Dollar Stablecoins Face The Grim Reaper: National Security
We will get US stablecoin regulations but they will be tough!
Link to the article on the Brookings website: HERE
Dollar-based stablecoins will face tough regulations because the US sees uncontrolled bearer instruments on decentralized exchanges as threatening national security.
Stablecoins are a security issue as they can short-circuit the well-developed offshore dollar markets, called Eurodollars, which are designed to be monitored as they must pass through the US.
This monitoring of dollar transfers is precisely what allowed the US to weaponize the dollar with sanctions and is a major tool in the US’s arsenal.
There is no direct path between overseas payer and payee that doesn’t go through the US’s Clearing House Interbank Payments System (CHIPS) netting system.
Stablecoins as decentralized bearer instruments short-circuit the Eurodollar system and will be heavily regulated sooner rather than later.
👉TAKEAWAYS
🔹 The US’s control of the dollar and the financial infrastructure on which it trades is one small part of its ”exorbitant privilege.”
🔹 Eurodollar deposits, a misnomer as they include all off-shore USD deposits, must pass through the US correspondent banking system, which allows the US to weaponize the dollar.
🔹 Stablecoins represent a direct threat against the US dollar as their bearer nature and use on decentralized networks without AML and KYC short circuits US control on dollar deposits.
🔹 “Stablecoins and other unregulated digital assets could erode the potency of U.S. economic statecraft by reducing our ability to exclude a rogue actor from the global dollar system.“
🔹 Once again, fintech and, in this case, stablecoins are geopolitical players impacting national security.
🛑 Understand that the US is in absolute control of US dollar use. While any jurisdiction can launch a stablecoin, which can afford to upset the US and be cut off from access? (Tether, are you listening?)
🔹 KYC and AML for stablecoins at the exchange will be insufficient as they do not account for the stablecoins’ history. Individual-approved users will be necessary, perhaps through a white list or digital ID system.
🔹 Legislation proposed by Senators Warren and Marshall suggests KYC responsibilities be assigned to wallet providers, miners, validators, and all crypto network participants. The industry hates it!
🔹 Competing legislation from Senators Lummis and Gillibrand would classify all stablecoin issuers as financial institutions equally devasting for some issuers.
🔹 Even worse, the Bank of England recently wrote that a legal entity was required for a payment system operator, a standard no decentralized network could pass.
👊STRAIGHT TALK👊
Last week I wrote: “As most stablecoins are issued in US dollars, US regulators will set the standards [for stablecoins], like it or not!
This statement remains very true. No one can issue a US dollar stablecoin and assume that because it is in a territory outside the US, it is not subject to strict US oversight.
The US will do everything to preserve its ability to weaponize the dollar through the financial system, and stablecoins will not be allowed to threaten use of this weapon.
This is not theoretical:.
“The Wall Street Journal suggests Russian smugglers were using Tether to purchase weapon parts on a regular basis, with some estimating this “shadow trade” was $10 billion a month.”
The ability to short-circuit dollar sanctions is putting additional pressure on legislators in the US to find a solution.
The good news is that we will likely get some form of stablecoin legislation this year.
The bad news is that it is unthinkable that the US would allow the transfer of bearer instruments on decentralized networks to undermine the extreme control it now exerts on the dollar.
I expect tough regulation!
Thoughts?
This is another great article on stablecoins!
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