The Taiwan Banker

In the past, the US Republican party was known for its anti-regulatory ideology in the financial sector. In part, this was an image it cultivated for itself despite a more complex reality. The most important deregulatory measures implemented during the presidency of George W. Bush, for instance, had already been signed into law under the previous (Democratic) Clinton administration. This reputation is not entirely unearned, however; conservatives have vigorously opposed the Consumer Financial Protection Bureau (CFPB) since its creation in the wake of the financial crisis, and it also more recently become a major target of the Department of Government Efficiency. At the same time, one of the most significant priorities in the early days of the Donald Trump presidency is not about free markets, but rather involves bringing an important unregulated emerging area into the scope of the formal financial sector. Stablecoins are a linchpin of the continued development of the cryptocurrency industry, and are set to become a legislative priority, with draft proposals currently working their way through both houses of Congress. Surprisingly perhaps, the US may even end up with more restrictive stablecoin regulation than the EU, which allows hypothecation up to a set ratio through highly liquid investment in non-credit institutions. The measures being considered are strict enough to exclude Tether (USDT), the dominant stablecoin provider, in its current operational form. They will preclude opportunities for speculative profits in the onramps to digital assets; rather, the plan is to assign this portion of the market more of a utility function. Digital assets are shaping up as an important element of both Trump’s domestic and foreign policy. Domestically, the right turn among Silicon Valley elites has delivered him an important new constituency. On the international stage, advisors have spoken of stablecoins as a defense against de-dollarization. Indeed, if that money is being funneled almost directly into government securities, it will improve fiscal sustainability – although it is also important to note in that same light that it could also fuel dollar appreciation, somewhat contravening some of his trade war objectives. As stablecoins are integrated into the formal financial system, their ecosystem will split into largely separate illicit and licit portions. This is probably a positive step overall in the global fight against money laundering, even if prevention of money laundering is ironically not one of the priorities of the new administration. Another recent order suspended enforcement of the beneficial ownership information requirements of the Corporate Transparency Act for domestic small businesses, for instance. The American financial system will soon gain unprecedented visibility and control of global cash flows. Not all corners of the stablecoin world are happy about this possibility, which contravenes the decentralized ethos of cryptocurrencies. “The government realizes that if they control stablecoins, they control financial transactions,” said Jean Rausis, co-founder of the Smardex decentralized trading platform, in a statement to Cointelegraph in reaction to the GENIUS stablecoin bill currently being considered by the Senate. “Working with centralized stablecoin issuers means they can freeze funds anytime they want – essentially what a CBDC would allow. So, why bother creating a CBDC?” Conservatives tend to have strong opinions about the possibility of a Central Bank Digital Currency (CDBC), reflecting continuity with their traditional skepticism of the government in this case. Minnesota Congressman Tom Emmer introduced the Anti-CBDC Surveillance State Act to prevent any progress toward this end, following up on an earlier executive order. “CBDCs introduce significant privacy risks and are fundamentally the antithesis of American values,” said Emmer in a statement about the bill. Rausis is however correct. Civil libertarians concerned about government control exerted through payments infrastructure cannot take solace in the possibility that private operators will defy government orders or regulations. Instead, it makes equal if not more sense for them to be concerned about “overcompliance,” or actions taken ahead of any formal guidance. Protections against politically-motivated “debanking” would be easier to implement centrally, if that were the purpose of payments innovation, but the consumer protections in the new stablecoin legislation instead deal solely with solvency, not inclusion. The Republican financial agenda is now divided almost equally between the culture war and forces for financial regulation. Nevertheless, the commonality between these two mostly contradictory impulses can be explained with reference to another financial policy: a cryptocurrency strategic reserve, which clearly positions the government on the long side of digital assets. A government-led CDBC would not promote the market in the same way that regulated stablecoins would. Integrating cryptocurrency with the formal banking sector will bring in mass retail users who can help support the continued price appreciation of this new asset class, which reached a record market cap of US$ 3.2 trillion in November. During the first several months of Trump’s second term, his signature unpredictability has come to the fore, perhaps more so than in any previous period. Financial regulation may not attract as much attention as the short-term impact from policies like tariffs, but it does have the potential to reshape the financial order for the longer term.