When Terra's stablecoin lost its peg to $1, it resurrected a debate on how stablecoins should operate. Unlike other stablecoins, Terra USD was not backed by collateral. Instead it used a set of algorithms and smart contracts to try and maintain the coveted $1 value. Traditional stablecoins like Tether and USD Coin use a more straightforward model by having an equal amount of assets worth the same amount of stablecoins issued. While there is some concern over the actual amount of reserves due to a lack of transparency, these types of stablecoins are generally considered to be less risky.
The meltdown of Terra was not only a failed experiment, but a costly one which might finally push governments around the world to issue guidance and legislation on stablecoins since it cost investors roughly $40 billion.
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Japan leads the charge
Just recently, Japan became one of the first countries in the world to release a comprehensive bill on stablecoins. On June 3, the country's parliament ratified a bill that would legalize stablecoins and set firm boundaries on issuance and practices to protect investors. The bill is the first of its kind among any developed economy.
The laws specifically outline that only entities that are backed by Japanese yen or other legal tender can issue stablecoins, meaning no more algorithmic stablecoins. Additionally, the legislation will require agencies to be licensed with the government if they want to distribute stablecoins. Entities that currently meet these requirements are banks and other government-backed financial institutions.
While newcomers like Tether and USD Coin can apply for this licensure, they certainly face an uphill battle to compete with banks and other agencies that are already licensed.
Governments and the digital age
Since the announcement by Japan to regulate stablecoins, there have been murmurs that other governments will introduce similar legislation.
At the end of May, the U.K. government announced in a report that they will be leading an initiative to research what their own version of stablecoin regulation would entail. The report highlighted the importance of long-term crypto developments but added that regulation and safeguards are important too. While not official like Japan, British regulators are looking to give the Bank of England regulatory oversight and add legislation to protect investors from possible risks of crypto firms being insolvent.
Last month, Germany became one of the first developed countries to clearly define crypto assets and DeFi practices in a new tax-friendly crypto bill. Within the new legislation, the German Ministry of Finance added clear, concise guidance on how investors should report taxes on things like hard forks, gas fees, and even airdrops.
Governments are beginning to understand the dynamics of crypto and will continue to introduce new legislation. Investors should be aware of these laws and how the landscape continues to change. Current uses of stablecoins, like earning interest or yield farming, could dramatically change in the coming years.
This is likely just the beginning for stablecoin regulation. Other countries will follow Japan's lead and pass their own laws. In the coming months, make sure to keep an eye on any further developments and how they might impact your investments.
