What Happens if All Stablecoin Users Have to Be Identified?
Imagine the following scenario: Sometime in 2021, financial regulators declare that all stablecoin owners must be verified. What would happen to the cryptocurrency ecosystem?
Right now, a large chunk of stablecoin usage is pseudonymous. That is, you or I can hold $20,000 worth of tether or USD coin stablecoins in an unhosted wallet (i.e., not on an exchange) without having to provide our identities to either Tether or Circle, the managers of these stablecoin platforms. We can send this $20,000 along to other users, who can transfer the coins on, who in turn can transfer them on, and no one along this chain needs to unveil themselves.
J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.
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The only point at which stablecoin users have to submit to a Tether or Circle know-your-customer (KYC) process is to redeem stablecoins directly for traditional bank dollars. Or vice versa, to deposit dollars with Tether or Circle and get freshly minted stablecoins.
In a world where traditional non-blockchain based financial institutions like PayPal, Chase, and Zelle link all payments to names and addresses, stablecoin networks have become a rare moat of digital payments privacy. This has led to some fairly exotic uses for stablecoins.
In Moscow, Chinese gray market clothes vendors trade cash for tether to repatriate profits, writes CoinDesk’s Anna Baydakova. Ukrainian companies that import from Turkey use tether to skirt foreign exchange controls, and a multi-million Ponzi scheme relied on Paxos standard (PAX) for payments. Meanwhile, in the world of decentralized finance (DeFi), unidentifiable computer programs are conducting billions of dollars in unregulated financial transactions using USD coin and other stablecoins.
But will regulators allow this privacy moat to continue to exist? What if, at this very moment, officials working for the Financial Crimes Enforcement Network (FinCEN), the U.S. Treasury’s money laundering watchdog, are plotting how to rein in stablecoin pseudonymity?
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See also: What Are Stablecoins?
Let me speculate about how a potential unveiling might look.
FinCEN could rule that henceforth, if anyone wants to access tether, USD coin, or any other official stablecoin (TrueUSD, Paxos standard, Gemini dollar, Binance USD, HUSD) they will need to apply for a verified stablecoin account. That would mean providing photo ID, proof of address and other information to Tether, Circle or other issuers.
For many existing stablecoin owners, this won’t be a big deal. Professional arbitrageurs who use stablecoins to move value from one centralized exchange to another are probably already KYC’d. And retail clients who keep their stablecoins on an exchange like Binance wouldn’t see any changes because the exchange already verifies their identities anyways.
But given that every transfer would need to have names and addresses associated with it, an unveiling would certainly weigh on gray market uses such as the Chinese traders in Moscow.
With stablecoins getting bigger by the day, regulators probably can’t ignore the issue of pseudonymity forever.
The issuers themselves would be inconvenienced, too. Building infrastructure to collect and verify the identity of all users, and not just the few who redeem or deposit, is expensive. To recoup their costs, issuers like Tether and Circle may consider introducing fees. All of this could render stablecoins less accessible for people who only want to use them for casual remittances.
It is in the world of DeFi that the fallout of a stablecoin unveiling could be felt the most. Real people who own stablecoins can be easily identified. But in DeFi, stablecoins are often deposited into accounts controlled by bits of autonomous code, or smart contracts, which don’t have any underlying owner. It’s not evident how a stablecoin issuer can conduct KYC on a smart contract.
Maker, one of the most popular decentralized tools, contains $350 million USD coins in various user-created vaults. This hoard of stablecoins serves as collateral backing for dai, Maker’s decentralized stablecoin. Another $130 million USD coin is held in a Maker’s peg stability module smart contract. If all stablecoin owners must be identified, it’s not apparent who or what entity would have to undergo a KYC check for this $130 million.
Compound, another popular DeFi tool, currently holds $1.6 billion USD coin and $350 million tether. Lenders can deposit their stablecoins into Compound smart contracts and collect interest from borrowers who draw from the contracts.
Liquidity pools, smart contracts underpinning decentralized exchanges like Uniswap and Curve, also hold large amounts of stablecoins. Curve liquidity pools currently contain $1.25 billion worth USD coin and $450 million worth of tether.
See also: JP Koning – What Tether Means When It Says It’s ‘Regulated’
Under the strictest scenario, stablecoin issuers could be required to cut off any entity that can’t provide a verified name or address. Which means Curve, Maker, and Compound smart contracts would all be prevented from receiving stablecoins.
Given the ecosystem’s reliance on stablecoins, this would come close to breaking it. Compound, Curve and Uniswap might try to adapt by substituting FinCEN compliant stablecoins like USD coin with decentralized ones, say like Maker’s dai stablecoin. Because decentralized stablecoins don’t rely on traditional banks, they are less beholden to FinCEN dictat.
But remember, Maker relies on USD coin collateral to imbue dai with stability. If Maker, like Compound and Curve, can no longer hold USD coin, then dai itself would become less stable. And so the usability of Compound and other protocols relying on dai would suffer.
If we imagine a more dovish scenario, FinCEN might allow for a smart contract exemption. As long as stablecoins are held in a smart contract rather than an externally controlled account, then FinCEN would allow the stablecoin issuer to provide financial services to the smart contract. Much of DeFi could continue on as before.
This option provides a pretty big loophole for bad actors, though. The whole reason for requiring platforms to verify accounts is to prevent them moving illicit funds. If stablecoins held in smart contracts are exempt from KYC obligations, then enterprising individuals will move stablecoins to the smart contract layer and thus stimie FinCEN controls.
See also: Questions About Tether Just Won’t Go Away. Does the Crypto Market Care?
A middle-of-the-road scenario is that FinCEN exempts smart contracts from stablecoin KYC, but only if the smart contract itself verifies the identities of all addresses that interact with the contract. So Curve, in this case, would have to set up a customer due diligence program if it wanted to qualify to use stablecoins. Maker would have to vet all vault owners.
Under this scenario, we could imagine DeFi splitting into two. Purely decentralized protocols would avoid stablecoins altogether to avoid subjecting their users to KYC. Not-so-decentralized finance would start to verify users to maintain access to stablecoins.
There are many other potential scenarios. As you can see, this is a complex problem. If FinCEN is indeed exploring the question of stablecoin pseudonymity, I wouldn’t want to be the official tasked with trying to design an appropriate response. Too strict and DeFi may no longer function. Too light and DeFi will continue to pose a money laundering threat.
But the clock is ticking. The combination of tether, USD coin, Paxos standard, Binance USD, TrueUSD, dai, and HUSD now regularly surpasses bitcoin in terms of on-chain volume. In January 2021, these stablecoins processed $308 billion in transactions compared to bitcoin’s $297 billion. With stablecoins getting bigger by the day, regulators probably can’t ignore the issue of pseudonymity forever.
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Diem Stablecoin Prepares for Liftoff With Fireblocks Custody Partnership
Crypto custodian Fireblocks and payments platform First Digital Assets Group are providing connectivity and support to diem, the global stablecoin and payments system formerly known as libra.
Fireblocks and First are providing the digital plumbing to allow financial service providers such as banks, exchanges, payment service providers (PSPs) and eWallets to plug into Diem on day one, the companies said.
Facebook unveiled the libra project in 2019 and almost immediately became embroiled in a whirlwind of regulatory blowback and governmental outrage. The project’s ambitious goal to create a private global stablecoin backed by a basket of fiat currencies threatened to unseat the high echelons of sovereign monetary policy.
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Now, the rebranded diem plans to emerge around the end of this quarter, with a modest minimum viable project based around a U.S. dollar stablecoin.
It will be integrated, via Fireblocks and First, with Diem Association members like Spotify, Farfetch, Lyft, Uber and Shopify. (It’s notable that former Libra Association members PayPal, Mastercard and Visa are busy pursuing their own plans with public cryptocurrencies.)
The streamlined project has bent to the will of regulators and operates on a strict permissioned basis with a specific onboarding process to become a diem virtual asset service provider, or VASP.
“What Fireblocks and First have built allows merchants and payment service providers to use the diem stablecoin as a payment method in a way that’s really integrated,” Michael Shaulov, CEO of Fireblocks, said in an interview. “It’s more or less seamless, like how they would accept Visa, Mastercard or any other form of payment.”
The diem payments system also allows things like refunds, and the stablecoin can be easily changed back into fiat to pay merchants or salaries and so on, Shaulov said. Looking further down the road, the network also includes a sophisticated smart contract language called Move, Shaulov added, which could be used in areas like permissioned decentralized finance (DeFi.)
Shaulov believes diem will still be one of the fundamental projects bringing crypto into the mainstream, despite taking a while to get off the ground and garnering criticism because of its narrowed-down launch product.
xSigma Prepares to Launch Its Stablecoin DEX With Major Backers – Press release Bitcoin News
xSigma Prepares to Launch Its Stablecoin DEX With Major Backers
press release
PRESS RELEASE. xSigma is a decentralized exchange and liquidity mining platform that supports stablecoin swaps. It enables dollar-pegged assets to be traded onchain with minimal slippage and lower fees than existing AMMs.
The project is gearing up for its public launch, when early adopters will have the opportunity to earn rewards for providing liquidity and traders can execute swaps in a highly liquid environment.
Backed by a NASDAQ-listed company, and developed by an experienced team that includes former Google engineers, xSigma has secured the support of several high profile figures. These include NBA star Dwight Howard, who has committed to participating in the xSigma launch as an early liquidity provider (LP).
Expectations are high ahead of xSigma’s debut, with a sizable community forming on Telegram, aided by extensive media coverage that has fueled interest in the decentralized exchange. The launch of xSigma coincides with the total value locked into defi protocols surpassing an all-time high of over $40 billion.
As the defi market accelerates, pulling thousands of new users and billions of dollars into its orbit, final preparations are being laid for the launch of xSigma. The deployment of the decentralized exchange could hardly come at a more favorable time: while interest in defi is at an all-time high, so are complaints from DEX traders, frustrated by the poor user experience.
While xSigma can’t fix all of these pain points — Ethereum’s network fees are beyond its purview — it can deliver a more pleasurable and profitable trading experience for its users. And that’s exactly what the team promises to do when xSigma debuts this month.
xSigma Lab Team: “Finally, the news you have all been wanting to hear: we’re pleased to confirm that the launch date for xSigma will be February 24. For everyone who’s on our mailing list, look out for an email dropping soon containing a link to our Resource Center where you can access guides and FAQs to help you master xSigma.
xSigma has been a long time in the making, and we’re grateful to our community and our backers for supporting us while we perfected our DEX. The wait is almost over and we promise you won’t be disappointed.”
If you haven’t already, join the mailing list HERE, join in the conversation on Telegram HERE and see you on the 24th for the xSigma launch!
This is a press release. Readers should do their own due diligence before taking any actions related to the promoted company or any of its affiliates or services. Bitcoin.com is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in the press release.
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