The Chief of the Monetary Authority of Hong Kong, who joined Philip Lowe in a panel discussion at the G20 event said the way to address the potential risks attached to Decentralized Finance (DeFi) is to regulate private tokens.
A survey carried out recently by the Bank for International Settlements shows that about 90% of central banks across the globe are currently working on issuing a digital currency. Some of them are still researching while some have moved to the pilot phase. And some have rolled out digital currency for use already (both wholesale and retail use).
On the other hand, privately issued tokens are tokens like Tether’s USDT, Circle’s USD Coin, and Paxos Trust’s Pax Dollar. The mechanism for the operations is built on the reserves held by the issuers to ensure one dollar is supplied for every token redeemed.
Stablecoins: a concern for regulators
Since the collapse of the Terra ecosystem caused by the TerraUSD de-pegging, stablecoins have become a thing of concern to regulators, especially the variations in the operational algorithm. Based on the Responsible Financial Innovation Act proposed by Senator Kirsten Gillibrand and Cynthia Lumis, stablecoins can only be issued when they have adequate reserves backing them.
Philip Lowe, at the event, said the state should back private tokens, and every deposit received by the issuers should be regulated like bank deposits are. The Australian central bank governor believes that the private token route is much better than CBDCs – Central Bank Digital Currencies as long as they are regulated. In his opinion, the private financial sector is much better at innovative thinking and pioneering features for their tokens, and it can be cost ineffective for central banks to go the CBDC route.
Eddie Yue, the CEO of the Monetary Authority in Hong Kong, agreed with Lowe. He added that scrutinizing stablecoins can be of great help in preventing the looming disasters in the crypto space especially the DeFi sector, since most token purchases used in the sector are made with stablecoins.
Yue added that government should concentrate its effort on regulating stablecoins rather than the DeFi space. Also, he said he believes the DeFi space is not vanishing soon.
FSB Gives G20 Countries New Rules
On Monday, July 11, G20’s Financial Stability Board said it is working on a new set of rules for crypto and it will be announced in October 2022. The board comprises central bankers, regulators, and treasury officials. Up to date, the board has limited the exposure of the G20 economies to cryptocurrencies. But the collapse of the TerraUSD gives the wake-up call.
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