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[TL; DR]

Hilar Allen, a law professor at American Universit, is calling for the ban of stablecoins while Marcelo M. Prates, a financial polic and regulator expert, is advocating for the introduction of a suitable Federal crptocurrenc law.

The three pillars of a Federal stablecoin law are backup asset bankruptc protection, issuing non-bank licenses and direct access to central bank accounts.

stablecoins should complement traditional financial services not competing with the Banks.

Introduction

Several prominent analsts who include Jerem Allaire, Circle CEO, believe that the United States ma pass its stablecoin crpto regulation this ear, 2024, which ma determine the future of digital paments. Alread, a proposed bill for stablecoins, the Clarit for Pament stablecoins Act of 2023, is under consideration.

However, what ma derail the assessment and approval of a stablecoin regulation could be the United States Presidential election slated for November 5. The aim of this article is to explore the progress which the United States has made towards the launch of a stablecoin legal framework.

Debate on Stablecoin Regulation in the U.S.: Marcelo Prates vs. Hilar Allen

The viewpoints of Hilar Allen, a law professor at American Universit and Marcelo M. Prates, a financial polic and regulator expert, regarding crpto regulations shows the division within our global societ pertaining to digital assets.

For example, Hilar Allen thinks that stablecoins pose a threat to the banking sector and therefore should be banned. Allen believes that the greater adoption of stablecoins will likel lead to the destabiliation of banks to the point that the will require government bailout.

Allens comments have come in the wake of a new U.S Congress drive to introduce stablecoin laws at a Federal level which will determine the future of digital paments. Even if it ma take more time for the Congress to approve the new bill, Allen thinks that such a stance gives the public time to back the proposed crptocurrenc regulation. Basicall, she thinks that stablecoins serve no important purpose and frankl just should be banned.

On the other hand, Marcelo M. Prates thinks that stablecoins are important in the econom since the promote financial inclusion, are cost-effective and improve competitiveness in the global financial economic sstem.

To make his point of view clear he used an example of the development of e-mone in the European Union. According to Prates, electronic mone (e-mone) has been one of the greatest innovations during the past 25 ears. Basicall, e-mone is the version of mone issued b non-bank institutions like PaPal. Now, experts classif crptocurrencies as e-mone as the are not issued b banks. However, for them to function properl the ma require clear regulation.

A good example is that of the European Union that devised the use of e-mone since the ear 2000. The EU found it essential to have e-mone as it facilitates cheaper paments and eas access. It also makes paments faster across the entire globe. With that vision the EU developed financial regulation for e-mone. As a result, FinTech companies that provide safe and regulated pament instruments came into existence.

The reason for the EU to allow e-mone was to increase financial inclusion through streamlined means of sending and receiving mone. This is because these e-mone transmitters do not require their customers to undergo complex procedures when sending or receiving mone. Also, e-mone services have less risks and complications than banks. For example, opening a bank account for the purpose of making electronic mone transfers takes much time and the process is cumbersome.

On the contrar, it takes little time and effort to send mone using non-bank financial services like PaPal. With e-mone, the responsible institutions simpl receive fiat mone from the customers and convert it to digital mone the can use for making virtual paments using credit or debit cards, among other methods. In the end, the e-mone can easil be converted back to cash.

Therefore, Prates believes that stablecoins work in modus operandi as e-mone that has been in existence for decades and has been safel used to promote a vibrant global pament sstem. In simple terms, therefore, most if not all the existing fiat currenc-backed stablecoins like USDT and USDC are a form of e-mone.

Thus, the main argument in support of fiat currenc-backed stablecoins is that the are e-mone 2.0 which can safel facilitate financial transactions just like traditional financial e-mone. However, Prates suggests that the US federal government should establish three pillars of stablecoin regulation namel, backup asset bankruptc protection, issuing non-bank licenses and direct access to central bank accounts which should promote financial inclusion and stablecoins pament sstems. Such a regulator framework will enable stablecoin providers to operate in a low risk, regulated financial environment.

Read also: LST-Backed Stablecoins: A New Frontier in DeFi

Pillars of Effective Stablecoin Regulation

As hinted above, the three pillars of effective stablecoin regulations are backup asset bankruptc protection, issuing non-bank licenses and direct access to central bank accounts. However, Prates advocates that there is a need for a Federal blockchain regulation rather than state-based mone transmitter laws which are not uniforml crafted and enforced.

Granting of a Non-bank License: The government should grant licenses to stablecoin issuers which must keep sufficient liquid reserves for their stablecoins. The role of stablecoin issuers is to get cash from their customers, hold it and issue out digital assets that are commensurate with the amount of mone the have received and hold. Since the do not lend mone there is a need for digital currenc safet through having 100% reserves.

Once the stablecoin providers maintain reserves at all times the can perform other functions. For example, the can promote cross border paments and stablecoin issuance as the demand for the coins rises. Through abiding b the Federal stablecoin legislation and protecting stablecoin users the will maintain a high reputation which creates confidence in the crpto market. Primaril, crptocurrenc regulation should enhance stablecoin market stabilit.

It is also important to note that e-mone and digital assets are not supposed to compete with banks in the provision of international financial remittance. As such, central banks and stablecoins should complement each other. Therefore, stablecoin issuers in the United States should be granted non-bank licenses similar to what E.U., U.K and Brail have done to e-mone providers in their jurisdictions.

Central Bank Accounts for Backing Assets: To increase transparenc and lower risk profile stablecoin issuers should keep their reserves with the central bank. With that, the will transfer their cash to the central bank accounts or invest in short-term low risk instruments like options. Therefore, the surest wa to reduce risks associated with reserve assets is to keep them with the Federal Reserve.

Segregation and Protection of Customer Funds: An essential thing for stablecoin issuers to do to protect stablecoin users is to segregate the customer funds from the compans funds. This will mean that if the stablecoin fails the compan will not need to go under insolvenc. Also, under liquidation the customers can quickl get their funds. This is because the creditors of the bankrupt issuer will not be able to seie the customers mone.

Read also: An Overview of the Global Regulator Landscape

E-mone Regulation in the EU and USA

Both the European Union and the United States are in the process of finaliing their stablecoin regulations. The EU has MiCA, a part of the digital finance package aimed at fostering the use of innovative technologies such as the blockchain and stablecoins. MiCA provides a clear regulator framework which contains details on the nature of stablecoins and the responsibilities of the e-mone issuers.

On the other hand, the United States has a proposed bill referred to as the Clarit for Pament stablecoins Act. If approved b the Congress the legislation will provide clearer guidelines on the operations of stablecoins. For instance, all stablecoin issuers will be required to register with the relevant authorities. Also, the will be subjected to bank-like regulation that requires them to keep sufficient reserves. Similarl state regulators like the Federal Reserve Board (FRB) will enforce the law and supervise them.

Conclusion

The United States and the EU are in the process of finaliing their stablecoin laws. While the EU has MiCA, the United States has a bill which the Congress is et to approve, the Clarit for Pament stablecoins Act. Marcelo M. Prates, a financial polic and regulator expert has stipulated that the best Federal stablecoin law should have three pillars - backup asset bankruptc protection, issuing non-bank licenses and direct access to central bank accounts.