Stablecoin Best Practices: No Easy Fix
US regulations are the linchpin to greater adoption
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The proposed new anti-CBDC legislation in the US, that will likely pass, has me thinking of stablecoins. This paper on stablecoin best practices is a great read that tries to solve some of stablecoin’s thornier implementation problems.
Of course, the first problem to be solved is US regulations, which appears partly solved with the GENIUS Act (I don’t know why it’s all caps either), which will likely pass this summer.
Even if the GENIUS Act passes, the assumption that in a few mere months, it will allow dollar-denominated stablecoins to fly worldwide to banks on decentralized networks without US regulatory involvement is far-fetched.
The GENIUS act requires that all USD stablecoins have US bank-style KYC and AML attached to them. These standards go beyond implementing “the travel rule” and Financial Action Task Force (FATF) requirements mentioned in the paper, which also ignored sanctions enforcement.
That isn’t to say stablecoins can’t work, but the regulatory light versions proposed in this paper do not capture the reality of the GENIUS Act and won’t fly.
The next big problem they must solve is interoperability with existing bank, securities, payment, and corporate treasury systems.
While the paper gives some solid examples of their implementation in custodial accounts, it would be flippant to say these are easily surmountable obstacles.
This is particularly true when dealing with cross-border transactions at which stablcoins excel.
Which coins will be accepted? Which networks can they come from? What level of KYC/AML do they support, and is it acceptable to local governments?
As a supporter of CBDCs, I consent that their implementation would also require significant hardware and software changes. That said, as national currencies, the costs would be spread among all financial institutions and occur only once.
Compare that with stablecoins where there will undoubtedly be many issuers, and each one must be provisioned individually after launch to achieve interoperability.
I look forward to using stablecoins in the future, but they still have a long way to go and that’s before they deal with the issue of de-pegging!
See this week’s earlier writing on stablecoins:
👉Best Practices for Stablecoin Issuers
1️⃣ Reserve Management
Maintaining high-quality liquid assets in the same currency as the stablecoin reduces the risk of depegging. Transparent reserve disclosures and regular third-party audits ensure accountability and build user trust.
2️⃣ Robust Risk Management and Governance
Establishing comprehensive governance frameworks allows issuers to manage risks effectively. Issuers must develop protocols to handle liquidity crises and ensure timely redemptions. This approach strengthens user confidence and enhances market stability.
3️⃣ Diversification of Banking Partners and Payment Rails
Relying on a single banking partner poses systemic risks. Diversified banking relationships ensure continuity of operations during periods of financial stress.
4️⃣ Technological Resilience
Relying on a single banking partner poses systemic risks. Diversified banking relationships ensure continuity of operations during periods of financial stress.
5️⃣ Customer Support Excellence
A responsive customer support system strengthens user trust. Addressing inquiries within 24 hours and providing clear explanations for delays enhances the user experience. Efficient support also mitigates reputational risks associated with operational delays.
6️⃣ Implementation Insight
Issuers should integrate advanced technologies, such as blockchain analytics, to monitor transactions for compliance with anti-money laundering (AML) and know-your-customer (KYC) standards. This approach ensures both regulatory adherence and operational
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