- The dominance of the dollar remains strong as the euro falls below parity with the USD.
- If uncertainty persists and the USD continues to appreciate against other fiat currencies, this could have an effect on regulatory requirements and the pace of adoption of stablecoins around the world.
Since the failure of algorithmic stablecoins like Iron Finance’s IRON and Terra Luna’s UST, the conversation around stablecoins has changed. Rather than debating which type of stablecoin is best, attention has now shifted to which type of audit and reserve system could be most beneficial.
This increasingly close consensus is an important change because it could enable widely accepted regulatory standards. But as the dollar continues to rise (meaning other fiat currencies continue to fall), it becomes more difficult to find a stable benchmark that will satisfy regulators.
Wallexthe creators of the Euro stablecoin EURST believe that exclusively using the USD for their reserves is the best way to build trust with users and regulators. In this article, we sat down with their experts to learn how the forex market is likely to impact stablecoin regulation and how their approach can help with adoption.
The current state of stablecoin regulation
It is only a matter of time before stablecoins are regulated. Many argue that algorithmic stablecoins are insecure and could be banned altogether. Some crypto-backed stablecoins have worked so far, but if the cryptocurrency backing a stablecoin is labeled as an unregistered security or is associated with criminal activity, it will cause further complications.
New US sanctions against crypto mixer, Tornado Cash represent a new precedent that could point to tougher enforcement by regulators. For example, issuers of mixed collateralized crypto stablecoins like MakerDAO are required to exclude any collateral tied to addresses on this sanctioned list.
If these risks cause regulators to ban algorithmic stablecoins and crypto-collateral stablecoins, that leaves us with fiat-backed stablecoins. But in this potential scenario, regulators will still need to provide more clarity on audit and reserve standards.
Dollar Rising Complications for Fiat-Backed Stable Coin Standards
For a stablecoin to remain stable, it must maintain its 1-1 peg at all times. Any sustained swing in the predicted value of the coin could cause investors to lose confidence and sell their holdings. This risk follows the same pattern as a bank run and can happen to any stablecoin.
When the value of the US dollar rises, it increases these risks for stablecoins that depend on fiat reserves other than the US dollar. In this scenario, a non-USD stablecoin could experience selling pressure on exchanges. This tends to temporarily drop the price of the stablecoin on the exchange, which then increases the demand for 1:1 redemptions directly from the stablecoin issuer. If demand is extreme enough and the issuer’s reserves are insufficiently supplied, redemptions could be delayed, potentially causing more fear and increasing selling pressure.
The potential for this type of liquidity crisis is why Wallex thinks overcollateralisation is useful in times of uncertainty. It inspires greater confidence in the ankle which can protect against a spiral of fear. If stablecoins are only backed by the fiat they represent, then there is a greater perception of risk.
How will USD-backed stablecoins like EURST impact adoption?
EURST euro stablecoin promises 1:1 support in USD reserves. They also provide real-time proof of reserve certifications through Armanino, one of the top 25 independent accounting firms in the United States.
Simon Mazzuca, the founder of Wallexdescribed the organization as a “digital asset ecosystem built on the idea of the future of banking using digital assets. We’ve built an infrastructure that has all the functionality of a traditional bank, but is also suitable for digital assets.”
He went on to say, “While being a euro stablecoin, EURST is backed by US dollars. This turned out to be a successful strategy, given the recent fall in the EUR/USD trading pair. Forex markets have been volatile lately, with the Euro falling to its lowest level in two decades. 0.9903 against the US dollar. The euro started 2022 with a ratio of around 1.14 euro for 1 dollar.
In fact, the EURST has become oversized due to its peg to the USD. As Mazzuca said, “Today we have about 8-9% more in our collateral due to the dollar rising against the euro.” In this way, a stablecoin like EURST can provide inflation protection while shielding investors from volatility, he added.
Even though the euro may return to a higher price, Wallex experts argue that the overcollateralization resulting from the use of a global reserve currency is greater during times of geopolitical and economic uncertainty. Bank run risks tend to be greater during these times.
Another point mentioned by Mazzuca was the insurance backing Wallex’s stablecoin reserves. He noted that “Wallex’s custodial account for collateral is protected by FDIC insurance. This is twice as much as the insurance of the Central Bank of Europe. When asked how they managed to achieve this, Mazzuca replied, “We have a custodial account with our own escrow and each account is FDIC insured for $250,000. This is another key element of our strategy. [We have a] very macro-economic plan on a large scale and over a long period.
In pursuit of its goal of working with traditional and crypto businesses to enable easy-to-use stable payment gateways, Wallex plans to launch 12 more stablecoins by the end of this year.
This content is sponsored by Wallex.
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