Want an Innovative Crypto Future? It Takes Regulation.

Protecting users and investors — while taking actions to guarantee financial stability — can only help Web3’s long-term viability

article-image

Blockworks exclusive art by axel rangel

share

key takeaways

  • The collapse of TerraUSD and the subsequent bear market has regulators scrutinizing the crypto space
  • Clear and fair rules governing stablecoins may well foster a market where innovation increases exponentially

Stablecoins have come under fire since the unraveling of UST triggered crypto’s lingering bear market, leading to mixed results of industry views when it comes to the role of regulation. 

But, the reality is, all of crypto stands to benefit from clear, fair regulation.

Without clarity around how cryptocurrencies will be treated, decentralized applications (dapps), financial institutions and users must navigate the potential for sudden shifts that could upend their businesses, hindering innovation and growth. 

Governments take action on standards 

If regulators strike a healthy balance between supporting innovation — while simultaneously protecting users against high-risk and negligent projects — rule-making will greatly enhance DeFi’s growth.

President Biden’s administration recently followed its March executive order with a framework for how the US intends to responsibly approach cryptocurrencies. A fact sheet acknowledges great potential benefits derived from digital assets. Indeed, protecting users and investors — while taking actions to guarantee financial stability — can only help Web3’s long-term viability.

Though the fact sheet is low on details on what shape policies pertaining digital assets should take, global regulators for payments and settlements issued guidelines in July that proposed treating stablecoins like other assets that perform a transfer function.

The maneuver would require stablecoins to meet attributes outlined in the Principles for Financial Market Infrastructures (PFMI), should financial watchdogs choose to enforce it. The PFMI includes guidance when it comes to risk management, financial strength and ready-to-go recovery plans in the event of a sudden downturn.

Though we’ll never know if such guidelines would have prevented the collapse of the Terra ecosystem, they form a solid baseline for building stronger, more resilient stablecoin rails.

Protecting users and fostering innovation

Clear and fair rules governing stablecoins may well foster a market where innovation increases exponentially. 

Privacy-preserving stablecoins leveraging zero-knowledge proofs, for instance, can play an important role in enhancing and expanding stablecoin use cases, privacy and stability. 

Institutional TradFi players have been hesitant to dive head-first into crypto, in no small part due to the radical transparency inherent to the bulk of blockchains.

The likes of banks and hedge funds do not necessarily like the idea of competitors witnessing how much capital they’re moving, when — and via what financial instruments. The privacy-preserving capabilities of zero-knowledge proofs can help assuage TradFi concerns, bringing that much more liquidity into DeFi.

The need to get regulations right

The stakes are high. If laws governing stablecoins are not properly designed, they will inevitably weaken the US’s standing as a world economic leader. 

The formation and adoption of regulations will inevitably determine the future of finance, as DeFi becomes synonymous with TradFi and Web2 evolves into Web3.


Don’t miss the next big story – join our free daily newsletter.

Tags

Upcoming Events

MON - WED, MARCH 18 - 20, 2024

Digital Asset Summit (DAS) is returning March 2024. What you can expect: And more! Don’t miss out on the opportunity to be in the room when the future of crypto is decided. Join us and help shape the future of our […]

recent research

Research report - cover graphics-2.jpg

Research

Base has doubled-down on its commitment to the Superchain vision, has shown early signs of success with nearly $400M in TVL, and has become home to novel dapps such as friend.tech which has seen significant traction.

article-image

The bitcoin halving slated for April 2024 — an event expected to spur upward price action for BTC — could be a boon for Block’s stock price, analysts say

article-image

Seed Club founder Jess Sloss is excited to “open the doors and let other people see what we’ve been seeing for the last few months”

article-image

Blockchain is a “natural fit” in games based on open economies and user-generated content, says Wyatt

article-image

Their current stance is a half-baked attempt that could stifle innovation and burden an emerging industry

article-image

Maker’s DeFi-focused “subDAO” passed a proposal activating a lending market for DAI on the Gnosis Chain

article-image

Certain creditors could be repaid sooner, with one hedge fund exec telling Blockworks it expects a payout by the end of the year