Circle CEO Jeremy Allaire has pointed to increased regulatory scrutiny in the United States as a reason for the decline in market capitalization of stablecoin USD Coin (USDC). In an interview with Bloomberg TV, Allaire discussed the “huge amount of concern globally about the U.S. banking system” and the “regulatory environment in the U.S.” as contributing factors to the crackdown on cryptocurrency by regulators in the country.
The collapse of the FTX exchange and the banking crisis have also come under increased scrutiny, leading to a momentary depegging of USDC in March. Circle was left with $3.3 billion worth of USDC reserves stuck with Silicon Valley Bank, one of the three crypto-friendly banks to be shut down by regulators. Circle had assured its customers that it had backing from investors to fill the gap but the news prompted a quick reaction from the market and USDC depegged from the U.S. dollar.
At its peak, USDC had a market cap of $56 billion and was second only to Tether-issued USDT. However, following its depeg, the stablecoin’s market cap has been cut nearly in half and currently sits at $30.7 billion. Coinbase has also warned that the lack of regulatory clarity may force crypto companies to look for opportunities elsewhere.
With the recent passing of the Markets in Crypto-Assets Act (MiCA) by the European Parliament and the drive for adoption by Hong Kong, Allaire fears that the United States will be left behind. He has called on Congress to take action, stating that “it’s a critical moment here in the U.S.”
The United States Securities and Exchange Commission (SEC) has been active in enforcing regulations since the FTX collapse. The SEC has threatened regulatory action against several crypto platforms and exchanges. Gary Gensler, who oversees the SEC, has received pushback from policymakers during oversight hearings on digital assets, with many crypto proponents questioning the authority of the SEC and Gensler.
The push for regulation has also led to concerns about the future of stablecoins. Stablecoins are digital tokens tied to the value of an underlying asset, such as the U.S. dollar, to minimize volatility. However, they have faced increased scrutiny due to concerns around transparency and the risks posed if they become too big to fail.
According to a report from the Bank of International Settlements (BIS), “stablecoins may well become systemically important and raise a variety of challenges for policymakers.” The report highlighted the potential risks to financial stability posed by stablecoins and called for “heightened attention” from regulators.
Despite these concerns, the popularity of stablecoins has continued to grow. The overall market capitalization of stablecoins has increased from $5 billion in 2019 to over $100 billion in 2021. The growth has prompted several central banks, including China, to explore creating their own digital currency as a way to maintain control over monetary policy and to address concerns around financial stability.
The future of stablecoins is uncertain, and the regulatory environment will play a crucial role in determining their viability. While increased scrutiny is necessary to address potential risks, excessive regulation could stifle innovation and push companies to move their operations to more crypto-friendly jurisdictions. As Allaire has noted, this is a critical moment for regulators and policymakers to take action to ensure that the United States remains a leader in the crypto market.
