Stablecoin legislation is actually a general falling from the atmosphere in the United States, and this move will directly strangle the lifeblood of the entire blockchain industry.

Author: Liu Ye Jing Hong

The stablecoin legislation is actually an old topic. It was drafted and passed in the first half of last year, but it has not been substantially approved for implementation. Today, I brought it up because I saw a signal:

Representatives Patrick McHenry and Maxine Waters told Bloomberg News this week that they are "expected to obtain approval for the stablecoin legislation in the short term."

Bloomberg

To briefly explain the content of the stablecoin legislation, the specific content here is based on the stablecoin legislation version from last year, and there should not have been major modifications to date:

First, the Federal Reserve is responsible for supervising non-bank stablecoins, while banks and other deposit-taking institutions that issue stablecoins are subject to Federal Reserve supervision. All related stablecoin businesses need to register with regulatory agencies, and even overseas companies need to register in order to conduct stablecoin businesses.

Second, it prohibits the creation of new stablecoins without fiat currency support. The draft includes a two-year ban, requiring a prohibition on issuing, establishing, or creating stablecoins that are "not backed by tangible assets" within two years. This primarily targets various algorithmic stablecoins and stablecoins generated by cryptocurrency collateral.

Third, it allows the government to establish interoperability standards.

Fourth, it directs the Federal Reserve to research the digital dollar.

The renewed attention to the stablecoin legislation this time must be viewed in the context of the overall situation. Looking back at some major events in 2024, you can understand it:

First, the approval of a Bitcoin ETF and its unprecedented popularity in the capital markets directly pushed the price above previous highs. Second, the ongoing geopolitical war has led to historically high gold prices. And the end-of-year U.S. election and expectations of a Fed rate cut, and so on.

These events actually indirectly confirm that although the United States has not engaged in direct combat, it has already initiated a dollar war from a financial perspective. This time's war is different from previous financial wars. The United States has discovered and thoroughly researched the blockchain, or Web3, industry. While people in other countries are using blockchain for fund transfers, the United States is beginning to establish blockchain rules at a higher level.

For the blockchain industry, no matter how attractive various technologies and stories are described, its ultimate destination is to complete transactions, especially those involving USDT as the trading pair. Therefore, the core function of the stablecoin legislation is to redefine the trading pairs for the entire industry.

For some old investors, they will surely remember that before 2017, USDT was not actually the mainstream trading pair. In various exchanges that year, there were basically stable points issued by each platform. These stable points were not on the chain, but were completely anchored to the RMB in the platform's C2C.

Therefore, in the next three to five years, the trading pairs for the entire industry will gradually shift from USDT to stablecoins that comply with U.S. regulations. For example, Binance has always used USDT as the core trading pair, and then issued BUSD in an attempt to replace USDT. However, in 2022, due to U.S. regulation, BUSD was directly suspended. Subsequently, Binance also promoted TUSD, which was also regulated by the United States and eventually suspended.

Currently, Binance is promoting FDUSD, and FDUSD no longer complies with U.S. regulation, but instead complies with Hong Kong regulation. However, since the stablecoin regulatory rules in Hong Kong are not clear at the moment, FDUSD is still in limbo despite the issuing institution complying with Hong Kong regulation.

So, looking at the path of stablecoin promotion by Binance, it is clear that there has long been a plan to find an alternative to USDT and evade U.S. stablecoin regulation, showing great foresight.

Moments of fantasy:

Let's conduct a thought experiment now. Assuming that the stablecoin legislation has been approved and implemented, let's see what changes will occur in the entire blockchain industry.

First and foremost, USDT will definitely not comply with U.S. legal regulations, so exchanges will need to gradually delist USDT trading pairs. Of course, exchanges can choose to completely avoid U.S. business, not accept U.S. users, and block U.S. IPs. But don't forget, a key point in the stablecoin legislation is that stablecoins need to comply with interoperability standards set by the U.S. government. Therefore, if an exchange completely cuts off U.S. business, it will lag behind other exchanges in terms of stablecoin support.

So, what if this exchange chooses to unilaterally support compliant stablecoins but does not support U.S. business and does not accept regulation? Sorry, that won't work either. Because another key point of the stablecoin legislation is that even overseas companies need to register and accept regulation in the United States, otherwise they will be considered non-compliant.

And what if they forcefully continue this business even if it's non-compliant? As mentioned earlier, "stablecoins need to comply with interoperability standards set by the U.S. government," so U.S. regulatory agencies can likely freeze your address or directly block your assets related to the entity according to OFAC regulations.

See, this forms a closed loop in the American style.

In this hypothetical deduction, the entire industry is likely to split into two categories: compliant exchanges that actively embrace U.S. regulation, and gray area exchanges that are forced to continue using USDT.

However, continuing to use USDT is not a better choice either. Don't forget that Tether, the parent company of USDT, is a compliant company in Hong Kong, and Hong Kong is also implementing its own stablecoin legislation. And because Hong Kong is subject to national security law regulation, it seems to be even worse within this framework, doesn't it?

From blockchain to trading pairs:

As early as last year, the Bitcoin mining pool F2Pool admitted to filtering transactions from Bitcoin addresses marked by the Office of Foreign Assets Control (OFAC). Not to mention the custodian institution Coinbase for the Bitcoin ETF, which will definitely respond positively.

And on the upcoming topic of Ethereum ETF speculation, the various PoS validator nodes based in the United States will certainly operate in accordance with OFAC rules.

The stablecoin legislation is actually a general falling from the atmosphere in the United States, and this move will directly strangle the lifeblood of the entire blockchain industry. It can be foreseen that in the next few years, the entire blockchain industry, whether from the most fundamental blocks to the most widely used trading pairs, will be constrained by the United States and fall within its long-arm jurisdiction.

Finally, although China has long implemented the digital RMB, whether from a technical or application perspective, it is actually not the same as the digital dollar or compliant stablecoins. The two only share digital characteristics, nothing more.

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