Decoding the constructive and destructive aspects of stablecoin legislation on ‘DeFi+RWA

Analyzing the impact of stablecoin legislation on 'DeFi+RWA

Author: Jerry@TPDAO, BeeGee

The US House of Representatives voted on the stablecoin bill this week, marking the first time that a cryptocurrency regulation bill has been put to a vote in Congress. This is a milestone in the federal regulatory framework being developed by Congress for the digital asset industry. The bill discussion, which started a week ago, has been dragged out until now. This is not only a cautious attitude, but also a strategic ambition. It is about the layout of a new era of encryption for a major country, and it will determine the position of the sovereign country in the integration process of the sovereign country and the encrypted world.

Therefore, this article discusses the constructive and destructive aspects of the stablecoin bill on “DeFi+RWA”, which should be placed in the context of the integration process between the sovereign country and the encrypted world. This is a just right time point – the geek spirit of the encrypted world constantly touches the boundaries of the real world, Web3 technology and applications begin to enter industrial development, the real world financial market and order are in a state of stagnation, and the encrypted market, especially DeFi, also exposes the problem of lack of momentum. The integration of the two worlds is the best solution, which is objectively conditioned and promotes the integration of both parties to achieve their respective goals and seek common development.

Let’s start with the destructive aspect-first, at the beginning of the release of the stablecoin bill draft, the encrypted world was full of vigilance. For example, the specific and meaningful discussions in the encrypted market regarding the requirements that stablecoin issuers must comply with and who will regulate them:

• How does Worldcoin specifically handle privacy?
• The US Senate Includes Cryptocurrency Provisions in Defense Bill
• Struggle between Ripple and the SEC What Will Happen Next? Experts Assess 4 Possible Outcomes

If the bill is passed, the requirements for approval may bring more problems. It may directly destroy the composability of DeFi. For example:

If USDC has already obtained approval from relevant regulatory agencies, does Compound need to obtain the same approval to issue cUSDC (an income-generating asset) for its lending platform?

If I run a bridging protocol, do I need approval for the bridging version of USDC?

How can we achieve the connection between wrapped versions of stablecoins and real-world assets?

Since the release of the draft, discussions on how the stablecoin bill will affect top-tier decentralized stablecoins have permeated the agendas of every stablecoin project participant. But this is still a narrow perspective. Now, behind the differences of opinions between the Democrats and Republicans, there is a high level of strategic unity – as the encrypted market continues to develop and the encrypted world and digitalization process become more radical, the United States is trying to strengthen the influence of the dollar in the traditional financial order and the encrypted economic system based on stablecoins.

Therefore, we have to face up to the layout of the sovereign government’s power in the encrypted economic system, including the efforts of the stablecoin bill in the United States to establish the issuing status of the dollar. This may deviate from the original intention of Satoshi Nakamoto, but in fact, this deviation has been happening all along, especially now that the stablecoin system is dominated – to Satoshi Nakamoto’s surprise, cryptocurrency not only failed to overthrow the dollar’s dominance, but also made the dollar the biggest beneficiary. In the encrypted economic system, mainstream stablecoins are based on the traditional dollar system. The Federal Reserve does not issue a single unit of currency, but it already holds the encrypted market in its hands and completes the iteration from “gold·power·dollar” to “power·dollar” and then to the encrypted world – “power·digital dollar”. Without a strong opposing force, the era of the “digital dollar” hegemony is approaching.

As we face this integration process, we not only see the ambition of sovereign governments to regulate and dominate the cryptocurrency market, but also the process of integration and empowerment between traditional financial markets and the cryptocurrency economy. Obviously, the impact of stablecoin legislation is not only on the billion-dollar stablecoin market, but also on the trillion-dollar DeFi market, the trillions of RWA market, and the entire cryptocurrency ecosystem.

In the analysis “Why ‘Integration’ Becomes the Value Investment Research Theme for the Next Bull Market” at the end of last year, we concluded that after the hard work of early builders in the blockchain world, the infrastructure of the cryptocurrency world is constantly improving, and the cryptocurrency ecosystem is moving from the active area limited to ICO, DeFi, NFT, and other investment/speculation properties to the level of industry and financial integration. We believe that the keyword for the next bull market is integration – the integration of web3 technology with various industries’ industrial ecology, the integration of the cryptocurrency economy with the sovereign world’s financial system, and the integration of DeFi with non-financial use cases of web3.

Nowadays, RWA has gradually become the most valuable narrative in this integration process. In the article “Decoding RWA: The Most Valuable Cryptocurrency Narrative in the Compliance Context” at the beginning of this month, we concluded that Ethereum and other public chains’ application ecosystems will be the strongest fundamental support in this round of the cycle, but it brings us more confidence, and we believe that the biggest support in the market is RWA.

Returning to the US stablecoin bill and the layout of the US dollar behind it, it is necessary for us to focus on the financial landscape of sovereign governments in the physical world in the process of integrating sovereign finance and the cryptocurrency economy. The layout of the renminbi and Hong Kong appears to be urgent – in the RWA system with a total market value of trillions of dollars, the digitization of sovereign government currencies, including the possibility of digital Hong Kong dollars (e-HKD), has been explored in the pilot program of e-HKD, which includes six categories of use cases, including Web3 settlement, tokenized assets, and tokenized deposits…

On a more concrete level of capital market practice, we can see the two major directions of the US market’s RWA bond market and the Hong Kong stock market, representing the process of market-driven capitalization of RWA. For example, Ondo Finance announced the launch of tokenized funds in January this year, bringing risk-free interest rates to the chain, allowing stablecoin holders to invest in bonds and US Treasury bonds; Matrixport, an asset management company, launched the on-chain bond platform Matrixdock, which went live with government bond-related businesses in late January this year; OpenEden, created by former Gemini employees, launched tokenized US Treasury bonds in April this year, and stablecoin holders can mint TBILL through OpenEden TBILL Vault to obtain risk-free returns from US Treasury bonds. Recently, in the context of rising interest rates, the yield of US Treasury bonds has steadily climbed and has now clearly surpassed the yield of DeFi.

ThePrimedia has been paying continuous attention to the linkage between the Dubai RWA market and the Hong Kong market in the past month. In particular, there have been some doubts raised about the 200 million digital RWA issued by CMB International through UBS for the Hong Kong market in mid-June. The “main Ethereum blockchain” mentioned in the original UBS document actually refers to a centralized consortium chain deployed with Ethereum as the open-source code, rather than the Ethereum mainnet. Traditional institutions still have a long way to go in deploying businesses on public chains under uncontrollable risks such as policy compliance, regulation, and transaction efficiency, but even traditional financial institutions are showing more and more acceptance of tokenized RWAs.

It can be foreseen that traditional exchanges will play a role in the secondary trading of tokenized RWAs. For example, the Australian Securities Exchange may consider listing tokenized RWAs on its platform in the future. As this field continues to mature, regulatory development will become a driving force for mainstream adoption. However, the emerging RWA track not only brings forth new native projects.

In summary: The main purposes of the US stablecoin bill are twofold: 1. Regulate the stablecoin industry; 2. Serve the digital dollar. Specifically for the first aspect, the bill requires stablecoin issuers to apply for a license from the Federal Reserve and meet capital and risk management requirements. In terms of regulation, it requires that depository institutions seeking to issue stablecoins be subject to appropriate federal banking agency supervision, while non-bank institutions will be subject to supervision by the Federal Reserve. Failure to register may result in up to five years of imprisonment and a fine of $1 million. Overseas issuers must seek registration to operate in the country.

For the second aspect, the bill aims to seek new exports for the US dollar and prevent the creation of stablecoins in other aspects, favoring the expansion of the US dollar and hindering the discovery of new value. For example, in terms of reserves, it requires applicants to have a “one-to-one reserve”, including currency (i.e. the US dollar), government bonds, repurchase agreements, and central bank reserve deposits. These are all based on legal tender or its derivatives, without any others. In addition, the new draft of the bill has a “two-year ban” that prohibits the issuance, establishment, or creation of “non-tangible asset-backed” stablecoins within two years. Essentially, it is to remove existing barriers to the internationalization of the US dollar.

From a positive perspective, the bill clarifies regulatory boundaries, which is beneficial for the further development of stablecoins and is expected to provide “blood” for the development of the DeFi industry. From this perspective, it is favorable for the development of DeFi. However, on the other hand, it also increases compliance costs and compresses the profit space of DeFi. Overall, it is positive for DeFi.

For RWAs, it is also a positive promotion overall. The bill requires reserves to consist of legal tender, which means that fiat currencies in RWAs will become part of cryptocurrencies at the legislative level, allowing on-chain projects centered around fiat currencies, government bonds, and other assets to be legally and massively conducted. This is also an important step for the large-scale development of RWAs, and the scalability of RWAs will lay a solid foundation for the large-scale adoption of the cryptocurrency industry.

In 2023, tokenization was referred to as the “killer application of traditional finance” by JPMorgan Chase and referred to as the “future market” by Larry Fink, CEO of BlackRock. Therefore, at the market level, the diffusion of tokenized RWAs is a positive development for cryptocurrency investors. In addition to being able to take advantage of higher government bond yields, the introduction of RWAs also brings more stable assets to DeFi and increases the diversity of collateral in this field.

However, we have to look at stablecoin legislation from the perspective of the layout of the sovereign state’s crypto economy. From this perspective, the RWA track will be the main battlefield for the integration of sovereign state finance and the crypto economy. We have seen the ambition of the United States and also look forward to Hong Kong’s layout.

Note: This article was co-researched and co-created by TheprimediaDAO, with main co-authors being Jerry (@ThePrimedia), the initiator of TheprimediaDAO, and BeeGee (@BeeGeeETH), the Builder and TigerVCDAO Investment Head of TheprimediaDAO.

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