Stablecoin issuers don’t want to be pigeonholed with crypto

Issuers of stablecoins do not want them to be pigeonholed with other cryptocurrencies, because the products are fundamentally different, despite being digital assets.

Issuers argue that regulators should decouple stablecoins from other cryptocurrencies when designing regulatory frameworks. Moreover, stablecoins should not face the same rules as tokenised deposits, according to industry representatives attending the Stablecoins Unblocked conference in London.

Stablecoins are inherently less risky because their reserve levels can be verified instantly, said industry officials at the June 26 event.

According to one attendee: “This is very much an ‘alpha and betaʼ scenario — where the perceived risk isn’t truly being reduced but rather routed around through workarounds. What we often observe is that much of the infrastructure is already on-chain.

“We work with clients who offer 24/7 real-time reporting. At any moment, stakeholders of stablecoins — whether they are users, regulators or auditors — can verify reserve levels and see how assets are backed.

“This kind of visibility acts as a built-in system of checks and balances, and it provides a level of assurance that’s becoming increasingly valuable. That brings a level of transparency that traditional financial systems often lack.”

KYC a burden

However, one panellist claimed that adding know-your-customer (KYC) processes to regulations would be an “enormous operational burden” on stablecoin issuers.

Stablecoin entities are not banks, so would face millions of potential KYC processes, onboarding procedures and the need to establish payment channels for each customer.

This is a level of infrastructure and compliance that “does not currently exist” at such a scale in the stablecoin space, the panellist explained.

Tokenised deposits should face stricter controls

It was also suggested that tokenised deposits should face “stricter” measures, like those seen in traditional finance, because of their ability to “create credit”. Unlike stablecoins with 1:1 backing assets, tokenised deposits allow credit creation in the overall financial system, which makes them “more like deposits than tokens”, said an industry official.

Global regulators also need to look at stablecoins with a segregated ecosystem, the official added, as stablecoins are a completely different world in terms of responsibility, governance and infrastructure.

According to one stablecoin delegate: “As a former regulator in a specific area, I understand the need to eliminate risks that could destabilise the system. When asset values drop, people want stability — they want their money to hold its value. That’s why the principle behind stablecoins makes sense: they offer a way to preserve value.”

For example, there is a “non-zero probability” of losing money when depositing funds with a bank. However, the definition of loss in the context of a stablecoin deposit is broader and often tied to liquidity or depegging risk, rather than outright insolvency.

Redemption vs conversion

Most of the industry representatives agreed that regulators need to understand the difference between the risks arising from the “redemption” and “conversion” of stablecoins.

In the current ecosystem, stablecoins can be exchanged for goods, services, or other digital assets such as Bitcoin, but the majority are not cashed out into fiat currency.

The stablecoin delegate explained: “I believe the traditional model is somewhat outdated. The risks we’re trying to protect against — such as sudden redemptions or liquidity crises — can be managed through diversified asset maturities and improved liquidity planning.

“Some portion of assets may need to be held in cash for emergencies, but good liquidity management can handle redemptions, even under stress — large issuers have proven this during crises. Locking up 60% of banking assets for emergency situations is not efficient.”

The event was held under the Chatham House Rule, so neither the identity nor the affiliation of speakers can be revealed.