A look at the stablecoin market and regulations

Disclaimer: The author of this report did not use undisclosed material information to purchase or sell related tokens while researching or drafting this report. The content of each report reflects the opinions of each author of the report and is provided for informational purposes only, and is not intended to recommend buying or selling tokens or using the protocol. Nothing contained in this report constitutes investment advice and should not be construed as investment advice.

1. Entering

Stablecoins are widely used in P2P remittances, exchanges, DeFi, etc. due to their low volatility and high versatility, and play an important role in the cryptocurrency market. Going beyond its importance, discussions are underway about the impact it can have on traditional financial markets such as existing banks, securities, payments, international remittances, and trade.

The stablecoin market is growing rapidly, and the number of people using it is increasing. Accordingly, there is a need for each country to establish policies to clearly define stablecoins, determine responsibility, management, and supervision to prevent problems from occurring. Starting with the stablecoin regulatory framework announced by the Central Bank of Singapore in 2023, stablecoin-related regulations are expected to be launched and implemented in various countries in 2024.

• EU (MiCA): MiCA (The European Union's Markets in Crypto Assets regulation) was announced by the EU in March 2022, passed with overwhelming support in April 2023, and is scheduled to take effect from December 2024. Additionally, the EU has published draft technical standards for stablecoins collateralized by multiple fiat currencies or assets, complementing MiCA, and these regulations are scheduled to come into effect in the summer of 2024.
• Hong Kong: Stablecoin regulations are expected to be released in early 2024, and a stablecoin sandbox is also being prepared for operation.
• United States: Federal Reserve Chairman Jerome Powell said House Democrats need stablecoin legislation, and U.S. Representative Maxine Waters said in an interview that “we are very close to passing a stablecoin bill.” Due to this, expectations for stablecoin regulation are increasing.
• UK: UK Finance Minister Bim Afolami said at an event hosted by Coinbase in February 2024 that “we plan to prepare stablecoin legislation within six months.” Accordingly, related legislation is expected to come out in 2024.

The issuance of stablecoins linked to the fiat currencies of various countries not only allows for the inflow of new funds, but also suggests the possibility of creating an on-chain foreign exchange market that exchanges fiat stablecoins from multiple countries like the existing foreign exchange market. I also do it. In this article, we will look at the current status of the stablecoin market, the characteristics of representative stablecoins, and regulations currently in progress. Furthermore, in Part 2, we will look at the current status of countries preparing for stablecoin regulation and the characteristics of various new stablecoins. We'll find out.

2. Stablecoin market status

• Stablecoin market trends: According to The Block data, the total supply of stablecoins has continued to increase since 2020, reaching a peak of $180.4 billion on March 30, 2022. Afterwards, supply decreased due to the downtrend in the cryptocurrency market, but has been increasing again since September 2023. As of March 12, 2024, the size of stablecoin supply is approximately $153.6 billion (approximately 200 trillion won).
• Dollar-based stablecoin share: USDT's supply is $108.13 billion, accounting for 70.5% of the total, and USDC's supply is $31.38 billion, accounting for 20.5% of the total, so the supply of the two stablecoins is high. It was found to be 91% of the total. The total supply of dollar-backed stablecoins is approximately $153 billion. The total supply of euro-based stablecoins is approximately $600 million, and dollar-based stablecoins account for 99% of the current stablecoin market.

3. Current status of representative projects

3.1. USDT

• Issuer: Tether Limited
• Guarantee method: Pegged 1:1 with fiat currency, 100% guaranteed by Tether’s reserves
• Composition of collateral assets (as of December 31, 2023):
  • Cash and cash equivalents: 84.58%
    • US Treasury Bonds: 76.87%
    • Next-day reverse repurchase conditional sale contract: 11.4%
    • Institutional reverse repurchase contract: 0.99%
    • Money market fund: 10.16%
    • Cash and bank deposits: 0.48%
    • Non-US Treasury: 0.08%
  • Corporate bonds: 0.05%
  • Precious Metals: 3.62%
  • Bitcoin: 2.91%
  • Other investments: 3.89%
  • Secured loan: 4.95%

• Certification method: Audit report through an accounting firm (currently audited quarterly by BDO Italia from the second quarter of 2022)
• Fees and deposit/withdrawal policy
  • Minimum deposit/withdrawal amount: 100,000 USD
  • Fiat deposit fee: 0.1%
  • Fiat withdrawal fee: $1,000 or 0.1%
• Publishing Qualifications: Verified Member

3.1.1. Status update

• Revenue status
  • According to the 2023 fourth quarter report by global audit agency BDO, Tether's net profit was approximately $2.9 billion (approximately KRW 3.86 trillion) and net operating profit was approximately $1 billion (approximately KRW 1.33 trillion). . The main source of income was interest income from holding U.S. Treasury bonds, and there were also profits from rising prices of Bitcoin and gold. Considering that Bank of America's net profit during the same period was $3.1 billion, we can see that Tether's profit is not small at all.
• Reliability issues
  • In the past, Tether had been requested to audit its accounts since 2017, but refused to do so, and also received a subpoena from the U.S. Commodity Futures Trading Commission on suspicion of manipulating the price of Bitcoin by issuing false USDT without depositing physical dollars. Afterwards, in June and November 2018, assets were indirectly proven through law firm and bank balance confirmations, but there were limits to restoring trust as it was not a formal accounting audit.
• Conduct formal audits
  • Starting in March 2021, about 3 years and 6 months later, Tether began providing quarterly reports through an accounting firm, somewhat relieving investor anxiety. However, unlike competitor USDC issuer Circle, which releases audit reports every month, there are regulatory risks in that it reports quarterly. This is because the EU's MiCA and the New York Supervisory Office require mandatory disclosure of asset status every month.

• USDT issuing blockchain status
  • USDT is mainly used as a trading pair in centralized exchanges, and many USDT transfers between centralized exchanges are taking place on the Tron blockchain, which has low transfer fees.
  • As a result, USDT issuance on the Tron blockchain increased rapidly, surpassing that of Ethereum, the previous largest issuance platform. Currently, about 50% of USDT is issued on the Tron blockchain, while about 44.79% is issued on Ethereum.

3.2. USDC

• Publisher: Circle
• Guarantee method: Pegged 1:1 with fiat currency, 100% guaranteed by Circle’s reserves
• Composition of collateral assets (as of March 7, 2024): Cash 12.28%, Circle Reserve Fund 87.72%
  • Circle Reserve Fund (Ticker: USDXX) is stored at The Bank of New York Mellon and managed by BlackRock, and as of March 11, 2024, US Treasury Repurchase Agreement (US Treasury Repurchase Agreement) 58.01%, US Treasury Debt (US Treasury Debt) ) It consists of 41.99%.

• Certification method: Audit reports provided every month through the four major accounting firms (currently using Deloitte)
  • It is evaluated as having higher reliability than USDT in that it is issued monthly, is conducted by a famous accounting firm, and the trust and management of funds are transparently disclosed.
• Fee policy: Free
• Publishing Qualifications: Verified Member

3.2.1. Status update

• Revenue status
  • Circle's revenue for the first half of 2023 is approximately $779 million. A fee-free policy is being implemented to expand market share, and the amount of profit compared to USDT is small due to conservative fund management. However, institutional demand is expected to increase due to stable fund operations and regulatory compliance efforts.
• Depegging incident
  • At the time of the bankruptcy of Silicon Valley Bank (SVB) in March 2023, it was revealed that $3.3 billion (approximately 8-9%) of Circle's $40 billion reserves were deposited in SVB, leading to a depegging situation in which the USDC price fell to $0.86. occurred. Afterwards, the situation was resolved with no loss of reserves thanks to a full guarantee from the U.S. government.

• Issuance Status
  • USDC's issuance volume on the Ethereum blockchain accounts for 80% of the total, and unlike USDT, it is not currently being issued on the Tron blockchain. Circle has decided to discontinue support for Tron in accordance with its risk management framework in February 2024, and will support customers to transfer their Tron-based USDC to other chains until February 2025.
  • USDC is utilized more in the DeFi ecosystem than in centralized exchanges. With the recent growth of Solana's DeFi, USDC issuance on the Solana chain is increasing.

3.3. DAI

• Publisher: MakerDAO
• Guarantee method: Use Maker Vault to deposit collateral and issue DAI
  • LTV is volatile, but is basically overcollateralized.
• Composition of collateral assets: cryptocurrency, RWA, etc.
  • Spark DApp deposit collateral: $1.19B (approximately 26%)
  • USDC: $757M (about 16.55%)
  • ETH: $676M (about 14.77%)
  • WSTETH: $515M (about 11.25%)
  • RWA007 (real-linked assets): $446M (approximately 9.75%)
  • Others: $0.99B (about 21.64%)

• Proof method: On-chain data
• Fee policy: Varies depending on changes in Vault liquidity
• Eligibility for publication: Anyone

3.3.1. Status update

• Revenue status
  • MakerDAO's sales in 2023 are $75.5 million, and net profit is $21.7 million, an increase of 15.6% compared to 2022, and the proportion of RWA assets increases by 281.5% and the proportion of collateral changes.

• Issuance Status
  • DAI is used in various blockchains, but 90% of the issuance volume is concentrated on the Ethereum chain, showing a higher concentration in Ethereum than USDC. This is believed to be because Spark, the main dapp that can generate DAI, currently supports only Ethereum and Gnosis chains.

• characteristic
  • USDT and USDC, which are centralized stablecoins, are pegged 1:1 with fiat currency, and collateral assets are proven through regular audit reports, while DAI, a decentralized stablecoin, transparently discloses collateral assets on-chain. The advantage is that anyone can issue it.
  • However, there are disadvantages such as inefficiency due to overcollateralization, management difficulties due to changes in the value of collateral assets, and floating fees.

4. Stablecoin failure case

Existing stablecoins have had difficulty popularizing due to capital efficiency issues and lack of scalability in overcollateralized models such as DAI. To solve this problem, various projects attempted to attract large-scale investments, but most of them failed due to vague regulations and structural limitations.

Representative failure examples include the Basis, Terra, and Diem (formerly Libra) projects. Basis received $130 million in investment but was discontinued due to regulatory issues, and Terra suffered about 59 trillion won in damage from a depegging attack. The Facebook-led Diem project also ended after being postponed indefinitely due to regulatory backlash.

These cases of failed stablecoin projects have raised concerns about the influence of global companies' monetary policies, as well as the need for stablecoin regulations/guidelines in each country due to large-scale damage caused by the Terra incident. In addition, it was found that for the success of stablecoins, it is essential to establish clear regulatory standards as well as technical solutions. Below are descriptions of major failures.

• Basis
  • Basis is a stablecoin project aimed at solving capital efficiency issues, and attracted attention in 2018 by attracting $133 million in investment from large investment companies such as Andreessen Horowitz, Polychain Capital, and Meta Stable.
  • However, following the legal judgment that the token could be subject to U.S. securities regulations, concerns were raised that it would lose censorship resistance and liquidity would be significantly lowered, and this claim was judged to be out of line with Basis' vision, leading to the return of capital and the project being halted.
• Terra
  • The Terra project was also an algorithmic stablecoin that aimed to solve capital efficiency problems. Through the dual token structure of LUNA and UST, the UST price was pegged to the dollar in conjunction with LUNA.
  • In May 2022, UST was depegged due to a large-scale depegging attack, and contrary to design, LUNA collapsed due to hyperinflation. The amount of damage to Terra caused by this was estimated at approximately 59 trillion won, causing a great shock to the world.
• Diem (formerly Libra)
  • The Diem (formerly Libra) project was a global stablecoin project launched by Facebook in 2019. The goal was to popularize stablecoins linked to multiple currencies such as the dollar and euro. In addition to Facebook, 28 companies including Mastercard, Visa, and Uber participated in the project, with plans to expand to 100 companies.
  • Based on Facebook's 2 billion users, we attempted to provide a simple remittance service even to those who do not have an account. However, it was postponed indefinitely due to strong regulatory opposition from the EU and G7 countries, and partner companies withdrew one by one. Afterwards, the project name was changed to Diem, the scale was reduced, and the direction was changed to issuing dollar-pegged stablecoins, but in the end, ambiguous regulatory issues were not resolved and the person in charge resigned, disappearing into history.

5. Stablecoin definition and regulation status by country

5.1. Singapore (MAS)

• Stablecoin Definition
  • A digital payment token pegged to the value of one or more specified fiat currencies.
• Applicable to
  • A single-currency stablecoin (SCS) pegged to the Singapore dollar or a G10 currency issued in Singapore.
• Key Requirements
  1. Value stability: meeting reserve asset composition/evaluation/storage/audit requirements
  2. Capital requirements: Maintain minimum basic capital and liquid assets
  3. Repurchase at face value: face value returned within 5 business days of request
  4. Disclosure obligation: disclosure of information such as value stabilization mechanism, holder rights, audit results, etc.
• Certified as ‘MAS regulated stablecoin’
  • If the above requirements are met, you can apply for certified stablecoin certification from MAS.
  • Only if certified, it is allowed to state that it is a ‘MAS regulated stablecoin’.

5.2. Europe (MiCA)

• Stablecoin Definition
  • In Europe, stablecoins are classified according to their guarantee method as follows:
    1. E-money token
       • Issued in 1:1 exchange with fiat currency
       • Granting right of redemption to holder
    2. Asset-referenced token
       • Stabilize value based on fiat currency, products, crypto assets, asset baskets, etc.
       • Various assets constitute collateral
    3. Utility token
       • Not considered a stablecoin
  • In Europe, only electronic currency tokens and asset-based tokens are included in the stablecoin category, and regulations vary depending on the purpose of issuance and stabilizing assets.
• Types of Stablecoin Regulations
  • ‘Electronic currency tokens’ and ‘asset-based tokens’ each have regulatory differences in terms of issuer and major obligations.

• Regulation of electronic money token issuance and operation
  • Issuer Qualifications
    • Issuers are limited to banks and electronic money institutions.
    • To operate an electronic money institution, authorization is required in accordance with the relevant Directive (Directive 2009/110/EC, acquisition, pursuit and sound supervision of electronic money institution business)
  • Key Obligations
    1. Compliance with electronic money institution operating requirements, including minimum equity capital regulations
    2. Guaranteed right of redemption for token holders
       • It must be possible to claim repayment at the face value of fiat currency at any time.
       • Redemption fees are allowed at the level of the actual cost of issuance
    3. No interest payments
       • No interest payment for token holding period
    4. Secure Money Management
       • Receiving funds are invested in assets of the same currency to prevent cross-currency risks
       • Manage funds safely with custody service
  • implication
    • Promote the soundness of electronic currency token issuance and operation through strict qualification requirements and mandatory regulations.
    • However, there are limitations to innovation due to the issuance system centered on traditional financial companies such as banks.
• Regulation of asset-based token issuance and operation
  • Issuance approval and rejection regulations
    • Prior approval from EU authorities is essential for the issuance of asset-based tokens.
    • If the business model to be issued poses a serious threat to financial stability, monetary policy, or monetary sovereignty, authorities may refuse approval.
    • Before approval/rejection, consultation with the European Banking Supervisory Authority, the European Securities Market Supervisory Authority, and the European Central Bank is required.
  • investor protection regulations
    • Issuers must provide clear, fair and non-misleading information to holders.
    • The white paper should include information on value stabilization mechanisms, reserve asset policies, holder rights, etc.
    • A conflict of interest management policy must be established and disclosed.
    • Distribution volume and reserve asset value/composition must be disclosed at least monthly
    • When a major incident occurs, it must be disclosed.
    • The right of redemption must be provided to the holder, and if not provided, this must be specified in the white paper.
  • Reserve asset management and operation regulations
    • Issuers must maintain reserve assets and manage them conservatively.
    • A reserve asset policy (composition, distribution, risk assessment, creation/disposal procedures, etc.) must be established.
    • Appropriate custody policies must be established to protect reserve assets.
      • Complete separation from the issuer's assets, prohibition of providing collateral, ensuring prompt accessibility to the issuer, etc.
    • Reserve assets must be held by a credit institution, professional investment firm, or licensed crypto asset business operator.
    • Imposing liability for loss of reserve assets on storage institutions
    • Interest payments for token holding periods should be prohibited
• Possibility of using stablecoins
  • As the definition and issuance requirements for stablecoins become clearer through the MiCA regulation, the possibility of issuance and use of stablecoins is expected to increase in Europe.
  • In particular, as the regulatory base is established, major companies such as Galaxy Digital, DWS, and FlowTraders are beginning to issue euro-based stablecoins, and fintech companies such as Spain's Monet are also conducting experiments under bank supervision.
  • As the euro's proportion in the foreign exchange market is high, it is expected that more diverse and active attempts will continue in the euro-based stablecoin market in the future based on the MiCA regulation. It is expected that the possibility of using stablecoins will further increase with the establishment of a clear regulatory foundation.

5.3. Japan (PSA)

In June 2022, Japan established a definition and system for stablecoins through the third revision of the Payment Services Act (PSA), which governs discipline related to the transfer and settlement of funds.

• Stablecoin Definition
  • Stablecoins defined by the Financial Services Agency of Japan are primarily divided into 'digital currency type', which is pegged 1:1 to fiat currency, and 'crypto asset type', which is pegged to crypto assets, depending on the method of maintaining value. In the case of crypto assets, they are divided into crypto assets and marketable securities according to the PSA.
• Digital currency stablecoin regulation
  • Electronic payment means must meet three characteristics
    1. Payment may be made to an unspecified person in exchange for goods/services.
    2. Transfer possible through electronic payment system
    3. Property value that can be exchanged with an unspecified person
  • 4 types of electronic payment methods
    1. Price for goods/services, property value that can be sold to an unspecified number of people
    2. Property value interchangeable with No. 1
    3. Specific money trust beneficiary rights
    4. Separately designated by the Financial Services Commission
  • It is the 1st electronic payment method for banks, etc., and the 3rd electronic payment method when issuing digital currency.
  • Cryptocurrency type may be classified as No. 4

Electronic payment methods No. 1 and No. 2 are difficult to access because the issuer basically requires a license for banking or fund transfer business, but in the case of electronic payment method No. 3, a trust company only needs to obtain a trust business and specific money trust business license. Therefore, the difficulty of entry is relatively low.

This revision to the PSA includes regulation of electronic payment method intermediaries. Intermediaries are divided into trading and handling licenses.

• Electronic payment method trading business: If you perform the following activities, you must obtain a trading business license.
  1. Selling or exchanging electronic payment methods
  2. Electronic payment method brokerage
  3. Manage electronic payment methods for others
  4. Manage funds received from users on behalf of fund transfer service providers
• When obtaining a trading business license, you can handle not only electronic payment methods issued in Japan but also electronic payment methods issued abroad. However, foreign-issued electronic payment methods that can be handled at this time must meet the following conditions.
  • Must have been issued by a company that has obtained a qualified license pursuant to a law equivalent to the PSA or Banking Act in foreign laws and regulations
  • The company must have undergone a thorough accounting audit on the assets required for repayment.
  • If the electronic payment method issued was involved in a criminal activity, the company in question must have taken appropriate action, such as suspending the transaction.
• Electronic payment means handling business: The electronic payment means handling business license is a license that must be acquired in order to broker electronic payment means issued by a bank. Details are as follows.
  • A depositor who is entrusted by the bank and opens a deposit account with the bank on behalf of the bank.
  • A person who uses an electronic information processing system to manage funds related to an account and funds received through foreign exchange transactions.

To summarize, in order to conduct brokerage business, you must obtain 1) an electronic payment method handling business license if the electronic payment method issuer is a bank, and 2) a trading business license if the issuer is a fund transfer business or trust company. One thing to note is that mixing between the two licenses is not allowed, so for example, in order to broker both electronic payment methods issued by a bank and a money transfer business, both licenses must be obtained.

• Possibility of using stablecoins
  • Japan established a stablecoin regulatory system through the revision of the PSA in 2022. In line with this, major companies such as Dickeret, ENF, Jasmy, and GMO Group are actively promoting the issuance of yen-linked stablecoins.
  • It is noteworthy that it is moving beyond simple issuance to actual use. MUFG is collaborating with Ginko and others to review a corporate cryptocurrency payment system and ways to utilize trade finance, and is also preparing to issue trust-type JPYC together with JPYC and Frogmat.
  • In particular, MUFG predicts that full-scale actual use of stablecoins will become possible after obtaining a stablecoin brokerage license in June 2024.
  • As the regulatory foundation is established, the issuance and use of stablecoins in Japan is expected to accelerate. 2024 is expected to be an important year for the Japanese stablecoin market.

5.4. New York Department of Supervision (NYDFS)

New York State is the first in the U.S. to announce the 'Virtual Currency Guidance', which includes guidance related to stablecoins, in June 2022.

• Stablecoin Guidelines
  • Redeemability of stablecoins: Stablecoins must have assets in reserve equal to the value of the stablecoin issued on the market at the end of each business day.
    • Stablecoin reserves must be segregated from the assets owned by the issuer and deposited in depository institutions recognized by a U.S. state or the Federal Deposit Insurance Corporation (“FDIC”) or custodians approved in writing by DFS in advance. .
  • Stablecoin Reserves: Reserves should consist only of the following assets:
    • US Treasury bills with a maturity of 3 months or less acquired by the issuing institution.
    • Reverse repurchase agreements collateralized by short-term US Treasury bills, intermediate-term US Treasury notes, or certain long-term Treasury bonds. Application of requirements approved by DFS in relation to overcollateralization.
      • Without exception, a reverse RP must be a three-party agreement or a bilateral agreement with a counterparty whose credit the issuing institution can trust, and the identity and credit evaluation information of the counterparty must be kept from the date the issuing institution enters into an agreement with the counterparty. It must be submitted to DFS at least 14 days in advance.
    • Government money-market funds (MMFs)
      • DFS-approved limits on the percentage of reserve assets to be deposited in money market funds and DFS-approved restrictions for such funds, including minimum percentage allocations to U.S. government direct obligations and reverse redemption covenants for such obligations, apply.
    • A state or federally recognized depository institution that is subject to restrictions approved by DFS, such as reserve ratio or absolute value caps on assets to be deposited with a designated depository institution and/or limits based on DFS's conclusions regarding the risk characteristics of a particular depository institution. savings account
      • However, this takes into account amounts reasonably necessary to be deposited with a depository institution to meet anticipated repayment requirements.
  • Stablecoin Reserve Audit
    • An issuing entity's disclosures regarding reserves must be audited at least once a month by an independent certified public accountant (CPA) licensed in the United States, as specified in the guidance.
    • At this time, the auditing standards of the American Institute of Certified Public Accountants (AICPA) are applied to the audit, and the certified public accountant information and the certified public accountant's audit agreement must be approved in writing by DFS in advance.
    • When conducting a monthly audit, the certified public accountant responsible for the audit must randomly select the last business day of the period covered by the audit and at least one business day within that audit period to verify the issuing entity's reserve disclosure information as follows:

Currently, Circle's USDC, one of the representative stablecoins, and PAXOS's PYUSD, USDP, and BUSD are being issued in accordance with the guidelines of the New York Supervisory Office. Therefore, unless there is a special incident, the New York Supervisory Office's guidelines are expected to have a significant impact on future stablecoin regulations in the United States.

If that happens, Tether's USDT is expected to require many changes to meet the regulatory environment. Unlike Circle, which currently publishes monthly audit reports, it publishes reports every three months, and the fact that it holds collateral that is not included in the reserve asset requirements such as Bitcoin may be problematic. As such, changes in the stablecoin market may occur depending on the regulatory environment. Therefore, we need to pay attention to how regulation will progress in the United States, the largest stablecoin market.

6. Conclusion

In this article, we looked at the current status of stablecoins, the characteristics of representative stablecoins USDT, USDC, and DAI, and related regulations being discussed in Singapore, the EU, and Japan. Stablecoin regulation has a large impact as various attempts emerge as its contents become clearer, while a large number of projects that make it difficult to continue business may emerge. Therefore, closely examining the status of related regulations introduced is of great significance in understanding market trends.

Accordingly, in the following article, we will look at the progress of each country trying to introduce stablecoin regulations and what differences there are from the policies of existing regulatory countries, and introduce the new stablecoin projects that have recently made various attempts to improve the stablecoin market. Let’s see how diverse it can be. Lastly, we will talk about the stablecoin market, which can grow further in the future through comparison with the existing foreign exchange market.

<Reference materials>

• Bank of Korea translation of EU crypto asset market bill
• Theblock Stablecoin Data
• Transparency Report , Tether
• Transparency & Stability , Circle
• MakerDAO 2023 Annual Report
• MakerBurn
• DeFiLlama
• MAS Finalises Stablecoin Regulatory Framework
• An overview of Japanese stablecoin regulations , Declan Kim
• CBDC and stablecoins: Insights from Bank of Korea, Circle, Paxos , Hashed Open Research
• NYFDS Virtual Currency Guidance