Research Summary
The report provides a detailed response to the FCA’s discussion paper on stablecoin regulation, referencing research on Mountain USDM and Ondo USDY. It discusses the benefits of limiting stablecoin backing assets to government treasury debt instruments and short-term cash deposits, and the importance of appointing an independent custodian to safeguard these assets.
Key Takeaways
Stablecoin Backing Assets
- Benefits of Limiting Backing Assets: The report supports the FCA’s proposal to limit stablecoin backing assets to government treasury debt instruments and short-term cash deposits. It cites the stability and reliability of these assets, as demonstrated by USDM and USDY, as key benefits.
- Over-Collateralization: The report highlights the importance of over-collateralization as a financial safeguard. It explains how USDM uses a collateral buffer composed of cash and stablecoins to mitigate interest rate risks and ensure stability.
Independent Custodianship
- Importance of Independent Custodianship: The report emphasizes the need for stablecoin issuers to appoint an independent custodian to safeguard backing assets. It argues that this enhances the credibility of the stablecoin and ensures that assets are held securely and not mismanaged by the issuer.
- Examples of Effective Custodianship: The report provides examples of effective custodianship, citing the practices of USDM and USDY. It notes that USDM’s reserves are managed by E.Q. Capital, a Bermuda-licensed Investment Manager, while USDY’s assets are held in cash-custody accounts at Morgan Stanley and StoneX.
Regulatory Compliance
- Regulatory Compliance of USDM and USDY: The report highlights the regulatory compliance of USDM and USDY. It notes that USDM operates under a Class M license from the Bermuda Monetary Authority, while USDY’s collateral infrastructure is structured for optimal security and compliance.
- NYDFS Supervision: The report cites the supervision of GUSD and USDP by the NYDFS as a prime example of the benefits of regulatory oversight. It outlines the NYDFS’s comprehensive model for asset custody in the stablecoin industry.
Actionable Insights
- Consider the Benefits of Limiting Backing Assets: Stablecoin issuers should consider the benefits of limiting their backing assets to government treasury debt instruments and short-term cash deposits. These assets offer stability and reliability, which are crucial for maintaining the value of the stablecoin.
- Implement Over-Collateralization: Stablecoin issuers should consider implementing over-collateralization as a financial safeguard. This can help to mitigate interest rate risks and ensure the stability of the stablecoin, even in the face of declining Treasury values.
- Appoint an Independent Custodian: Stablecoin issuers should consider appointing an independent custodian to safeguard their backing assets. This can enhance the credibility of the stablecoin and ensure that assets are held securely and not mismanaged by the issuer.
- Ensure Regulatory Compliance: Stablecoin issuers should ensure that they are in compliance with all relevant regulations. This can help to safeguard token holders’ rights and contribute to the stability and reliability of the stablecoin.
