional money. The advantage of crypto: fast, global payments that do not require bank approval. The advantage that stablecoins have in common with fiat money like dollars and euros: the price does not fluctuate.

Those advantages have won many people over in the past two years. Currently, there are $170 billion of stablecoins in circulation and this number has been growing explosively. By comparison, in the spring of 2020, the number was still under 10 billion. Indeed, why not use stablecoins when the can be used to transfer money to your family in, say, Australia in a flash? When, as a fat bonus, you also draw interest of 8% or more on your stablecoin balances. The problem in the eyes of governments: if everyone puts a substantial amount of their money in stablecoins, the Central Bank risks losing its grip on the issuance of money.

No wonder, then, that lawmakers know they have to do something with this market. When Facebook wanted to introduce its version of a stablecoin in 2019 (Diem), the company was effectively told to stop right then and there. Crypto companies that issue stablecoins, such as Tether (USDT) and Circle (USDC), have been tolerated until now, but constantly have to deal with the regulators - with Circle having the best papers, while Tether is always under scrutiny.

A big slice of the financial pie

Now that the real big bucks are slowly starting to come into sight, the slice of the pie is too big to be ignored. Banks are the parties that have traditionally been authorized to create money, namely by issuing loans. Companies that issue stablecoins do so in a different way with, if all is done according to the rules, 100% collateral of assets in the real world. A service that banks would love to add to their portfolio.

The argument by which the government wants to justify the regulation of stablecoins, is that the market is "systemically important”. Problems in the stables market would pose risks to the entire financial system. This argument might look sound on superficial inspection, but doesn't really cut it. First, the market is still relatively small and second, stablecoins operate in the parallel financial system of crypto.

Either way: putting the stablecoins market on a leash gives the government opportunities for taxation on the one hand, while in the process having some power to curb the growth of the crypto market as a whole. Because to trade in crypto, stablecoins, while not indispensable, are very convenient. You move profits tostablecoins and they can also serve as collateral for crypto loans, for example.

Threat or opportunity?

The fight has begun but the outcome is not yet certain. While the crypto industry is not as powerful as the traditional banking sector, it already has proponents in many walks of life and also the US Congress.

One argument from political proponents of stablecoins is that they are a new tool to promote the dollar's status as the world's reserve currency: by far the majority of stablecoins worldwide are dollar stablecoins. On top of that, the US government is vastly behind China in the creation of its own digital dollar (CBDC), which could be seen as an official stablecoin. In short, there may be just as many financial interests served by promoting stablecoins as by suppressing them.

Regardless of the outcome of this fight, we need not worry that crypto's ideal of decentralization is going to be stifled. The genie is out of the bottle and no amount of regulation will get it back in. For example, decentralized or algorithmic stablecoins have been around for a few years now. These are stablecoins 'without headquarters', which have don’t use assets from the tradiotional system as collateral, but other crypto assets. It’s all pure blockchain. An example is Terra. It will be many times more difficult to curb this strongly growing sector of the stablecoin market.

Another thing to realize, if you’re worried about regulation, is that strict regulation is considered by investors better than regulatory unclarity. Many institutional investers won’t want to enter a market that is not clearly regulated.