"Ensuring that a stablecoin retains its peg even under stressed market conditions is a solvable problem," Catalini says. In an optimal scenario, he says, reserves would be made up of exclusively "high-quality, liquid assets," like short-term US government bonds, and providers would maintain an "adequate capital buffer." This illustrates the importance of having a robust structure in the stablecoin market, ensuring that reserves are resilient and adequately safeguarded by quality assets.
"This is where regulation is required," says Catalini regarding Tether's operational framework, highlighting the need for oversight in an industry where some companies or directors may not follow best practices without regulatory guidance. Tether's actions underscore the complex nature of trust and reliability in stablecoin reserves and their management, raising questions about self-regulation in a largely unregulated market.
In April, US senators Cynthia Lummis and Kirsten Gillibrand proposed a bill under which stablecoin issuers would not be permitted to lend out reserve assets. The bill is unlikely to pass through Congress before the upcoming presidential election, says Cooper, but "there is recognition on both sides of the aisle that some level of regulation is necessary." This underscores a bipartisan acknowledgment that oversight could stabilize the fluctuating realm of stablecoins.
"We're dealing with a new asset class that, as of right now, is run by a group of people looking around for guidance as to what is and isn't allowed-and they are not getting it," says Cooper. Such comments reflect the chaotic nature of self-regulation in the crypto market, where companies might operate autonomously but lack definitive rules or standards, leading to increased risk-taking and potential instability.
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