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Sylvia Garcia, a Democrat lawmaker from Texas, has recently introduced to Congress a draft bill that seeks to create more regulatory clarity on stablecoins.
The draft bill was introduced to the House of Financial Services. Under the purview of the Securities Act of 1933, the House will be empowered to regulate cryptocurrencies in the form of stablecoins.
Stablecoins are digital currencies that are backed by real-world financial assets. These could be national currencies or valuable commodities such as oil. In theory, stablecoins tend to be more stable than independent cryptocurrencies such as Bitcoin(BTC)trade.
Bitcoin and similar digital currencies are not pegged to any commodity. Their value is determined by the confidence level of people who buy and sell the digital coin. This promise of trust is what spurs the value of Bitcoin. Demand and supply are also regulated through this confidence (a hype in confidence would increase the demand and hence the price). However, unlike Bitcoin, the value of stablecoins will remain tied to the value of the assets by which they are backed.
The bill stresses that the value of stablecoins is determined by a small group of people or companies that control the asset. As such, stablecoins are like securities because their value is also linked to third-party actors.
The Confusing Case of Facebook’s Stablecoin, Libra
The bill seeks to create more clarity on how to deal with stablecoins. This sort of digital asset has often confused policy makers and as of now the US law-makers are beating their heads over the likes of Facebook’s Libra, another stablecoin that was announced by Facebook a few months ago. Since then it has garnered significant attention from around the world. Like any stablecoin, Libra will be tied to national currencies and other securities’ assets. But many European nations have rejected the prospect of allowing Libra into European markets.
The U.S. government itself has also been skeptical about Libra and the potential risks that it poses. Opponents of Libra speculate that Libra, owing to the huge scale on which it will operate, could disrupt traditional markets and initiate a global financial crisis. There are, of course, other concerns too. For instance, money laundering and terrorist funding are often cited as two major reasons that hold back any cryptocurrency’s success.
This bill comes at an interesting time when Facebook is trying to win friends in Washington. If this bill passes, the Securities and Exchange Commission (SEC) will take hold over regulatory proceedings concerning stablecoins.
However, for the bill to pass, it has to be approved at multiple levels, starting from the House of Financial Services, then to the House of Representatives, the Senate and finally to the President.