As the federal government is aiming to regulate the digital asset space, the National Institute of Standards and Technology examines the technical components preceding regulation.
The National Institute of Standards and Technology is seeking comments for draft guidance on the stablecoin industry, as the U.S. government seeks to better understand and participate in the digital asset and currency market.
The draft publication, “Understanding Stablecoin Technology and Related Security Considerations,” examines the market growth of stablecoins, which are digital currencies pinned to relatively stable assets, typically existing fiats—which are currencies valued by government decree, rather than backed by a commodity like gold or silver .
After examining the relative stability in value of 20 sample stablecoins, researchers outlined how stablecoins function as well as key components of stablecoin technology, such as blockchain ledgers, cryptocurrencies and smart contracts. They also used a market analysis to observe the overall value retention of stablecoins.
“Stablecoin values are normally stable with little to no volatility relative to their pegged asset, currency or index,” the draft report reads. “This is in great contrast to most cryptocurrencies (e.g., Bitcoin) whose value experiences significant volatility and whose price is dictated by supply and demand.”
The report also noted the drawback of pinning a digital asset to a fiat, primarily that the devaluation of the national currency could spark a lack of confidence in the stablecoin, ending in a potential user withdrawal.
“It could also enable anonymous entities to cheaply buy control of the stablecoin, and the change of ownership could cause stability concerns,” NIST researchers noted. “In the worst case, the new owner might abscond with reserves and run the stablecoin to ruin, if a profitable path can be found in doing so.”
While lawmakers and industry players alike are both interested in how the Biden administration could move to regulate cryptocurrencies and other digital assets, NIST underscored that it is not a regulatory agency and doesn’t make formal recommendations with its draft document.
Instead, the draft briefly discusses what impact federal regulations could have on the stablecoin industry.
“As with most new technologies, regulations have not caught up with the development of cryptocurrencies or stablecoins,” the document said. It cited stablecoin potentially traded over decentralized finance platforms––as opposed to a centralized finance platform––and the regulatory challenges associated with anonymous ownership of stablecoins.
Stablecoins pegged to a fiat and stored and traded on a centralized finance platform are easier to regulate. However, regulating the stablecoins’ owning institution is critical to instilling more oversight and consumer protections the federal government wants to bring.
“Fiat-backed stablecoins are more amenable to being regulated by countries than their DeFi counterparts,” the report read. “This is because an off-blockchain managing company registered in a particular country typically exists. This company may be subject to financial regulation, thereby subjecting the stablecoin to regulation.”
Comments are due on the draft by January 6, 2023.
The NIST document comes as the Biden administration has taken critical steps to impose regulations on the cryptocurrency and digital asset market, particularly through an executive order signed in March. Lawmakers have been investigating the consumer safety of the currently unregulated market, with multiple bills introduced in both the House and Senate proposing more oversight.