The greatest risk for most stablecoin holders is whether the issuing entity has the reserves that it claims to have. A lack of transparency about the reserves that are used to stabilize the coin’s value prevents a holder from evaluating the issuer’s claims about stability and does little to protect holders from fraudulent misconduct.
A good regulatory framework addresses this issue by providing basic collateral requirements and requiring a baseline for transparency. While state laws generally provide protection against deceptive or unfair practices (and the state of New York did sue Tether for deceptive trading practices), dealing with up to 50 separate state laws is cumbersome and costly for both issuers and holders. Therefore, it makes sense to have a streamlined federal regulatory framework for stablecoin issuers.
See:
Biden’s PWG report on stablecoins and the verdict is….
Hester Peirce: Lawless in Austin
This briefing paper suggests creating such a proper federal framework by requiring a stablecoin issuer to be regulated as a newly created “limited purpose investment company.” A limited purpose investment company would be subject to basic reserve requirements and mandatory disclosure of relevant information about reserve holdings. This framework would be designed to regulate the reserves that stablecoin issuers claim to hold and, therefore, the actions that issuers undertake to maintain a stable coin value.
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