During today’s BIS conference on DeFi, a considerable proportion of the panel on DeFi and stablecoins was spent discussing compliance and anonymity. The panel included David Newns, the CEO of the SIX Digital Exchange, and David Puth, former CLS CEO and current head of Centre, the standards body behind the second largest stablecoin, USDC.
There’s been considerable discussion about the regulation of custodial stablecoins backed by fiat currency deposits and assets. Some level of identity requirement from regulators is potentially on the cards. But there is also a class of non-custodial stablecoins, such as the U.S. dollar-denominated DAI, backed by Ether and a range of other assets.
Clearmatic’s Robert Sams asked Aleksander Berentsen of the University of Basel whether these non-custodial coins should also be regulated. Berentsen believes that isn’t practical as many are smart contracts. Hence there’s no person or location to address a regulatory letter.
“I think the current regulatory environment worldwide is so inefficient. It’s so costly to do cross border finance that I really think the only way around that is that one of these non-custodial stablecoins is going to be so big someday that you can’t ignore it,” said Berentsen. “And then you have to adjust to a worldwide common sense regulatory framework.”
Ekaterina Anthony of the Crypto Valley Association was a little less resistant to regulations. However, she observed a lack of stablecoin issuance in certain jurisdictions because there are still too many unanswered regulatory questions.
Is blockchain analytics a regulatory alternative?
The topic of blockchain analytics was raised. Transactions can be easily viewed on a blockchain, so regulators can explore the history of questionable transactions.
Sams asked Centre’s David Puth whether blockchain analytics could be an alternative to regulatory mandated permissions for stablecoins. “(If) you give people more and more sophisticated tools, where does that stop? There’s a digital currency in the world today that’s used as a means of surveillance,” said Puth, perhaps a reference to China’s digital yuan. “We certainly don’t want to see a world where that happens.”
“I think regulation will do a better job of guiding things than giving these super tools to people. They may fall into the wrong hands.” And he believes that would undermine the potential of blockchain.
The topic was raised during a discussion about whether it is acceptable to perform compliance for every single stablecoin transaction, including paying for a coffee, which EU regulators are currently suggesting.
AML on every transaction
University of Basel’s Berentsen believes only the on and off-ramps should have anti-money laundering compliance, so a stablecoin should be treated the same as cash in your wallet. SDX’s David Newns countered by raising the issue of smurfing, where electronic transactions can easily be split into much smaller transactions to evade reporting thresholds.
He said that regulation could be a good thing, highlighting the problems of how web 2 surveillance capitalism crept up in a regulatory whitespace.
However, Newns doesn’t believe traditional finance’s AML and KYC concepts should be superimposed straight onto DeFi. “I think that will be a way of absolutely killing it,” said Newns. “And it’s not appropriate, as David (Puth of Centre) mentioned, there are potential DeFi solutions to these problems.” He was referring to Puth’s suggestion about using decentralized identity for AML and KYC, something that Centre is working on with its Verite framework.
Newns continued, “I think the important thing for regulators to do is really have a think about what the future might look like, what the future problems might be that we need to be solving. And then solving them with innovative solutions rather than simply – as we tend to do in the financial services sector – squeezing anything new into an old model.”
Moving on to the anonymity of cash, Newns said, “if it were proposed today, it wouldn’t be accepted by the regulator.”
However, he observed that criminals are not the only group to benefit from anonymity. There are different views around the world on religion and other topics where anonymity might provide protection. “There are regimes out there that are not pleasant or where there are very different approaches to social issues,” said Newns.
Stablecoins: a trillion dollars in 5 years
At the end of the session, Sams asked the panelists for their predictions in five years’ time. Three out of four estimated that all stablecoins would have a total market capitalization of around one trillion dollars, compared to today’s $190 billion or roughly fivefold growth within five years. Centre’s Puth gave a more ambitious prediction saying it would be in the trillions. That’s consistent with a recent report from USDC issuer Circle that forecast the USDC’s market capitalization will grow 4.5 fold between today and the end of next year.
