The Taiwan Banker

The blockchain was designed as an extension libertarian ideology. The genesis block of Bitcoin includes a message from its anonymous creator Satoshi Nakamoto on the response to the financial crisis unfolding at the time: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The dream was that issuance would be programmatically controlled, with no influence from government-controlled entities. New technologies are frequently used in ways that do not reflect the original intentions behind their creation. Blockchain later became far more useful as a speculative investment instrument than a payment tool for items like pizza; and with the current discussion on stablecoin regulation, its design philosophy has become unrecognizable. The most urgent discussion is not transaction secrecy, but rather how to integrate payments with the global surveillance infrastructure – which happens to more-or-less completely invert the original ethic of decentralization. “If you take Bitcoin, in 2008-2009 we thought it was going to disappear, and now it has it has warped, transformed, said Mark McKenzie, a Senior Financial Specialist at the South East Asian Central Banks (SEACEN) Research and Training Centre. “I mean Bitcoin is still there, but if you look at it, it has propelled all these new players and new industries” which could not have been conceived at the time – such as exchanges and hosted wallets, and now banks. SEACEN is a research and training organization which tracks a variety of emerging issues relevant to its19 Asian central bank members. Debates over “surveillance capitalism,” which originally rose to public prominence with rise of AdTech and the tech sector, are now moving to finance. Here, in their international version, concerns over privacy and data protection often take the form of “data sovereignty.” Independence from Silicon Valley and US regulatory influence is emerging as one of the most central design points for most of the countries currently considering stablecoin laws. This is one of the main drivers of the EU’s continued push for a central bank digital currency (CDBC) to complement its existing regulated stablecoin system, says McKenzie. “With stablecoins we have two big players. In banking you have a handful of big banks right? The question is…how do you keep these firms in check?” Currently, regulated stablecoin issuance is dominated by Circle, which issues the USD Coin (USDC), which is utilized by the Visa and Stripe payment networks; while Paxos issues the Global Dollar (USDG), the infrastructure for services including Mastercard, Robinhood, and Kraken. Programmable money necessitates centralization of control. Aside from the relatively minor economic impacts like carrying costs of transaction settlement, as well as reserve currency effects, the main difference between a regulated stablecoin account and a conventional bank account is that the bank cannot decide which transactions to execute on an ad hoc basis. Concrete, systematic rules must be in place ahead of time. This approach to monitoring financial flows has both pros and cons, but it by no means constitutes the surrender of jurisdiction over money laundering which crypto advocates may have imagined. A similar principle also applies once the transaction has been executed. Laundering of illicit funds, such as those obtained from financial fraud, typically relies on rapid movement, hence the importance of a ‘golden hour’ for recovery of lost funds. For pre-approved nodes, on-chain settlement may accelerate this process, further compressing that window – but it also improves traceability later. This double-edged sword is typical of the tradeoffs created by regulated stablecoins, but one clear result is an enhanced role for centralized institutions capable of facilitating trust. In some ways, therefore, stablecoin regulation builds on the existing progress made through entities like the Financial Action Task Force (FATF), whose grey list can exclude countries whose financial supervision if underdeveloped from global capital markets. The so-called “Travel Rule” deals with the difficult question of integrating compliant accounts with the wider digital asset ecosystem, making it a key aspect of cryptocurrency regulation. Officially known as Recommendation 16, the Travel Rule was originally codified as a domestic law in the US, but was later promoted internationally as “soft law.” FATF also connected it with Virtual Asset Service Providers in 2019. While pointing to the progress the FATF has made in shoring up the financial system over the years, McKenzie pointed to regulatory arbitrage as a key risk of integrating stablecoins with the formal banking system. If a threat actor needs to use stablecoins to move dirty money, they can simply set up an account in a jurisdiction with more lax regulations – which points to a potential need for more difficult decisions ahead to exclude some entities from the advanced segment of the global financial system. These might include countries with lagging financial regulation, as well as newer entrants to the payments ecosystem. “Whereas the big banks know the importance of public confidence, your big bank knows the importance of maintaining trust, I think the challenge you may find is that newer players, new participants, and smaller players might be more inclined to operate on the periphery, because there is a cost to compliance.” Within the US, whose GENIUS Act has jumpstarted a global stablecoin regulation trend, much of the associated discussion has revolved around financial solvency. Indeed, reserves are important – along with the question of yields on those reserves, which is the subject of a current administrative decision. This focus however reflects several specific elements of the American financial system, which may not be applicable elsewhere, such as its reserve currency status, technological dominance, and robust banking sector, with little risk of disintermediation. Europe, as mentioned, defines some of its risk orientation in relation to the US. Emerging markets, meanwhile, are often at more acute danger of capital outflows, which domestic stablecoins could perversely enable. They appear to have both the most to gain and most to lose from stablecoin regulation. Finally, for a mid-tier financial power like Taiwan, the most important consideration may simply be not to isolate its financial system by falling too far behind the global frontier. The costs and benefits of a domestic-currency stablecoin for a country in this position are complex to calculate, although perhaps not especially large either way. On the one hand, capital markets are already sufficiently liquid and open that it should not impact the soundness of the Taiwan dollar. Financial fraud often utilizes money laundering via unregulated Tether (USDT), but the influence of regulated stablecoins would be unclear. Nevertheless, even if the foreseeable benefits are more abstract than concrete, an algorithmic-regulatory innovation like this will likely also produce many unforeseeable benefits in the next iteration. Maybe price stability will even allow Bitcoin to fulfill more of its early promises, which were later abandoned due to its volatility, as well as disconnection from the ordinary financial system.