Unstable stable coins: how to regulate?

29-06-2022 | Carlo de Meijer | treasuryXL | LinkedIn |


The crypto market was shocked by the sudden collapse of the third largest stablecoin TerraUSD early May. Long-time isolated from the falls in crypto coins like Bitcoin and Ethereum, stablecoins were designed to sidestep crypto volatility and supposed to remain stable across the crypto ecosystem.

The significant crash of TerraUSD that lost more than 90% of their value in a few days and the resulting crypto market turmoil however has put stablecoins in the regulatory spotlights. Regulators worldwide are prompting new calls for regulation highlighting the risk of certain cryptocurrencies and especially algorithmic stablecoins.

In this blog I want to highlight why TerraUSD, also called UST,  dropped below its target value, what the risks are of the various stablecoins, how regulators should react and what investors can learn from the crash of TerraUSD.

TerraUSD collapse

TerraUSD, also called UST, a so-called algorithmic stablecoin, had been another popular option for cryptocurrencies and was even the third largest stablecoin in the world at the threshold of the collapse. That system appeared to work well until then.

But TerraUSD was not able to withstand a panic outburst amongst investors, this notwithstanding they were providing a 20% interest. Sparked by a massive drop in the value of the crypto markets overall, investors lost faith resulting in a mass sell-off in the TerraUSD stablecoin. Luna Foundation Guard (LFG) tried to stop this slide by liquidating part of its 10 billion Bitcoin holdings.

The collateral, partly existing of Bitcoin, was insufficient to maintain its one to one peg to the dollar. As a result it slipped far from its $1 target price and dropped in value beginning May 9, 2022, hitting a low value of $0.015 at the time of publication of this blog.

As of this writing, the combined market capitalization of TerraUSD and partner stablecoin Luna was just over $4.5 billion, indicating a market decline of approximately $14 billion.

How did the  markets react?

In the wake of the TerraUSD collapse, other signs of the crypto sector’s vulnerabilities have emerged. When the Luna Foundation Guard sold almost its entire holdings of Bitcoin following the crash early May, as a result the price of Bitcoin, that lost already more than half of its value since last November from $64.000, sank to a 16-month low below $28.000 per coin. But also other cryptocurrencies were hit, triggered by  higher inflation and fears of raising interest rates. TerraUSD’s woes contributed to a slide in crypto markets that saw over $357 billion or more than 30% of digital asset market capitalization wiped out week-on-week. 

While the TerraUSD collapse has spelled trouble for Bitcoin and other cryptocurrencies, the chaos is somewhat contained in the stablecoin sector. That especially goes for the fiat collateralised segment, where most of the stablecoins such as Tether and Binance have the backing of actual cash and other valuable assets. TerraUSD  is however different from most of its stablecoin peers.

Investors fled TerraUSD into more trusted stablecoins such as DAI and USDC, which drove the price of TerraUSD further down. This increased demand for DAI and USDC temporarily increased their price and were shortly after arbitraged back to $1.

The failure of TerraUSD’s peg already has sent shocks through the decentralised finance (DeFi) sector, with a key saving and lending protocol, Anchor, seeing massive liquidation of TerraUSD-collateralised loans and the pricing of other crypto tokens also being affected. This has led to further liquidation triggers throughout the ecosystem. ‘Bouts’ of volatility will probably continue as the cryptosector digests the repercussions of the failure of the TerraUSD peg, while US policy rate increases and equity volatility may pressure so-called ‘high-beta assets’.

Regulated financial markets
Recently the Financial Stability Board (FSB) pointed to the increased intertwining of the crypto world with the traditional financial world. Up till recently links between crypto markets and regulated financial markets remained weak. The potential for crypto market volatility to spill over and cause wider financial instability was limited. But that has changed.

A growing number of regulated financial entities have increased their exposure to cryptocurrencies, DeFi and other forms of digital finance in recent months. If crypto market volatility becomes severe the risks for the financial stability of the real economy could as a result escalate.


But not all stablecoins are the same

Stable coins are cryptocurrencies designed to be protected from the wild volatility of crypto currencies like Bitcoin and Ethereum. They attempt to maintain a constant exchange rate with fiat currencies, mostly through a 1:1 US dollar peg.

Stablecoins are often used for transactions within the crypto world and between cryptocurrencies and the traditional financial system. They have played a crucial role for cryptocurrency traders, allowing them to hedge against spikes in Bitcoin’s price or to store idle cash without transferring it back into fiat currency.

Regulators should however be aware that not all stable coins are the same. Some stablecoins are more vulnerable than others. The stablecoin sector is a critical and complex part of the crypto ecosystem. Stable coins are an umbrella term. They are not a monolithic asset class and every stablecoin operates differently.

Stablecoin models

Stablecoins can be divided into two broad groups based on how they choose to pursue price stability: collateralised stablecoins and non-collateralised stable coins. Collateralised stablecoins can be split into fiat-collateralised and crypto–collateralised. The newest group of non-collateralised stablecoins are so-called algorithmic stablecoins like TerraUSD.

Fiat collateralised
The value of fiat-collateralised stablecoins is backed by reserves comprising assets, such as fiat currency, mostly the dollar, as collateral assuring stablecoin’s value. Collateral can also consist of bonds, commercial paper, commodities like gold and silver as well as crude oil. But most fiat-collateralised stablecoins have reserves of US dollars.

Dollar-based collateralised stablecoins like Tether and true USDC use a more fluid collection of traditional assets to secure its stable coin. Most of these reserves consist of treasury bills, certificates of deposit, and cash deposits to match the value of outstanding tokens that are maintained by independent custodians and audited regularly to ensure that holders of these stablecoins guarantee they can redeem them for actual fiat money, at some point.


Another category of stablecoins are crypto-collateralised stablecoins, with their underlying collateral being another cryptocurrency or basket of cryptocurrencies. Because the reserve cryptocurrency may be subject to high volatility, such stablecoins are often over-collateralised, whereby the value of cryptocurrency held in reserves exceeds the value of the stablecoins issued. The Dai stablecoin for instance which is pegged to the US dollar uses a basket of crypto assets as collateral at a ratio of 150% of the value.

Non-collateralised stable coins
And there is the newest group of stablecoins which are algorithmic or ‘decentralised’ stablecoin. While most stablecoins are reserve backed and are supposed to always be exchanged for one dollar, algorithmic stablecoins ‘forgo this failsafe’ and attempt to maintain their pegs through other means. Their primary distinction from collateralised stablecoins is the strategy of keeping the value of their stablecoin by controlling the supply through an algorithm and smart contracts to control the supply of tokens.

TerraUSD (UST)

TerraUSD, which trades with the symbol UST, is one of those algorithmic or decentralised stablecoins. To get somewhat more insights in this new type of stablecoin, let’s go more deeply into how it works.

The purpose of TerraUSD was to create a “crypto-native” dollar – with all of the supposed benefits of blockchains, like censorship resistance – that would be cheaper to use than a fully or partially collateralized option. It was intended to be worth exactly one dollar, enabling transactions to process with predictable results and giving cryptocurrency investors and traders an option to store their assets in cryptocurrency without the risk and volatility associated with typical digital currencies. Its peg to the dollar was supposed to be maintained by a complex algorithmically driven mechanism rather than by reserves of dollars or other assets, as is typical for stablecoins.

As TerraUSD’s popularity took off, its partner stablecoin Luna increased in value as well. The coin popped from around $5 in July 2021 to a high of $116 in early April 2022. Before its collapse TerraUSD was the third-largest stablecoin by market capitalization with about $18 billion and the largest algorithmic stablecoin.


How does TerraUSD work?

TerraUSD as an algorithmic stablecoin, is fundamentally different from most of its peers. Their value is assured not by financial collateral in the traditional markets – though owner Kwo diversified earlier this year their backing by purchasing $10 billion in Bitcoin – but backed by lines of computer code so-called algorithms to stay pegged to the dollar.

This stablecoin used a sophisticated but complex automated system of arbitrage to maintain its valuation at the 1:1 level. This mechanism relies on two coins: the TerraUSD stablecoin and the Luna governance token. It involved swapping TerraUSD coins with this free-floating cryptocurrency Luna to control supply.

The value-protecting transactions are executed by smart contracts on the Terra network. A computer algorithm thereby creates (mints) and destroys (burns) both TerraUSD and Luna to bring the price back into equilibrium. When the price of TerraUSD drops below $1, traders can burn TerraUSD—removing it from circulation, thereby reducing the overall supply —and raise the price back up. If the value of TerraUSD goes higher than $1, traders can burn Luna for TerraUSD, increasing the overall supply and lowering the price. This creates trading margins and supply and demand models that help keep the coin pegged to $1.

Another key part of the Terra ecosystem is the interest rates on TerraUSD deposits. These are offered through Anchor Protocol, a decentralized finance (DeFi) platform, which can garner annual percentage yield rates of 20 percent on TerraUSD tokens that could be borrowed by investors in need of dollar-like capital. The Terra decentralized finance (DeFi) network incentivized traders, holders, and users to either use, lend, or stake these crypto assets. This system worked reasonably well in practice from the inception up till early May.


As things stand nowadays, stablecoins are very lightly regulated. A significant part lays outside the control of regulators. Given the explosive growth of the $130 billion market and its potential to affect the broader financial system, it is not strange that stablecoins have come under growing scrutiny by regulators. The recent turmoil has reignited calls in virtually every major financial market in the world for increased regulation of the crypto asset market in general and of stablecoins in particular.

Common themes in the discussions are the volatility, the lack of transparency with regards to crypto operations and the reserves they are supposed to hold, the overly optimistic promised returns and investors that are not well informed with regards to what is being purchased.


Politicians have increased calls for tighter regulation of stablecoins. The falls in cryptocurrencies and the collapsing value of TerraUSD have further alarmed policymakers in both the EU and the US such as Treasury Secretary Janet Yellen and Securities and Exchange Commission Chair Gary Gensler.

US Treasury Janet Allen
US Secretary of the Treasury Janet Yellen has cited risks to broad financial stability due to stablecoins. She told a Senate Committee that the TerraUSD debacle has reinforced the need for proper oversight and for a “consistent federal framework” for regulating stablecoins and said that stablecoin guidance could come as early as this year.

“A stablecoin known as TerraUSD experienced a run and declined in value” “I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks.”
 Janet Yellen

Fed semi-annual Stability Report
In its recent published semi-annual Stability Report, the Fed discussed the uncertainty of what is actually backing stablecoins and the lack of oversight in that market. The Fed repeated its concerns that stablecoins are vulnerable to investor runs because they are backed by assets that can lose value or become illiquid in times of market stress. The increasing use of stablecoins to meet margin requirements in leveraged crypto trades may further heighten redemption risks. A lack of transparency around the assets may exacerbate those vulnerabilities. A run on the stablecoin could therefore spill over into the traditional financial system by creating stress on these underlying assets, according to the report.


What sort of regulation

There are however still different visions on how to regulate stablecoins. Some regulators are preparing rules for stablecoins to make them look and function more like banks. Some others come up with proposed regulation that will look like more as governance tokens being considered securities. According to them, as tokens have claims against assets, or claims against cash flows, they are looked at the easiest target for regulators.

The International Organization of Securities Commissions (IOSCO) said stablecoins should be regulated as financial market infrastructure like banks alongside payment systems and clearinghouses. The proposed rules should focus on stablecoins deemed systemically important by regulators, with the potential to disrupt payment and settlement transactions.

The ECB is also increasingly worried about the risks for the financial stability of crypto investments. They are urgently calling for accelerating the implementation and acceptance of regulation to implement constraints to crypto currencies and stable coins. The EU’s Markets in Crypto Assets regulation, that would enter into force from 2024 onwards, is expected not not permit the issuance of algorithmic stablecoins and would require crypto providers to have a (bank-like) license and systemic stablecoin issuers  be backed by enough reserves.

What issues for regulators to consider?

There are important lessons to be learned from this crypto collapse, that regulators should keep in mind when designing legal frameworks for cryptocurrencies in general and for stablecoins in particular.

Like all new technologies, these assets — including dollar-backed, crypto-collateralized and algorithmic models — deserve a smart and thoughtful conversation around potential regulation, in order notto  frustrate financial innovations.

Regulators should thereby be aware that this collapse of TerraUSD is not a reflection of all stablecoins, because they weren’t all built the same under the same philosophy. As has been described before algorithmic stablecoins are very different compared to the collateralised stablecoin types.

Stablecoins in general should therefore not be forbidden but should be firmly regulated to prevent that a collapse like TerraUSD will happen again.  Buyers should understand what the risk are especially of these algorithmic stable coins. It therefore needs standards

Factors to keep in mind for regulators

There are a number of important factors policymakers and investors should keep in mind as stablecoins continue to develop and mature. This latter group take deposits without any insurance that customers rely upon to know their money is protected.

Regulators should likely pay more scrutiny to the risks surrounding stablecoins and their reserve attestations especially algorithmic stablecoins, given that UST’s problems have sparked wider crypto market volatility.

Stablecoins backed by reserve assets with clear fiat currency value however face a fundamentally different set of credit issues to algorithmic stablecoins, in our view. In such cases, the stablecoin’s stability risks can be more manageable, depending on various factors, notably the safety and liquidity of the reserve assets.

Asset-backed stablecoins therefore should become transparent about what is in their reserves. With traditional stablecoins, regulators also want to know that their operators have sufficient assets to pay out customers in the case of a run on the system.

Factors relevant to the credit profiles of issuers of reserve-backed stablecoins should include regulatory risk, counterparty risk (including reserve custodians), transparency over reserves and the extent to which the underlying assets are truly uncorrelated, the legal rights of stablecoin holders, as well as governance and operational risks.

In the case of algorithmic stablecoins, they should, in regulatory terms, not be [backed] one-to-one, but being over-collateralized because these are inherently more risky. Other issues to keep in mind that are relevant for regulators are:  what are the permissible reserves?;  who can issue a stablecoin?; how should an issuer and the reserved be audited?; and, what kind of disclosures are made to consumers?”

Factors relevant to the credit profiles of issuers of reserve-backed stablecoins should include regulatory risk, counterparty risk (including reserve custodians), transparency over reserves and the extent to which the underlying assets are truly uncorrelated, the legal rights of stablecoin holders, as well as governance and operational risks.

Final remarks

It is clear that regulation of stablecoins is urgently needed to prevent collapses like that of TerraUSD. There are still many open questions.

It is however still unclear how this new regulation will look like and what impact this new upcoming regulation will have for the future of stable coins in general and algorithmic stablecoins specifically. But also what would it mean for the further development of underlying technologies.

What is clear is that stablecoins are here to stay but in a more regulated framework. It does seem very likely that many more investors will choose collateralized stablecoins in the future. This will most likely result in a growing number of stablecoins with lower risks.

In the end this may further benefit the crypto industry as thanks to lower risks and increased transparency it may attract more players from the traditional financial world.


Carlo de Meijer

Economist and researcher






Discussion LinkedIn poll | What is the expected conclusion of crypto volatility for Corporate Treasury?

08-06-2022 | treasuryXL | LinkedIn |


A couple of weeks ago we launched a poll on our LinkedIn page about the impact of crypto volatility on corporate treasury.

The poll received 72 votes in total, which is a great number! Thanks to everyone who joined the poll.

Scroll down to read our recap with the results and treasuryXL expert opinions. 



Currently, we see Crypto volatility crushing Stablecoins. What is the expected conclusion of these events for Corporate Treasury?



              • Crypto is too risky (25x) 35%

              • We need more regulation (19x) 26%

              • Crypto is the solution (8x) 11%

              • Let’s wait and see (20x) 28%

What do our treasuryXL experts say about this topic?


Francois De Witte



“There is a clear need for more regulation”

It is quite clear that cryptos present a high-risk profile. The volatility is high, and it is not easy to hedge these risks. In addition, payment transactions in cryptos take more time and energy than existing payments systems like the instant payments.

Currently, cryptos are held within the blockchain and are based upon a consensus. As a corporate, you do not have a control over these assets. In addition, you do not have the stringent KYC and AML checks which you have in the classic payment systems. The KYC and AML controls occur only on the moment that an individual or a company buys cryptocurrencies with its bank account or card, or when the proceeds of the sales of cryptocurrencies are paid to their bank account.


For this reason, there is a clear need for more regulation. Although the 5th AML Directive covers certain crypto assets under the term “virtual currencies”, it does not provide a harmonized approach. This problem will be addressed by the proposal of the EU Commission for the Regulation of Markets in Crypto Assets (abbreviated as MiCAR), which aims to create an EU framework for crypto assets falling outside the scope of other existing EU financial regulation and is expected to enter into force by end 2024. Let’s hope that this will bring more clarity in this complex topic.


Pieter de Kiewit



“Let’s see what will happen”



Rejecting crypto currencies or even blockchain before fully understanding the concept is like holding on tohorse and wagon when seeing the first cars. And current inflation following the QE strategy of the ECB shows that stability is not guaranteed in the traditional system. At the same time, treasurers are there to manage risk and the current crypto landscape seems very risky. So let’s see what will happen.




Carlo de Meijer


“Without well thought-out regulation, the inherent volatility of cryptocurrencies will continue to make stablecoins vulnerable to various risks”

Regulation of stablecoins has long been on the agenda of regulators worldwide. To date, however, the crypto sector in general and the stablecoin segment in particular remain largely unregulated.

Stablecoins continue to come under scrutiny from regulators, given the rapid growth of the $130 billion market and its potential to impact the broader financial system. As stablecoins are deemed increasingly important to the system by regulators, with the potential to disrupt payment and settlement transactions.

The recent collapse of stablecoin TerraUSD (UST) and the resulting fall of Bitcoin below the $28.000 level have provided an additional argument for speeding up the regulatory process and coming up with adequate regulatory measures.


With a growing number of traditional financial institutions, investors and also companies entering the Crypto and DeFi market, regulation becomes urgent to prevent such collapses in the future. Buyers need to understand the risks of these algorithmically stablecoins in particular. Therefore, standards are needed.

Without well thought-out regulation, the inherent volatility of cryptocurrencies in general but also of some types of stablecoins, will continue to make these stablecoins vulnerable to various risks, and make using these instruments for treasury purposes a difficult activity. The lack of transparency about what assets are being used and whether they have enough dollars to support all the digital coins in circulation also amplifies this consequence.


Would you care to explain your vote on this poll? Or would you like to explain your vote in a future poll? Don’t hesitate to get in touch with us!



Central Banks Digital Currencies: what may it bring for banks?

18-05-2022 | Carlo de Meijer | treasuryXL | LinkedIn |


The future of money is digital, according to a new global CBDC index from Price Waterhouse Cooper (PwC). This year’s Index shows that central banks are “ramping up” activity in the digital currency space. It is estimated that more than 80% of central banks worldwide are considering launching a central bank digital currency (CBDC), which some have already done so.

Before introducing their CBDC there are however many challenges and considerations to cover, ranging from cybersecurity and privacy concerns to the impact on financial markets and legislation. But the most fundamental one is: what may CBDCs bring for banks? Should they worry or is this an opportunity for them?

Introducing CBDCs may pose potential risks to the banking sector. How are central banks acting to mitigate those risks. What design is most suited for banks? And if well designed how would the future of banks look like.


Challenges and risks for banks

Despite having potential advantages, there are also various risks associated with CBDCs that could harm financial stability if not well designed. According to research, risks to financial stability depend on the take-up or rate of adoption, of a CBDC as well as bank funding, lending and resilience. If take-up is too fast, it could throw the existing financial and banking systems out of balance, a recent BIS report says.

Banking system disintermediation
The question of whether – and to what extent – CBDCs could pose risks to financial intermediation is central to the present debate. With the ability to provide digital currency directly to its citizens, it is widely viewed that if not well designed CBDCs could crowd out bank deposits and payment activities, as depositors would shift out of the banking system.

Bank runs
But there is also the possibility of digital bank runs. CBDCs would provide consumers access to a safe asset that – unlike cash – could potentially be held in large volumes, in the absence of safeguards, and at no cost. In the event of a banking crisis consumers could withdraw their savings from commercial banks and put them into safer CBDCs. If a bank has problems (be they technical or financial), customers with easy access CBDC wallets could trigger a run on the bank even if the problems are temporary. Such runs could even be self-fulfilling, leading to savers reducing their bank deposits and thereby amplifying volatility in normal times too.

Increase in funding costs
And there is the prevailing fear that the use of any CBDC would require a shift of funds out of bank deposits and into digital cash. Should CBDCs rapidly replace bank deposits, they could reduce banks’ ability to lend, leading to instability in the financial system. Without bank deposits, banks won’t have the funds to issue loans that help them make money. If customers move their money from commercial banks to CBDCs then this reduction in the deposits at commercial banks could make the cost of funding loans more expensive with knock-on impacts to the availability of credit for retail and corporate customers.

Weaken balance sheet position
While customers may deem the safety, liquidity, solvability, and publicity of CBDCs to be more attractive, this may weak the balance sheet position of commercial banks. An unconstrained CBDC could potentially have an impact on the funding structure of banks, with potential implications for financing conditions.

CBDCs could thereby interfere with the way in which nowadays credit lines and deposits complement each other. This would make funding more unstable and costly, reducing a bank’s profitability. Replacing deposit funding with central bank funding could exacerbate frictions. Greater recourse to central bank credit could increase collateral scarcity. This could affect banks in asymmetric ways, with a potentially greater impact on those that rely more on deposit funding. And the impact on yields could vary across the different segments of the yield curve. Research shows that the magnitude of these effects depends on the take-up of the CBDC, which in turn hinges on design features such as payment convenience and remuneration.

CBDCs should be carefully designed

According to research by various international financial organisations including IMF and BIS most central banks are committed to minimizing the impact of CBDCs on the stability of the financial system. It is for this reason that they are moving slowly on CBDC adoption and experimenting with CBDC design to mitigate them.

It is a growing conviction amongst central banks that the introduction of CBDC should follow a set of core principles in both design and implementation, that should minimise the impact of CBDCs on financial disintermediation, system-wide bank runs and credit provision as well as limit competition between CBDCs and bank deposits.

One of these main principles is that CBCDs must not harm. In particular, they should not become a source of financial disruption that could impair the transmission of monetary policy in the euro area. For that central banks worldwide have an intense dialogue with various parties in the payments market, technology providers and the general public.


Collaborative partnership public-private sector

Introducing a CBDC is a complex process requiring appropriate resources and capacity. Banks are recognizing that the adoption of CBDCs could enhance the efficiency, resilience, and effectiveness of money flows and capital markets, but for a CBDC to be a valuable instrument, it must be part of a collaborative partnership between public and private sectors, to ensure successful adoption, or the building of additional features.

Any CBDC ecosystem should involve the public and private sectors in a balance, in order to deliver the desired policy outcome and enable innovation that meets users’ evolving payment needs. Central banks that contributed to the BIS report envision CBDC ecosystems based on a broad public-private collaboration, or a “tiered system” where the core roles are assigned to the central bank and other more public-facing roles to private financial institutions like banks.


Two-tier structure

The risks that CBDCs may pose to bank intermediation depend crucially on the choices that central banks make. Most central banks are opting to follow the current two-tier structure which places central banks at the foundation of the payment system, while assigning end-user-facing activities to financial institutions and other payment service providers (PSPs). This cooperation has proven itself over many decades.


It is key in this relationship that central banks issue the value of CBDCs and grant its authenticity, while commercial banks as well as financial services providers issue the wallets that handle CBDC and are responsible for the application. This would allow central banks to benefit from the experience of intermediaries – especially banks – in areas such as onboarding of consumers and anti-money laundering checks. And it may preserve the role of financial intermediaries in providing front-end services.

Commercial banks are the best players to take on a customer-facing role in the CBDC ecosystem and be responsible for the distribution – just as they are now with physical money. Central banks can therefor entrust financial intermediaries with distributing CBDCs, while central banks take care of macroeconomic aspects, such as money supply management and currency stability. The commercial banks are thereby responsible for services such as customer advice, lending or corporate financing. But more than that, since CBDC offers the opportunity to develop new financial products and services.


CBDC design features and tools

Careful design and policy considerations will be crucial in allowing to maximise the benefits of CBDCs and manage any unintended consequences, thereby underpinning trust in CBCDs. So it is important to undertake in-depth research regarding the tools and design features, which are found to be strong drivers of the potential demand for CBDCs, that could be introduced to limit such risks.

To be successful, CBDCs will need to add value for users, support competition rather than crowd out private innovation, and avoid risks to financial intermediation. Central banks thereby need to strike a balance so that the digital euro is not “too successful” – by limiting its use as a form of investment – but is “successful enough” – by avoiding such restrictions becoming inconvenient and by ensuring that the CBDC adds value for those using it.

CBDC Design options

The BIS report lays out a number of design options that could help control CBDC take-up and the crowding out of banks including setting holding and transactional limits on CBDCs, and considering different ways of remuneration.

There are various options available including the issue whether to pay out interest. This as a way to limit competition between their and existing bank deposits. The curbs are designed to avoid heightening the risk of bank runs and crowding out depository banks.

Another option is implementing quantitative limits. These latter are also meant to cap competition with depository banks, and can entail limits on CBDC balances that people can hold.

Not interest bearing CBDC

Research from the BIS and the IMF on the various CBDC projects world wide shows that most are not interest-bearing like cash, which makes CBDCs useful, but not as attractive for savings as traditional bank deposits, to ensure they do not compete.

If central banks issue a remunerated interest-earning CBDC it would prove to be a more attractive substitute for cash, low interest-bearing deposits or other cash-substitutes, risking rapid emptying of deposits.

Tiered remuneration
Another option would be to make remuneration on CBDC holdings less attractive above a certain threshold. Up to that threshold, CBDC holdings would never be subject to negative interest rates, ensuring that it is a means of payment that is as attractive as cash. Above that threshold, however, remuneration would be set below the main policy rate in order to reduce the attractiveness of the CBDC as a store of value relative to bank deposits or other short-term financial assets.

Soft limit
One way round this is to set a soft limit with penalties if the upper limit is exceeded: for example, a negative interest rate on all amounts above the upper limit or a penalty amount for every day the limit is exceeded. This would work for temporary balances (for example between the payment of wages and the day the rent is paid) but may not be effective in safeguarding against a bank-run.

Setting a ceiling on individual CBDC holdings
There are also a number of active CBDC projects that have put ceilings on the amount of holdings that a customer can hold in CBDC, to prevent sudden large outflows of bank deposits into CBDC, thereby mitigating undesired effects on monetary policy and/or financial stability. But such a cap would risk reducing the scale and scope of CBDC use and, its usefulness as a means of payment. To address this issue, solutions linking CBDC accounts to private money accounts could be implemented, allowing large(r) banking to be made. This would require funds in excess of users’ limits to be redirected to or from their commercial bank accounts.

Another alternative could be expiring money. Any CBDC tokens loaded onto a wallet would need to be spent within a time-period otherwise they would expire. While this could ensure that any money loaded on a CBDC wallet is for day to day spending it however could penalise people who are unable to use their wallet.

Ease liquidity conditions
Central Banks could also ease liquidity conditions, for instance by providing abundant and favourable central bank funding if required to limit strains from possible changes in the composition of bank funding.

ECB and IMF research: findings

ECB and IMF analysis suggests that the impact on the aggregate banking sector in normal times could be manageable overall, subject to safeguards. Adequately designing and calibrating CBDC safeguards could help to counteract the adverse effects of CBDCs on bank run and mitigate potential risks to bank intermediation.

All CBDCs that are currently circulating, either as official currency or through a pilot, are designed with restrictions that limit the competitiveness of CBDC versus bank deposits. By limiting the amount of CBDCs that can be held and not offering interest on them, they don’t compete with bank deposits.

A notable finding is that a CBDC could itself be used as a tool to counter the risks of bank runs. This is because it could provide real-time information on deposit flows, complementing the information on liquidity available to supervisors every day. This would enable the central bank to respond more swiftly if needed, which in turn would help to stabilise expectations by increasing depositor confidence.


How should financial institutions react

It is especially important for financial institutions to understand where central banks are with digital currencies, because ultimately CBDCs will start flowing through the payment system and start to hit bank balance sheets.

Careful consultation with central banks is critical in clarifying the business case for CBDCs, from an inclusivity, financial performance and interoperability perspective.

However, it would be wise for commercial banks to track these design features and model potential impacts on their business so that any mitigating actions, such as increasing interest rates on savings accounts or providing CBDC wallet overflow accounts, can be planned well before they are needed.


Future thinking: digital opportunities for banks

Looking at the various CBDC projects there is no need to fear competition from central banks.

The proven division of roles and tasks between central banks, customer banks and financial service providers, in which consumers are supplied and serviced in a decentralised manner, may remain intact.

In this future scenario, commercial banks may not only retain their previous role and function, they can even expand their position as service providers.

With the basic currency infrastructure delivered by central banks, this provides a driver for digital innovation. The introduction of a general CBDC may pave the way for new digital business models and additional revenue and growth opportunities.

Commercial banks can also use the introduction of a digital central bank currency to bind customers even more closely to themselves with special apps for the use and custody of CBDC and to link them with new CBDC-based customer services.


Carlo de Meijer

Economist and researcher






Crypto in the frontline: victim or survivor

11-04-2022 | Carlo de Meijer | treasuryXL | LinkedIn |

The war of Russia versus its neighbour Ukraine has triggered many countries from the West to impose severe sanctions, mainly aimed at hurting the oligarchs around president Putin. They are trying various ways to evade these sanctions as much as possible. Western countries led by the US now also have put crypto on the sanction list, as there are increased signals that oligarchs moved to cryptocurrencies to hide their assets. This however raises a number of questions such as: in what size are cryptos being used, what is the effectiveness of crypto sanctions and what are the limitations of using crypto to circumvent these. But above all will crypto become a victim or a survivor in the end.

Western allies: sanctions

The U.S. and its allies including the EU, UK and Canada have imposed heavy sanctions on Russia’s financial infrastructure, and against the wealthy elites close to president Putin, known as oligarchs, their banks and financial intermediaries, thereby trying to block the pass-through of their assets.

Western governments have frozen Russia’s reserves in the West and ousted Russia from the SWIFT banking system, while banks are resisting deposits and transfer requests and ramped up compliance checks for fear of contravening sanctions. A number of countries have also seized some oligarchs’ assets by law enforcement as part of the sanctions including yachts, private jets, real estate and/or financial assets. Next to that foreigners are not allowed to sell their domestic securities in Russia, while on the other hand local exporters are being urged to liquidate a vast portion of their foreign currency holdings.

Impact of sanctions on the Russian economy 

These sanctions are mainly aimed to hit Putin and the group of billionaire oligarchs who support him, it is hurting the entire Russian economy. The Institute of International Finance estimates that the Russian economy will shrink by 15% this year, instead of the 3% growth that was expected pre-invasion.

Russia lost access to vital imports for its military gear and more than $600 billion in assets held by its central bank. The country also faces ongoing rounds of targeted sanctions against companies and the wealthy elite, which have already lost more than $38 bn up till now.

The measures have crippled the banking sector and financial system, whereas the Russian stock market has yet to reopen since the sanctions began. Rating agencies are prompted to downgrade the country’s debt and warned Russia would likely default if it used Rubbles to repay dollar-denominated debt .

As a reaction, the Rubble initially collapsed, but returned to its pre-war level thanks to income from Western gas deliveries. There are however still concerns that the inflation rate would further rise. In order to stop this, the central bank of Russia has increased its benchmark rate to 20%.

Crypto is taken a crucial role in the Russian-Ukraine war

As cryptocurrency is now a more mainstream part of the global financial system, it has been inevitable that it became a part of this international conflict as a key tool in this war. Some even called Russia’s invasion of Ukraine “the world’s firts crypto war.”

Cryptocurrencies have thereby taken opposite roles: it has become a tool of Ukrainian resistance, being sent as donations to help the government in Ukraine; it also provided a lifeline for some fleeing Ukrainians whose banks are inaccessible; at the same time, it is being used by Russian oligarchs to evade sanctions, but also by normal Russian citizens as a flight to safety.

Ukraine: donations to finance the war

It is not that strange Ukraine is using crypto during the conflict. Not only is Ukraine one of the most cyber-literate countries in the world, it has also been one of the most open to exploring the use of cryptocurrency in the past few years.

The Ukrainian government itself is urgently asking for donations in crypto to finance the country’s defence against Russia. More than$100 million worth of crypto has been sent to support Ukrainians over the past several weeks. The Ukrainian government has already spent at least $20 million of the crypto it has received. Because the country’s officials can’t make all the purchases they want using crypto, they sometimes convert some of these donations back into fiat currency to buy supplies.

The government has also launched a website to centralize its crypto-based fundraising efforts, but it is also open to fiat currency donations. This new website explains that Ukraine is indeed accepting several cryptocurrencies, including Bitcoin and the meme-inspired Dogecoin, to support its fight against Russia. Ukraine also plans to issue NFTs (non-fungible digital tokens) to support the war against Russia.

Russia: evade sanctions and flight to safety

The use of Bitcoin in Russia has accelerated since the beginning of their offensive against Ukraine. While ordinary citizens see it as a way to maintain their buying power, the elites may be using it to circumvent sanctions thereby hiding their assets in cryptocurrency. Crypto’s thereby offers a flight route that would otherwise not exist.

Evade sanctions by oligarchs

Russia is the third-largest Bitcoin mining nation in the world. So, the fact that cryptocurrencies could be used by oligarchs that are hit by the Western sanctions as a vehicle to evade these has been a concern

In some ways, using cryptocurrencies would make sense for Russia, existing in a closed system being not regulated by central banks. Not only do they facilitate peer-to-peer and borderless transactions, but they’re also non-confiscatable unless another party knows the holders’ private key.

Flight to safety for normal Russians 

The increased use of crypto is however dominated by normal Russians that are looking for a safe haven for their money. The drastic fall of the Russian Rubble showed why ordinary Russians had good reason to buy cryptocurrency, giving a way out of the crisis.

With both the public and private banking sector in Russia increasingly frozen out of international commerce and access to foreign currencies blocked, Russian citizens have been scurrying to convert roubles into cryptocurrency to help preserve wealth.


Elliptic: Real crypto activity in Russia 

Blockchain security firm Elliptic is actively investigating crypto asset wallets believed to be linked to Russian officials and oligarchs subject to sanctions, while collaborating with government agencies and other organisations. Elliptic has thereby tracked down a crypto wallet, which has ‘significant crypto-asset holdings’, amounting to millions of dollars worth of crypto. The findings come amid a heated debate on whether cryptocurrencies can be used to evade additional sanctions imposed on Russian oligarchs and officials since Russia’s invasion of Ukraine.

The firm has passed on to authorities information on this digital wallet. They have identified several hundred thousand crypto addresses linked to Russia-based sanctioned actors. Elliptic claims it has “directly linked” more than 15 million cryptocurrency addresses to criminal activity with a nexus in Russia. This goes beyond those included in sanctions lists to include other addresses that Elliptic has been able to associate with these actors.

The firm has also identified more than 400 virtual asset service providers (VASPs), mostly exchanges, where cryptocurrencies can be purchased with roubles. Most of these services are unregulated, and can be used anonymously. According to Elliptic, a week before the conflict between Russia and Ukraine broke out, Rubble-related activity on some of these services (like Tornado Cash ) was seen surging. Tornado Cash has declined to restrict services or comply with the sanctions and continues to anonymise transactions in Ethereum.


Western allies: halt crypto escape routes 

Politicians and regulators across the West expressed their worries about these crypto escape routes used by Russian oligarchs. In order for the sanctions levied by the Western allies to have the maximum impact they are advocating for more action to close off avenues oligarchs might use to evade.  Authorities worldwide are now closely monitoring any efforts to circumvent or violate Russia-related sanctions via the use of digital currencies.

All big crypto market places are urgently asked to block Russian users and cut off of the trade in cryptocurrencies, to ensure that specific sanctioned individuals and organisations from Russia are not using their platforms.

Worldwide banks and intermediaries should report suspicious transactions, and be watchful of Russian oligarchs and governments institutions to evade sanctions through crypto.

US crypto regulation

The US has sped up the launch of US legislation for cryptocurrencies, ‘to close potential avenues for evasion of sanctions against Russia’. Crypto exchanges, wallet hosts and other crypto service providers will be prohibited from engaging in crypto transactions that involve blocked Russians.

This legislation aims to ensure that president Putin and his oligarchs do not use digital assets to undermine the international community’s economic sanctions against Russia for its invasion of Ukraine. It would give the US government the authority to ban US companies from processing cryptocurrency transactions connected to sanctioned Russian accounts. Treasury will be given the authorization to treat these crypto platforms much like the banks are treated: i.e. got to know your customer and not dealing with people who are in violation of sanctions and to block if they are sanctioned.

This Digital Asset Sanctions Compliance Enhancement Act (DASCE) will identify foreign digital asset actors that are facilitating the evasion of sanctions against Russia and authorizing to apply secondary sanctions to foreign cryptocurrency exchanges doing business with sanctioned Russian individuals, companies or government agencies. It would also provide the Treasury Secretary with the authority to prohibit digital asset trading platforms from transacting with cryptocurrency addresses that are known to be in Russia.


US CleptoCapture taskforce

The US Department of Justice announced the creation of a new task force dubbed CleptoCapture, to enforce sanctions on Russian oligarchs. The actions of the new task force will be focused on freezing and seizing their assets.

The task force will also investigate banks, financial firms and cryptocurrency exchanges that have helped oligarchs hide or launder their money, and prosecute those that fail to prevent sanctioned individuals using their services. Their goal is to bring any appropriate charge against any sanctioned Russian oligarch or entity, and those who would help them to evade economic sanctions.

In addition to pursuing charges such as money laundering, sanctions evasion and wire fraud, the task force will trace assets that are tied to federal crimes impacting the U.S. financial system and seek to seize them through civil and criminal forfeitures.

The CleptoCapture task force would consist of professionals in expert control enforcement, asset forfeiture, tax enforcement, overseas evidence gathering, and anti-money laundering. The task force will work with prosecutors, agents and analysts, among others, and will pursue “appropriate charges” and will try to disrupt Russian assets and their facilitators.

In the meantime, the Kleptocapture task force will be exclusively authorized to leverage advanced investigative techniques such as cryptocurrency tracing, foreign intelligence sources, data analytics, and relevant data from financial regulatory agencies and private sector partners.


EU crypto legislation


The EU clarified that its sanctions against Russia and Belarus would also include cryptocurrency transactions. The EU is looking at putting more sanctions on wealthy Russians and recently also Belarus are banned from trading digital assets in the EU. They thereby also include the families of those Russians along with members of the Russian Parliament.

The EU crypto legislation to regulate and control cryptocurrency transactions incl. the movement of Russian capital, already provides for ways for the EU authorities to intervene in cryptocurrency accounts, known as wallets. They can also selectively intervene before the currency conversion takes place. There are companies, including the exchanges, that can mark wallets that have been identified as being related to the Russian government or its collaborators.


G7 REPO taskforce

The G7 is also looking to coordinate on sanctions enforcement so that Russian efforts to evade can be dealt with effectively. They are committing to impose measures to make sure that the economic repercussions are felt by Russia through restrictive measures, to ‘cracking down on evasion and to closing loopholes’.

Representatives from the US, Australia, Canada, Germany, France, Italy, Japan, the United Kingdom, and the European Commission agreed to launch the REPO (short for Russian Elites, Proxies, and Oligarchs) multilateral task force. Agencies in these countries will work together to collect and share information to take concrete actions, including sanctions, asset freezing, civil and criminal asset seizure, and criminal prosecution. The group is now looking into 50 individuals, with 28 names publicly announced.

US CleptoCapture will closely work alongside the REPO task force, to enforce the economic restrictions imposed on Russia. Both groups will use data analytics, cryptocurrency tracing, intelligence, and data from financial regulators to track sanctions evasion, money laundering and other criminal acts. Countries that serve as havens to oligarch’s property will have to cooperate in REPO’s effort, or else sanctions will be less impactful.

Crypto platforms reaction

From the start of the Ukraine war cryptocurrency exchanges around the globe were pressurized to ban transactions with Russia. Aim was to prevent Russian oligarchs from using crypto. The Ukraine vice prime minister Fedorov even asked not only freeze the (crypto) addresses of Russian and Belarus oligarchs and politicians but to even ban normal Russians.

Somewhat expected, initially most of the largest exchanges were not willing to comply with these sanctions and did not really react on calls to block Russians. Binance, Coinbase and Kraken, and other popular digital asset trading platforms said blocking Russian-based entities would be against crypto’s nature and contrary to the reason of existence of crypto.

But mainstream crypto players had to change their stance shortly after. This came after the US and other watchdogs introduced bills to prohibit financial entities from operating with Russian banks and customers. In the meantime most mainstream crypto players have complied with the regulator’s requests saying they will abide the imposed sanctions, and cracked down on transactions originating out of Russia.

They took necessary steps by freezing crypto moneys of specific persons from the direct circle around Putin. And they are already working as per the instruction of conventional financial institutions to collect data on their consumers and recognize suspicious activities. Coinbase disclosed that it had blocked 25,000 accounts supposedly linked to sanctioned Russians, who were suspects of carrying out illegal activity.

They however declined an outright ban on all Russian accounts as was asked by the Ukraine vice-prime minister. These crypto exchanges argue that “banning the entire nation could run counter to Bitcoin’s spirit of offering payments access free from government oversight. It would also be unethical if all Russians would not get entrance to their cryptocurrencies, or could not trade anymore”.

However, there are still more than 400 crypto services in the world that are refusing to shut down access by Russians to their exchange platforms and let anonymous users trade digital assets using Russia’s native currency, the Rubble.


Limited power of crypto to circumvent sanctions

Crypto can and will be used for sanctions evasion. What’s in question is on what kind of scale. Crypto however is not a perfect solution to bypass authorities. It is not proving out realistic that oligarchs can completely circumvent sanctions by moving all their wealth into crypto. Statistics also suggest there is little sign of Russian-based oligarchs moving large sums out of Rubbles and into crypto assets. It also suggest anyone wishing to trade large volumes of Bitcoin against the Rubble will have difficulties.

Crypto “is not the silver bullet.” For that crypto has a number of important limitations.

Crypto is pseudonymous
It turns out to be harder to hide via using crypto than Russian oligarchs might think. Blockchain assets don’t have the best privacy, which, makes large-scale transfers and buys difficult to conduct without being identified. Almost every public blockchain – including Bitcoin’s – is pseudonymous, yet totally comprehensive. All of the largest crypto exchanges are required to collect personally identifiable information from their customers to comply with KYC and AML rules. In order to register on a regulated crypto exchange need to upload a passport and corroborating identification.

No complete anonymity
There is no such thing as complete anonymity on a blockchain. Ultimately, crypto is very easy to track, whether it’s decentralized or centralized. To monitor accounts and transactions, all you need is a wallet address. It is possible to protect a crypto wallet from scrutiny by taking it offline. That typically means using a hardware wallet — also referred to as a cold wallet — that is not constantly connected to a blockchain network. Oligarchs can hide their crypto, but moving it is another matter, especially, especially if they’re moving huge amounts.  

Crypto is traceable

No one would be able to convert crypto assets to official currency without properly identifying themselves. If one want to buy cryptocurrencies they must also show/prove the source of those assets.

Once oligarchs  try to move funds, the crypto account or wallet, which is typically identified as a series of numbers and letters, is visible to a network. With that wallet one can see how much is in the crypto accounts. Pretty much all transactions can be tracked. Funds can be traced through the blockchain ledger to screen them for links to all known and inferred cryptocurrency addresses controlled by sanctioned actors.

While no ledger address explicitly names who controls it, its entire historic activity is available for all to see. Every transaction that an identified account has with another account is noted and can be traced. The nature of these activities and the volume of transactions taking place with the address is sometimes enough to identify its owner.

Those that have not complied with these rules in the past have faced major legal repercussions. They are also disallowed from facilitating transactions with blacklisted individuals, providing a major roadblock to those groups from cashing out on their crypto.

Low liquidity
The capacity to put large amounts of Rubbles through crypto exchanges operating in Russia is also heavily constrained by the relatively low liquidity in Russian crypto trade. A measure of the liquidity of the Russian Bitcoin exchanges is the value of orders submitted by buyers and sellers at any given time. This is about US$200,000, compared with $US22 million for US-based crypto exchanges – a volume 110 times larger.


Short cuts for oligarchs

Oligarchs however have other methods to secure their belongings and shield their money and assets in creative ways.

There are signals that crypto companies in the United Arab Emirates, Dubai and Qatar were inundated by requests to liquidate billions of dollars of digital currency from Russians who are seeking to protect their wealth. They are thereby cashing out their crypto assets to invest in real estate in these countries.

But it is more likely that most of their capital was already protected earlier than the sanctions have been launched and that their wealth is mostly invested through shell companies in assets in tax havens like Bermuda, British Virgin Island, Isle of Man or Monaco. They often have real estate ownership in relatives’ names or have assets registered in these tax havens.

Most of these oligarchs may also have their fiscal residence in another country, or have groups of companies that operate in different jurisdictions, making it possible to at least partially avoid the new sanctions.


Crypto: victim of war or .….  may it survive?

For now, we don’t know how crypto will shape the international conflict, or whether it will ultimately help or hurt. What we do know is that Bitcoin and other cryptocurrencies are now a real factor in global economies and in conflicts.

But what does that all mean for crypto itself? Crypto nowadays faces another defining moment in its still short history. Whether it’s good or bad in wartime, crypto is doing what its proponents say it does — giving people a way to work outside of traditional financial institutions — and there’s no sign that will change anytime soon

The Ukraine war however will be an interesting test case for the crypto sector at large. There is the risk that the vision for the transformative power of crypto is at risk of being overtaken by greed.

May it become a victim of the war and will that mean the end of crypto …. or may it survive in the longer term. The ultimate goal of crypto is not to fight a war but to be used in a free world and do the things that accomplish meaningful effects in the real world. In terms of:

–       bringing the many unbanked people around the world into financial systems

–       allowing capital to flow unencumbered across borders

–       and providing the infrastructure for entrepreneurs to build all sorts of new products.


Carlo de Meijer

Economist and researcher






Blockchain, crypto mining and the environment: towards sustainable solutions

21-02-2022 | Carlo de Meijer | treasuryXL | LinkedIn |

Blockchain has always been presented as providing speed, efficiency and low costs. But there is also a flipside. Since the crypto industry is booming, including DeFi and NFT, and blockchain technology is going more mainstream the discussion of their negative impact on the environment is heightening.

Blockchain consumes huge amounts of energy and that is growing by the day. This while the combat of the climate crisis has the highest priority all over the world. Especially the electricity usage of Bitcoin and other similar blockchain networks have pulled into a larger conversation around sustainability. To understand this we should go back to the basics of how blockchain works. But above all, are there ways to reduce that and could blockchain also contribute to a positive climate change?

Cleaning-up crypto mining

A recent hearing by the US Committee on Energy and Commercial Staff on “Cleaning up the Cryptocurrency: the Energy Impacts of Blockchain “ shows a very dark picture. Many blockchains, amongst which the two largest platforms Bitcoin and Ethereum, still use a so-called Proof-of-Work (PoW) mechanism to support their resp. crypto currencies that require enormous amounts of energy to operate. According to a recent analysis, the energy required for a Bitcoin transaction could power a household for more than 70 days.

How does mining work?

On the Bitcoin blockchain platform, the infrastructure is distributed and delegated to so-called ‘miners’ around the network. Each time a transaction is made, consensus must be established all across the distributed database (or at least 51% for Bitcoin, for security reasons). This is done through Proof-of-Work (PoW).

Miners are thereby responsible for processing transactions and adding them to the blockchain. These are super-users who compete for the processing work by attempting to solve highly complex algorithmic problems. Mining for PoW cryptocurrencies requires specialised computers that make trillions of guesses per second. In return for this processing, the winner is awarded new cryptocurrencies i.e.  Bitcoin or Ether. This all comes down to the most powerful computer processor exerting the greatest amount of effort. After that other computers on the network quickly verify and a new block containing additional new info is then added to the blockchain. After that the mining process starts over again. A highly energy-intensive process.

As a crypto-miner increases their likelihood of identifying the correct answer by increasing the number of guesses, this process further increases computational power and is creating more energy consumption. Today, PoW miners need a great number of so-called application-specific integrated circuits (ASICS) to have any chance of reliable earnings cryptocurrency rewards on the major cryptocurrency networks. The profitability of mining as well as the increase of the value of PoW currencies requires ever-increasing amounts of energy to power and cool machines.

Environmental impact

While there are many hundreds of different cryptocurrencies, Bitcoin and Ethereum are not only the largest ones but are also the most energy-intensive. In the past few years, their environmental impact has increased greatly in terms of both energy consumption and carbon or CO2 emission.

Energy consumption

The scale of mining has increased substantially triggered by the increased value of mining. This has resulted in a rapidly increasing energy consumption. According to the Bitcoin/Ethereum Energy Consumption Index that is looking at the environmental impact of a blockchain transaction, Bitcoin is the leading coin with the most energy-intensive mining process.

A single Bitcoin transaction uses as much energy as one US household would over 73.82 days (2.5 months). The annual energy usage of the Bitcoin network last year grew from 78 Tera (trillion) watt-hours (TWH) to almost 198 TWH.

Ethereum, while less energy demanding, still uses This is as much electricity for a single transaction as a US household over 8.32 days. The annual energy usage of the Ethereum network grew from almost 15 TWH to more than 92 TWH.

CO2 emission

Bitcoin is also the most polluting cryptocurrency. In total figures and based on 2021 estimations Bitcoin mining edited more than 56.8 million tons of CO2 (or more than 1.000 pounds of CO2 per transaction) to the atmosphere. This would require more than 284 million trees in order to offset the transactions and become carbon neutral. Its total annual energy footprint is similar to Thailand while Bitcoin emits as much CO2 as Kuwait.

ETH mining emitted more than 22 million tons ( or more than 90 pounds per transaction) of CO2. Over the year, that is still as much power as the Netherlands. And as it is projected to emit almost 22 million tons of CO2 by the end of 2021, it would take planting nearly 110 million trees to offset Ehtereum’s contribution to carbon emission.

But taken together, both these blockchains use major economic amounts of energy. These are just ahead of Saudi Arabia and Italy and just behind the United Kingdom. It would be the 12th most consumptive economy on the planet.

To put these figures in perspective global 2021 CO2 emission of Bitcoin and Ethereum mining is equivalent to the emission from more than 15.5 million gasoline-powered cars on the road every year.


Bitcoin mining ban

Triggered by the chance of having too little energy left for both consumers and the broader industry, a growing number of countries is now banning or is planning to ban crypto mining.

In China, where 70% of miners worldwide were based, authorities last year has forbidden mining. Whereas since a majority of crypto mining has been moved into lower energy price countries, the present high energy prices caused by the Russian – Ukrainian crisis forced countries like Kosovo and Kazakhstan, but also Iran and India to ban crypto mining. Early this year Russia announced such a ban to prevent winter blockheads. Even in the EU an ESMA official suggested also banning crypto mining. And it is expected that other countries will follow.


Ethereum: shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS)

There however are also positive developments within the blockchain world towards climate change. Blockchain technology is still young but is advancing and slowly, but definitely, crypto mining is increasingly driven by more renewable energy. And in the meantime, there is  a number of other ground-breaking energy-saving solutions.

Proof-of-State networks

A promising one is the change-over from Proof-of-Work (PoW) to Proof-of-Stake (PoS) networks, that do not require miners to compete for energy power for zero-sum awards. This could greatly limit energy consumption and carbon emission, thereby mitigating the negative impact of blockchain on the environment.

Proof-of-stake blockchains are newer generation networks. Instead of miners, PoS use a network of ‘validators’ who will stake their own cryptocurrency in exchange for the ability to validate a transaction in exchange for a reward. Effectively, the resource of energy is replaced by capital.

Ethereum 2

Ethereum is now moving forward with their transition from Ethereum 1 (Proof-of-Work), to Ethereum 2 (Proof-of-Stake). With this shift Ethereum hopes that it will make its blockchain both safer to use while greatly minimising energy consumption. Other major PoS networks now include names like Polkadot, Cardano, and Tezos among others.

According to UCL (University College London) research, while using far less energy than proof-of-work (PoW) network Bitcoin (relative to the number of transactions the network can perform at any one time), all the proof-of-stake networks use far less energy – two to three orders of magnitude less than Bitcoin. The same research says PoS-based systems can contribute to the challenges posed by climate change and could even undercut the energy needs of traditional central payment systems, raising hopes that blockchain technology can contribute positively to combatting climate change.

Blockchain and environmental projects: green smart contracts

But there is another – and even more positive – side of blockchain-related to the environment and climate change. Blockchain technology could also be linked to various environmental projects by using so-called green smart contracts.

Green smart contracts

Green smart contracts running on blockchain may unlock new ways to fight climate change and to cope with its impact. At its core, the fight against climate change is going to require a massive shift in global consumption habits. Green smart contracts are an interesting tool for incentivizing participation in global green initiatives. Especially in the areas that ask for large amounts of data collection and verification and rewarding sustainable environmental behaviours, such as regenerative agriculture, carbon offsets, crop insurance etc. Green smart contracts could deliver great promises for environmental issues as these could scale up environmentally conscious blockchain-based solutions. Blockchain could thereby play a great role in stopping or reversing climate change if adopted on a global scale.

Ethereum: DApps and Oracles

The Ethereum platform facilitates the creation of decentralised apps that run on the blockchain. Some of these applications include the management of supply chains, recycling programs, energy systems, environmental treaties, environmental charities, and carbon taxes. These all may help make it more possible to address various environmental issues including air pollution, ocean sustainability, and bio diversity conservation.

This approach relies on networks of so-called oracles, entities that can share data about the world. The development of green smart contracts got a boost as oracles have become production-ready. Today these oracles are broadcasting agricultural data sets onto blockchains, enabling smart contract developers to build applications around crop yields, soil quality, weather reports, carbon offsets etc.

As more and more data sets are fed into blockchains, developers are beginning to produce a wide range of environmentally-conscious smart contracts applications, helping fight against climate change, reduce carbon footprints, sustainable conscious consumption, improve consumption habits etc.


New generation consumers and crypto: towards a more climate-conscious approach

New developments like the firm rise in cryptocurrencies, the spectacular growth of DeFi and the growing market for NFTs have attracted many from the New Generations, especially Millennials and Gen Z. This group is increasingly looking for and experiment with these more attractive digital and crypto-assets. But while many of them also worry about climate change and the consequences, most are not aware of the environmental impact of the crypto world.  More delving into the world of blockchain and crypto would not be a bad idea as that could lead to a more climate-conscious approach.


Carlo de Meijer

Economist and researcher






Main blockchain and crypto trends in 2022: unexpected expectations

18-01-2022 | Carlo de Meijer | treasuryXL | LinkedIn |

For me it is becoming a sort of tradition. Writing a blog about the upcoming trends in the Blockchain and crypto arena for the next year and beyond.


A year ago I concluded with the sentence: “always expect the unexpected”.


And unexpected was the upcoming of the DeFi market, as well that of NFT. But also a growing number of traditional banks entering the crypto scene, increasingly believing crypto is here to stay. What may bring this year? This will be described in the following 15 trends.


1. New third and fourth generation blockchain solutions

A first trend we will observe is de-acceleration in the development of new third and fourth-generation solutions aimed at removing the speed and scalability challenges. Third-generation blockchain platforms like Aion, Cardano, and EOS, introduced technology such as sharding to tackle scaling issues in order to cut down on cost and speed of transactions. These platforms also matured the distributed application capabilities of blockchain.

And there are fourth-generation blockchains aimed to resolve prior challenges and enable trust in easy-to-consume ways, accelerating the formation, operation, and reconfiguration of business networks. In addition to greater ease of onboarding, these lower cost, and highly scalable platforms are built to make pragmatic trade-offs such as recognizing that not all transactions are created equal using variable consensus mechanisms. Interesting fourth-generation blockchain platforms like Insolar and Aergo, are enabling business networks to be easier to use through business-oriented interfaces that hide the complexity of the underlying blockchain technology.

2. Towards more blockchain standardisation and interoperability

Another trend we will see in 2022 is an acceleration in the creation of standards and interoperability possibilities. These should enable multiple blockchains to communicate. The number of blockchain and distributed ledger networks are firmly growing. Most blockchain networks operate on isolated ecosystems as they try to resolve a unique set of needs. Interconnecting these new chains is becoming a necessity as more people continue to take note of the emerging technology and its capabilities.

Standards are an important key to success for any developing technology, and blockchain is no exception. The right standards, set at the right time in a technology’s development, can ensure interoperability, generate trust in and help ensure ease of use of the technology. In this way, they support its development and create a pathway to mass adoption.

The rapid development of blockchain is set to give rise to many different kinds of chains. One such technology that is becoming increasingly evident is cross-chain technology, an emerging technology that seeks to allow the transmission of value and information between different blockchain networks. This technology is increasingly becoming a hot topic of discussion seen as the ultimate solution for enhancing interoperability between blockchains.

3. Blockchain-as-a-service (BaaS) solutions

BaaS has emerged as a boosting adoption across business companies due to many developments in this atmosphere of blockchain. The demand for Blockchain-as-a-service (BaaS), a third-party creation and management of cloud-based networks for companies in the business of creating blockchain applications, among companies is firmly growing and that will continue in 2022. Main players in this space include Microsoft, Amazon and R3.

BaaS facilitates its clients to leverage the solutions to build hosts, based on the cloud and enable them to operate related functions on the blockchain and their applications, without having to overcome technical difficulties or operational overhead and without the need to invest in more infrastructure developments as well as lack of skills. BaaS operators help the clients to focus only on their core job and blockchain functions

4. Great demand for blockchain and crypto skills

The year 2022 will see a greater demand for blockchain and crypto skills. The potential for growth in the blockchain industry and the increasing dominance of blockchain across various sectors serve as a prominent reason for the increased demand for these skills. The promises of blockchain technology for enterprises in terms of cost efficiency and performance improvement and the booming development of the crypto markets translate directly into the rise in demand for blockchain professionals.

A report by LinkedIn has placed blockchain as one of the most in-demand skills for 2021 and beyond. Enterprises therefore need blockchain professionals with the skills to help them leverage most of blockchain technology for driving their business objectives. 

5. Blockchain-IOT-G5 integration 

This year we experienced a growing trend of blockchain being integrated with other technologies such as Big Data and Artificial Intelligence amongst others. There is also growing attention of corporates to use blockchain for IoT or Internet of Things applications.

The IoT market is increasing drastically and this is expected to continue in 2022 in an accelerated way triggered by the recent uptake of the 5G network. The expected potential of the 5G IoT market today is however limited by an extremely fragmented IoT ecosystem.

Blockchain technology appears as potentially the most suitable and efficient way to the various 5G IoT challenges. It can potentially help to solve many problems around security as well as scalability due to the automated encrypted and immutable nature of blockchain. It is expected to hear about more pilot projects and initial use cases in this field during 2022.

6. Blockchain and the Metaverse

Blockchain applications in Metaverse are another top blockchain trend in 2002. Metaverse is the emerging universe of the formerly known Facebook where there will be ‘immersive’ experiences with new technologies like blockchain, augmented reality, virtual reality etc. Without blockchain technology the Metaverse would be incomplete because everything would be stored in the centralised network.

Blockchain will enable the upcoming of a new wave of social networks that could be bigger and even better than the existing ones such as the former Facebook, Instagram, Twitter, and YouTube that are now synonymous with the word social media.

Blockchain in 2022 is expected to run multiple platforms on Metaverse with NFTs and cryptocurrencies. Digital assets like NFTs will thereby define ownership on the Metaverse and cryptocurrencies will power the new digital economy. Moreover, also Twitter, with its vast user base of 192 million daily active users, is now planning to integrate cryptocurrencies into the platform with things like Bitcoin tipping for creators.

7. Blockchain and governments

Governments are also starting to enter the blockchain market. Blockchain provides new ways for governments to organize processes and handle information in a more efficient way. Over the past few years, governments in several countries have been experimenting with the application of this novel technology to a wide variety of functions and services, including land registration, educational credentialing, health care, procurement, food supply chains, and identity management.

What is holding back various governments up till now is the factor of trust. The World Bank therefore proposes a “Three Layer” design and implementation framework, to prevent potential glitches between the technology and its intended application. Their framework comprises the social layer, data layer, and technical layer. The social layer constitutes human actors and social aspects such as incentives and motivation among others.

The data layer is the ledger itself and what it provides in terms of usability, security, authenticity, and reliability. The technical layer comprises DLT protocols, data storage, and consensus mechanisms among others.

8. More projects on CBDCs

With 80% of the world’s central banks now exploring Central Bank Digital Currency (CBDC) projects during 2021, according to the Bank of International Settlement, the year 2022 will see a further breakthrough. Governments worldwide realise that cryptocurrencies are here to stay and the majority of CBDCs are being introduced to ensure their monetary system stays relevant to consumer demands and not necessarily to eradicate the use of Bitcoin and other private cryptocurrencies.

Despite most central banks are still planning their frameworks for what a CBDC might look like, there are already CBDCs that have gone live. These however are limited to a few small countries including the Bahamas, Cambodia, the Eastern Caribbean States and most recently followed by Nigeria.

In terms of developed nations, China and Sweden (e-krona) are the most advanced with extensive pilots having already taken place. China is expecting to further test its CBDC – digital yuan – during the Winter Olympics in early 2022. This will certainly trigger other central banks including those of the UK, the US, Russia, Japan and the European Central Bank, to follow suit.

9. The DeFi market will further boom ….

DeFi, or decentralised finance is quickly emerging as a transparent and permissionless way for users to interact directly with each other. This year the value of assets in DeFi reached more than $180 bn and expectations are that this will further rise in 2022. As there is an increasing need to replicate physical items properties like uniqueness, ownership proof, we will see further uptake of the DeFi market as well as the arrival of more dedicated DeFi applications. Upcoming regulation, as well as the growing acceptance that crypto is here to stay, may in the longer term lead to more convergence between traditional or centralised finance (CeFi) and decentralised finance (DeFi).

10. ….. as well as NFTs

The remarkable growth of the NFT market in 2021 is expected to continue in 2022. As almost everything is becoming digital, there is an increasing need to replicate physical items properties like more uniqueness, ownership proof and scarcity. The Metaverse concept that was earlier described will bring plenty of new opportunities for innovative NFT use cases.

Various new use cases including gaming, music, ticketing, post on social media etc. are entering the NFT market attracted by the various benefits and the profits that can be made.

But the risks and challenges this market is confronted with will ask for regulatory intervention. This raises the importance of having an international regulatory body of non-fungible tokens for its better regulation and legalization. The outcome could have a great impact and will be decisive for the future of NTFs. It is however still uncertain how that will proceed.

11. Large banks are entering the DeFi market

The attitude of traditional banks, especially the larger ones towards crypto and DeFi is changing. . With central banks around the world beginning to embrace the concept of CDBCs and stablecoins, the principles underlying the DeFi industry will gain more and more acceptance amongst traditional firms. The banking industry is beginning to see DeFi’s potential to overhaul the inflexibility of present processes and are reacting. More and more established banks, pushed by the demands of their clients and shareholders, are now exploring how they might engage with DeFi and the crypto markets. While this year some big names entered the DeFi space in order to meet their customers’ demand for crypto thereby delivering a number of DeFi based applications, this number will further increase in 2022 thereby seeking greater exposure to the DeFi space.

12. We will see more DAOs

To meet the upcoming governance issues at DeFi organisations we will see the arrival of more decentralised autonomous organisations or DAOs in 2022 and beyond.

The decision-making, or governance, at DeFi organizations (from the fees they charge users to the products they offer) is often meant to be decentralized. In the initial stage of DeFi a single person or a small group of people might be driving a decentralized application at inception. But as the DeFi project gains momentum they often seek to step away, thereby handing over control to the community that uses it.

That transition is expected to be increasingly in the form of a decentralized autonomous organization (DAO). They have their rules and regulations embedded in programming code via smart contracts and may issue governance tokens, which give holders of those coins a say in decisions.

13. The number of challenger banks and crypto banks will further grow

A new trend we will see in the years to come is the rising number of challenger and crypto banks, aimed at meeting the needs of millennials and the Gen Z generation. Both are increasingly looking to new ways money is being managed. This has led to the emergence of challenger banks that are making finance fully digital. But even this is not enough for the 25-year-olds and under, Gen Z. Saving, making money work, and being in control of finances is a key difference between millennials and Gen Z and this is where cryptocurrency starts to enter the discussion. This will intensify the upcoming of crypto banks.

14. Crypto currency rates to more realistic levels

Notwithstanding there is a growing demand for cryptocurrencies not only from consumers but also from institutional investors as well as large financial institutions, 2022 will see the end of the cryptocurrency hype, a further correction in crypto rates and the return to more realistic levels, triggered by the upcoming regulations worldwide (see trend 15).

Notwithstanding the growing importance of the DeFi and NFT markets, the year 2022 may see crypto currencies lose some of their magic. Investors are greatly overestimating the speed with which the related blockchain technology will see a broad-based adoption. This may retrace trading euphoria in a bigger way in the cryptocurrency space.

15. Regulators are making up their mind

And finally, but most important, a growing number of regulators around the world – long-time struggling how to deal with the various crypto issues – will intensify their work and come up with regulatory measures, both individually and collectively. Aim is to meet the various risks and challenges of the crypto industry, including cryptocurrencies, crypto assets, stable coins, DeFi, NFT etc. on one hand, but without frustrating or harming technology developments.

While some countries have banned cryptocurrency entirely, there is a growing trend that regulators believe cryptocurrencies are here to stay and try to partially control their flow in the economy. International institutions like BIS, IMF, World Bank and others however are messaging that international regulatory collaboration and a cohesive regulatory framework is urgently needed.

Promising 2022

Dear followers. All these trends are based on a number of premisses. Thereby older trends play an important role in making these forecasts. If all these predictions come through, 2022 will be a great year for blockchain and the crypto industry. But as I also concluded in my blog on the trends of 2021: always expect the unexpected. Curious to experience.


Carlo de Meijer

Economist and researcher






What is holding back blockchain adoption and what should be done?

08-12-2021 | Carlo de Meijer | treasuryXL | LinkedIn

Early this year I wrote a blog about the existing technology challenges that were holding back a more massive adoption of blockchain technology and of possible solutions that may tackle these. Though blockchain has many advantages this technology still has a lot of growing pains to go through before it could unlock its full potential.

So I was wondering where we are now. Gartner showed several times, any new technology – and that is blockchain too – has to go through various stages.

“According to recent surveys, almost 90% of blockchain-based projects still failed.”


And that is not strange. For new technologies, it takes a lot of time to get rid of all the challenges and use it to power the modern world. And these challenges are not only technical. What is the way forward?


Blockchain technology has been surrounded by plenty of hypes, which makes many business leaders keenly interested in adopting it. Blockchain however faces different blockchain adoption challenges that make them reluctant. These are not only related to technological inefficiencies, but also to the lack of regulation and limited knowledge/awareness. Most of these challenges still need to be addressed and overcome in order for the technology to reach omnipresence and make blockchain a more acceptable technology for all.


Technological challenges

Although blockchain technology has a lot of benefits, it still has a number of shortcomings in technological ways, that are preventing a much higher adoption. Bitcoin but also other blockchains are well known for their inefficient technological design, leading to low scalability, lack of speed of the network, high energy consumption and as a result high costs of transactions. Besides, there is a lack of standardisation and interoperability, limiting the chance for different blockchains to communicate with each other. Ethereum tried to cover up a number of these defects, but it is still not enough.

Low scalability
First of all there is the scalability issue. Their limited capacity to scale in order to handle large transaction volumes. This so-called ‘scalability trilemma’ is the main reason why many doubt that blockchain systems would ever be capable of operating at scale. It essentially revolves around the difficulties current blockchain platforms experience when trying to find the right balance between scalability, decentralization and security. In reality, blockchains work fine for a small number of users. But what happens when a mass integration will take place? Ethereum and Bitcoin nowadays have the highest number of users on the network, but they are having a hard time dealing with the situation.

Lack of speed
Another important challenge that should be addressed is the need to increase the processing speeds. When the number of users increases, the network tends to slow down taking more time to process any transactions. This may result in huge transaction fees, making the technology less and less attractive. Also, the encryption of the system could make it even slower. Completing a transaction can take up to several hours or sometimes even days. It is thus most suited for making large transactions where time is not a vital element. This blockchain adoption challenge can become a hurdle soon.

High energy consumption
High energy consumption is a blockchain adoption challenge, especially now with the worldwide climate discussion. Most of the blockchain technologies follow Bitcoins infrastructure and use Proof of Work (PoW) as a consensus algorithm, thereby needing massive computational power, which is very energy-intensive.

This not only limits the opportunities for ordinary people to join PoW networks and hinders decentralization by encouraging the formation of large mining pools, but it also raises environmental concerns. At present, miners are using 0.2% of the total electricity. If it keeps increasing, then miners will take more power than the world can provide. Many organizations are trying to avoid blockchain altogether just for this challenge.

Lack of standardization
A fourth issue that is limiting a more massive blockchain adoption is the lack of standardization. Standards are required for any technology to have a scalable adoption across the globe. All networks which will be using blockchain technology need to speak the same language in order to be understood and to complete the transaction. All new technologies however suffer from this at the beginning till the standards slowly build up from experience.

Lack of interoperability
As more organizations begin adopting blockchain, there is a tendency for many to develop their own systems with varying characteristics (governance rules, blockchain technology versions, consensus models, etc.). These separate blockchains mostly do not work together, and there is currently no universal standard to enable different networks to communicate with each other. Blockchain interoperability includes the ability to share, see and access information across different blockchain networks without the need for an intermediary or central authority. This lack of interoperability can make mass adoption an almost impossible task.

Regulatory challenges

Next to these technological challenges, another big obstacle to blockchain adoption is the lack of regulatory clarity. Existing regulatory regimes are unable to keep up with the rapid development happening in blockchain and crypto. There aren’t any specific regulations about it. So, no one follows any specific rules when it comes to the blockchain.

Initial coin offerings, stablecoins and DeFi protocols have in recent years demonstrated the limitations of current rules and regulations when it comes to handling the sector. There are various challenges caused by this lack of regulation, including criminal activities, lack of privacy, and, although blockchain guarantees visibility as one of its benefits, there is still no security.

Criminal connection/activities
There is the anonymous feature of the blockchain technology that may become a great threat. The nature of the blockchain network is decentralized so that no one can know your true identity. Being anonymous is however quite convenient for illegal transactions. This has attracted criminals leading to various cybercrimes/illegal transactions such as crypto exchange hacks, scam projects, market manipulation asking cryptos in exchange as a ransom or using Bitcoin as a currency in the black market and on the dark web.

Lack of privacy
Privacy is another challenge as far as the blockchain is concerned. One of the greatest strengths of blockchain technology, public blockchain networks in particular, is the transparency that comes from having a record of a network’s transaction history that is public and easy to verify. This is however not always seen as a positive, as it also poses threat to privacy of organisations or the public using it. Many companies that work with privacy need to have defined boundaries. Enterprises, which want to protect their trade secrets and other sensitive information, are therefore reluctant to embrace some of the most prominent blockchain protocols.

Security and trust problems
Security is another crucial topic here that may limit blockchain adoption. Every blockchain technology talks about its security as the main advantage. But like any other technology, blockchain also comes with a number of security risks including coding flaws or loopholes. Ethereum allows developers to implement dApps based on their system. And there have been many dApps based on them. However, most of them seem to have a matter of false coding and loopholes. Users can utilize these loopholes and hack into the system quickly. The resulting lack of trust among blockchain users is another major obstacle to widespread implementation.


Educational challenges

Blockchain is still very much an emerging technology, and the skills needed to develop and use it are scarce, while the lack of awareness amongst the large public are challenging the adoption of this technology.

Lack of Adequate Skill Sets
This skills gap is a top challenge. The marketplace for blockchain skills and qualified people to manage blockchain technology is highly competitive. The demand for this qualified staff is enormous but few people have the adequate skills to support such technology, so one has to pay up high salaries.

The expense and difficulty of talent acquisition in this area only adds to the concerns that organizations have about adopting blockchain and integrating it with legacy systems.

Lack of awareness
Though broader awareness of the technology is growing, the majority of organizations are still in the early stages of adoption. Only 12% of participants in a recent survey reported that they are live with either blockchain or blockchain as a service, while 34% of respondents are not even exploring the use of it. But also the majority of the public is still not aware of the existence and potential use of blockchain, while there is lack of proper marketing of this technology.

Blockchain = Bitcoin?
Blockchain is an emerging technology and the distributed ledger technology (DLT)  space is still relatively young. And with crypto price volatility dominating the headlines of mainstream media, it is not surprising that the immense utility the technology has is not well understood by the public. Currently, blockchain technology is almost the same meaning as Bitcoin and remains associated with the dark transactions of money laundering, black trade, and other illegal activities. Before a general adoption is possible, the large public must understand the difference between Bitcoins, other cryptocurrencies, and blockchain.

Ways to accelerate blockchain adoption

As I described in my earlier blog, there are a number of ways to solve the various challenges. Challenges such as inefficient technological design, lack of scalability, low speed, lack of standards and interoperability as well as high energy consumption should be tackled by technology innovations.

The privacy, trust and security issues ask for proper regulation without endangering technology innovations. Lack of skills and poor public perception and awareness should be increased by education and broad information and communication.

Technological improvements

The list of blockchain adoption challenges clearly underlines the need for technological improvements. The sector needs to find ways to address the biggest challenges it is currently facing. In my blog of 28 February 2021 “Blockchain Technology Challenges: new third-generation Solutions” I already explained the various solutions in a more detailed way. So, I am not going to repeat that.

The good news is that, as we saw above, the blockchain community is actively working on solving these technological challenges such as speed and power consumption thereby using improved technology.

Refining consensus algorithms
Proof of Work (PoW) has played a crucial role in bringing the blockchain revolution to the world, but its drawbacks in important areas such as scalability, speed and energy consumption suggest that PoW can no longer support the further growth and evolution of blockchain. Blockchain can utilize other more refined consensus methods to validate the transitions. This has forced Ethereum to start a transition to a Proof of Stake (PoS) consensus algorithm that requires fewer energy to process.

Layer 2 solutions
The scalability problem can also be tackled by building so-called Layer 2 or off-chain scaling solutions that refer to approaches that allow transactions to be executed, taking some of the load of the main chain, without overcharging the blockchain. There are a number of interesting off-chain solutions ranging from state channels, accelerated chips, side chains to sharding.

State channels
State channels refer to the process in which users transact with one another directly outside of the blockchain, or ‘off-chain,’ and greatly minimize their use of ‘on-chain’ operations, while accelerated chips could be used to speed up confirmation and transaction time.

Another tool to speed up scalability are so-called side chains. These are aimed to reduce the load on a given blockchain by sending transactions via these connected side chains and putting the end state of the transaction on the main blockchain.

And there is sharding, a scaling solution of spreading out the computing and storage workload from a blockchain into single nodes. This technology divides a blockchain into many separate areas, called shards, with each shard assigned a small group of nodes to maintain, thereby limiting the transactional lode. Polkadot is one of those examples built around the idea of sharding.

Multi-layered structure
Another solution to upgrade scale is the use of multi-layered structures, which is the isolation of transaction processing and data storage. Main projects are Cardano and CPCChain.


Zero-knowledge proofs
To solve the privacy challenge several protocols have been developed as alternatives to Bitcoin’s pseudo-anonymity, such as CoinJoin and Ring Signature.  An interesting tool is a zero-knowledge proof. This is a class of mathematical instruments that can be used to show that something is true without disclosing the actual data that proves it. The Baseline Protocol, for example, utilizes Zero-Knowledge proofs and other cryptographic techniques and instruments to synchronize private business processes via the Ethereum Mainnet while preserving privacy, confidentiality and data security.


Private blockchains
The privacy issues, especially for enterprises, that come with the transparent nature of public blockchains can also be avoided by using private networks such as Corda, Hyperledger and Quorum. These networks are designed to support a relatively small number of network participants with known identity, thereby providing the capability of executing private transactions between two or more participating nodes. Since participation in such networks requires permission, they are also called permissioned blockchain networks.

Private blockchain protocols can be used to create practical enterprise-grade solutions capable of connecting multiple companies or separate departments within a company. Participants would get limited access, and all sensitive information would stay private as it should. As an example, to build trust among users, TradeLens (a global logistics network created by Maersk and IBM using the IBM Blockchain Platform) uses a permissioned blockchain to offer immutability, privacy and traceability of shipping documents. 

Hybrid approach
The power of private and public blockchains can also be combined to achieve optimal results. This so-called hybrid blockchain approach involves using a public blockchain to store encrypted proof for all the work that has been done on a private network thereby connecting a small number of known stakeholders.

Standards and interoperability
Over the past few years we have seen an increasing number of interoperability projects meant to bridge the gap between different blockchains. Many of them are aimed at connecting private networks to each other or to public blockchains. These systems will ultimately be more useful to business leaders than prior approaches that focused on public blockchains and cryptocurrency-related tools.

Next to the more well-known examples of cross-chain communications that are most first- or second-generation, like the Bitcoin Lightning Network, the Ethereum Raid Network and the Ripple Interledger Protocol, there is a growing number of interoperability projects that are exploring third-generation solutions, including Cosmos, Neox and Polkadot.  And there is a growing number of projects teaming up in order to allow their blockchains to communicate with each other, aiming at solving the blockchain isolation problem. Main example is the Blockchain Industrial Alliance formed by ICON, AION and Wanchain.


Regulatory frameworks
The rapid evolution of blockchain technology has caught regulators around the world by surprise, leaving them scrambling to react to a rapidly growing and changing industry. Though regulators are now taking more and more steps in a growing number of countries to deal with this situation, there is still a lack of a unified approach when it comes to the regulation of the blockchain sector. This has resulted in a regulatory patchwork, with various jurisdictions across the world and sometimes even different regulatory bodies in a single region coming up with their own rules and regulations for the sector.

This problem could be countered by drawing up regulatory frameworks that afford regulatory consistency across larger regions. An example of such a framework is the European Commission’s propose Markets in Crypto Assets Regulation (MICA), which will introduce an EU-wide regime for crypto tokens. Thereby they are taking a pragmatic approach of regulating the market without harming the technology.

Raising skills quality and awareness
A closer examination of this barrier shows that it is very much connected to an underlying lack of organizational awareness, lack of adequate skills and lack of knowledge and understanding of blockchain technology. As awareness of blockchain technology becomes more widespread, the ability to effectively make a business case for their adoption, might contribute to more massive adoption.

Raising awareness
Considering that distributed ledger technologies are still largely unknown to the public, it is on the blockchain community to inform people about the technology’s design, strengths and utility. Building educational resources, holding webinars and other educational events are some of the ways that blockchain companies can utilize to raise awareness. Initiatives like Coinbase Learn are examples of how some of the world’s leading blockchain companies are working to raise awareness about blockchain technology.

And there is blockchain-as-a-service (BaaS) that has the potential to mitigate the blockchain skills barrier. The use of BaaS enables organizations to reap the benefits of blockchain, without having to invest significantly in the expensive blockchain skills. Users only need to know the basics of the technology (not the technological insides) to take advantage. They will for instance need to understand how to execute smart contracts, but they won’t need specialized knowledge about the complexities of distributed ledgers.

Blockchains are ecosystems that require broad adoption to work effectively. Without widespread adoption, the effectiveness and scalability of blockchains will remain limited. As described in this blog the adoption of blockchain and DLTs depends on solving the various challenges and will require active support from governments and other public organizations. Organizations are increasingly coming together and forming collaborative blockchain working groups to address common pain points and develop solutions that can benefit everyone without revealing proprietary information. There is already a lot of applications and projects live that is working perfectly. Like any technological innovation, the blockchain will continue to evolve. Yes, there may be challenges, but they should not be seen as obstacles. So, as I have shown, all the problems with blockchain will come with solutions and opportunities. There are this good reasons to be optimistic that the adoption of blockchain will grow.


Carlo de Meijer

Economist and researcher






Non-fungible Tokens: bubble or future?

| 29-11-2021 | Carlo de Meijer | treasuryXL | LinkedIn

A new phenomenon in the blockchain world are so-called NFTs or non-fungible tokens. Although NFTs have been around for some years, the market for digital art pieces, commemorative items, and other assets that now reside in blockchain ecosystems has exploded this year.

The NFT market got an enormous boost after Christie’s auction house sold a digital artwork last March titled “Everydays: The First 5,000 Days” made by digital artist Beeple for an astronomic $69,4 million. And there have been more of these exorbitant transactions. This triggered the NFTs market to grow exponentially, thereby gaining profound attention from various players from mainstream companies to retail and institutional investors.

Many are still struggling with the NFT phenomenon. While some see NFTs as a bubble, comparing it with the tulip mania in the 17th century,  thereby debating over how long the NFT trend would last, others believe NFTs are here to stay and see it as the next investment theme.

In this blog, I will go into more detail related to the world of NFTs, what they are, where they could be used and what they may bring. But above all what are the risks and challenges associated with this new phenomenon.

What are NFTs?

NFTs, which stands for non-fungible token, are unique or distinct digital assets that cannot be replaced. Broadly speaking, they’re a one-of-a-kind digital asset. They have distinct properties, and can’t be changed with other assets. They are digital files that can carry any form of digital content (and can even contain access to physical content) from art to video to music.

NFTs rely on blockchain and cryptocurrencies to keep track of digital ownership and create scarcity to ensure they cannot be identically reproduced. NFTs enable to verify the authenticity of a digital artwork.

NFTs are not cryptocurrencies

NFTs are a type of asset which can be bought with cryptocurrencies. Both are tokens that are key elements in the world of blockchain. While both NFTs and cryptocurrencies use the same blockchain technology, they however differ in their attributes.

Cryptocurrencies use fungible tokens, meaning they can be traded or exchanged for one another. They are accessible in various forms and are utilized for various reasons. Every token is exactly the same and equal (represent the same amount of value). Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain.

A non-fungible token is different from notable cryptocurrencies in terms of fungibility. With NFTs, every token is different and unique. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible). If a person were to receive two NFTs, they would not represent the same piece of digital content, even if they were both exact copies of the same digital file.

What Are NFTs Used For?

NFTs are considered beneficial in a wide variety of blockchain use cases  They can be literally anything digital such as art, fashion, licenses and certifications, collectibles, sports, etc.

NFTs are nowadays increasingly used in contemporary art auctions, including images, animation or even tweets. Non-fungible tokens also have made their way into real life applications beyond digital art and collectibles, such as music clips, videos, games, or even a ticket to an event, such as a movie or a sport game, that took place at a specific time. But also for domain names, virtual land and real estate.

An upcoming use case for NTFs recently is photography. Photography and prints have been particularly successful in this new online environment. Photographers are increasingly finding a new market for their work with NFTs.

An interesting new use case are political NFTs.  In the US a Democrat-backed group, named Front Row, is planning the launch of a political NFT marketplace, that will be exclusively used for Democratic party campaigns and causes.

How does the NFT market work?

But how does the NTF market work? How can they be created and traded?

Creation of NFTs

Artists who want to create an NFT of one of their digital artworks will have to use one of the NFT platforms or NFT marketplaces. An NFT is created by ‘minting’ a digital asset (whatever it may be) on a blockchain. For that a digital wallet is needed with cryptocurrencies that allows you to store NFTs and cryptocurrencies.

Though there are more blockchains supporting different cryptocurrencies that can host NFTs, most major digital transactions are taking place on Ethereum.  Ethereum’s MetaMask is such a wallet that is mostly used in the NFT market. This wallet can be downloaded from the App Store or via chrome extension.

Artists will need to purchase at least a fractional amount of Ether for so-called ‘gas fees’. This will enable them to cover the costs associated with minting your NFT, which places it on the Ethereum blockchain, and listing it for sale.

When adding an NFT to the Ethereum blockchain, a smart contract is added to the blockchain containing a set of actions and certain conditions to meet. They can be coded to detail the limitations on the use of an NFT. Once the conditions are met, the action takes place (such as providing a digital file to a buyer), and the blockchain is updated with this transaction.

Subsequently, the NFT creator has the privilege of putting up the NFT for sale on a marketplace. At the same time, NFT creators could associate the NFTs with a royalty agreement to receive added compensation with every sale.

NFTs can be sold or bought in the digital market via NFT market places.

NFT selling

In order to connect with NFT marketplaces and authenticate their identity, to access these market, they are required to have a digital wallet to streamline this process. If one wants to sell it or trade NFTs, it depends on the platform and whether he can send it to other platforms or only keep it on that platform. Even if one is just selling an NFT, one still needs to pay a transaction fee in ETH gas, which is a denomination of the token called Gwei (one billionth of ETH).

The new owner of an NFT would receive possession of the NFT through a smart contract. NFT sellers will thereby need to ensure that smart contracts clearly outline the rights that are being assigned as part of the NFT. In most cases, the NFT holder is simply obtaining a non-exclusive license to the underlying intellectual property rights of an asset and only for non-commercial purposes.

NFT buying

How you buy an NFT depends on the type of NFT you want to buy and the platform you are using. Most NFTs are purchased with a cryptocurrency and some with fiat currency. For buying NFTs, you must have a crypto wallet that allows you to store NFTs and cryptocurrencies.

Before purchasing any NFT, one first needs to purchase some cryptocurrency. This depends on what currencies your NFT provider accepts. Most likely this will be ETH, Ethereum’s native token. They can be purchased by using a credit card on almost any digital exchange from Coinbase, Binance, eToro to Coinbase and even Paypal now. Most exchanges charge at least a percentage of your transaction when you buy crypto.

After this one will be able to move it from the exchange to their crypto wallet of choice. From that on it is simple on most platforms to connect the wallet. Once the wallet had been connected, users can begin browsing the market and placing bids.

Each user’s wallet address thereby acts as a passport and lets users interact with certain NFT platforms. And if one later decide to use NFT marketplaces outside of Ethereum, one will still be able to swap ETH tokens for alternative blockchain tokens.

NFT Market places

NFTs allow digital works to at least be traded via NFT marketplaces. On these marketplaces NFTs can be created, bought or sold. Most marketplaces hold auctions where users can submit a bid for an NFT they wish to purchase. Buying an NFT from the primary marketplace increases potential resale value directly after the product goes on sale. That especially goes for a high demand NFT immediately after their release. On the other hand, one of the main issues with buying an NFT from a primary marketplace is it is hard to estimate the demand for the art. On the secondary marketplace, however, users are able compare purchases to previous sales.

Most popular NFT marketplaces

Currently there are several NFT marketplaces and each marketplace sell different types of NFT. The most popular and largest ones include: OpenSea, Rarible and Foundation NFT. Other interesting platforms have names like CryptoSlam, AtomicAssets, SuperRare, Nifty Gateway and NBA Top Shot. Most of these marketplaces are still hosted on Ethereum’s blockchain, thereby acting as Ethereum’s dApps.

OpenSea is a marketplace for NFTs which operates on Ethereum trading rare digital items and collectibles. It hosts a variety of digital collectibles, from video game items to digital artwork. Using OpenSea, users can interact with the network to browse NFT collections to exchange NFTs for cryptocurrency. One can also sort pieces by sales volume to discover new artists.

Rarible s a  so-called ‘democratic’, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform enable holders to weigh in on features like fees and community rules.

On the Foundation NFT marketplace artists must receive “upvotes” or an invitation from fellow creators to post their art. The community’s exclusivity and cost of entry – artists must also purchase “gas” to mint NFTs – means it may boast higher-calibre artwork.

An interesting newcomer on the NFT market is Coinbase. The cryptocurrency exchange, aims to launch a marketplace that lets users mint, collect and trade NFTs. Users can sign up to a waitlist for early access to the feature. Its marketplace, to be named Coinbase NFT, would include ‘social features’ and tap into the so-called creator economy (a term used to describe the world of people who make money posting videos and other content online).

What may NFTs bring?

NFTs provide a number of  advantages to both content creators, sellers and buyers, depending on the platform they are created on. With NFTs in Ethereum, the smart contract is automatic: The code in the smart contract cannot be changed once it’s added to the blockchain, and the transaction cannot be changed once the criteria have been met and verified. This provides security to both creators and buyers.

For the creator 

Blockchain technology and NFTs afford artists and content creators a unique opportunity to monetize their wares. For example, artists no longer have to rely on galleries or auction houses to sell their art. They can sell it directly to the consumer as an NFT, which also lets them keep more of the profits.

Typically, most art pieces are physically sorted, which exposes them to the risk of being stolen or duplicated. NFTs may eliminate these shortcomings to certain extent by allowing artists to keep the records of the actual copy on the blockchain network. On top NFTs create an ecosystem where artists can authenticate the actual ownership of their work by recording the metadata on-chain.

Most websites where NFTs are sold also allow content creators to add a royalty system to the subsequent selling of their content. Doing this they may receive a percentage of sales whenever their art is sold to a new owner. Importantly, the artist benefits every single time their NFT changes hands. This is seen as an attractive feature as artists generally do not receive future proceeds after their art is first sold.

For the collector

NFTs allow for proof of ownership in the digital world for the collector. Before the invention of NFTs, there was no way to prove the ownership or authenticity of digital artworks or collectibles. With NFTs the investor has true ownership of the non-fungible token they purchase. When a digital asset is tokenized this creates value as it is possible to prove its authenticity and ownership, which also means it can be bought and sold many times over.

With NFTs, a copy can be verified with the use of a unique identifier included in the NFT, and the history of ownership for that copy can be maintained. Because it has a unique identifier, and there’s a record of the work on the blockchain, it’s easy to track.

Next to that due to blockchain technology and NFTs, the principle of ‘scarcity’ now also exists
in the digital world. This because each NFT is rare, unique and indivisible. For a collector, the intrinsic value associated with the purchase of an NFT is supporting an artist whose work they admire.

It also give access to decentralised finance (DeFi) NFT services. Some NFT projects such as Hoard marketplace are providing DeFi services which allows users to buy, sell, loan or rent NFTs. The platform empowers developers with tools to integrate digital art, in-game items and domain names with the Ethereum blockchain.

Other potential benefits of this NFT eco system are growth prospects and value preservation where artist can preserve their art and yield income. The growth prospects of NFTs are significant and present more opportunities for creatives and investors to join the market. The NFT market is firmly growing, which means most NFTs could only become more valuable and innovative as time goes on.

And there are the utility benefits. NFTs enable businesses and individuals to acquire and protect value in real-world and virtual objects. When one owns an NFT on the blockchain, one has the ability to flip it, or sell it on the secondary market, for profit.

The downside of NFTs

While the advantages/benefits of NFTs clearly paint a promising  picture for their future, these markets are also confronted with various challenges and risks that one should consider before deciding to enter the space.

First of all there is the market risk. The market for NFTs such as digital art and collectibles is booming — but that doesn’t mean they are a safe investment. Investing in NFTs comes with its own unique set of risks. Their future is uncertain, and we don’t yet have a lot of history to judge their performance. When investing in NFTs one should be aware of volatility, illiquidity, and fraud in the nascent market.

Though investing in art is often a subjective act, there is the risk of losing its value. The NFT market suffers from massive volatility,  in part because there aren’t any mechanisms in place yet to help people price these digital assets.

When it comes to liquidity of NFTs every seller needs to find a buyer who’s willing to pay a certain price for a particular, one-of-a-kind item. That can put collectors in a difficult position if they have spent a lot of money on a ‘Top Shot‘ moment and the market begins to tank.

Another risk refers to the uncertainty in determining the value of NFTs. The valuation of NFTs depends considerably on the authenticity, creativity, and the perception of owners and buyers. An NFT’s value is based largely on what someone else is willing to pay for it, thereby leading to fluctuations. Therefore, demand will drive the price rather than fundamental, technical or economic indicators.

And there is the risk related to intellectual property issues. Someone who buys an NFT, only gets the right to use the NFT rather than intellectual property rights. It is therefore important to consider the ownership rights of an individual to a particular NFT in the metadata of the underlying smart contract, such as copyrights, trademarks, patents, moral rights, and the right to publicity.

The growing  NFT market is also attracting cybercriminals resulting in various risks of fraud, cybersecurity and hacks. There have been a few instances of fake websites, where NFTs hosted on the platform have disappeared and faced copyright and trade infringements.

Some artists have also fallen victim to impersonators who have listed and sold their work without their permission. And those who own an NFT do not necessarily own the original version of the digital content.

Another risk related to cybersecurity and fraud include copyright theft, replication of popular NFTs or fake airdrops, and NFT giveaways. And there is the risk of smart contracts being attacked by hackers and the challenges of NFT maintenance. This is seen as a main concern in the NFT landscape presently. As a result people can end up buying the fake NFT tokens, which practically do not have any value as an asset.

In addition, NFTs are also associated with jurisdictional challenges as there is no specific precedent for regulating NFTs. Decentralized peer-to-peer transactions on blockchain-based  NFT platforms without any monitoring authority can lead to AML and CFT challenges. As NFT can challenge the conventional FATF standard, regulations and intermediate supervision become necessary for these platforms.


An there are the various challenges NFTs may be confronted, that could limit their adoption. Some of these challenges are more fundamental.

One of the most fundamental challenge for this NTF market is how these tokens will have to be fused into an ill-suited legal framework. The lack of regulation creates a lot of pitfalls in NFT adoption. There is the confusion of how NTFs should be classified and thus regulatory treated. As a security or something else. NFT does not have a specific definition and can describe a wide variety of assets. They are unique, not interchangeable, and not fungible. With the increasing variety and number of NFTs, it is difficult to find a solid ground for compliance in NFTs. As of now, many of the existing laws pertaining to NFT are stuck on finding the ideal definition for NFTs. Various countries like Japan, UK, US and the EU have different approaches for the classification of NFTs.

Next to regulatory challenges there is the lack of uniform, universal infrastructure for NFTs that may limit their adoption. For instance the verification processes for creators and NFT listings aren’t consistent across platforms – some are more stringent than others.

Accessibility to NFTs can be a significant barrier for new entrants to the NFT market. While NFT marketplaces are user-friendly, content creators must pay fees for the creation and upkeep of the NFT. These fees are usually required to be paid with a cryptocurrency in a digital wallet. The NFT marketplaces are also only popular for certain types of digital content; currently, for example, there are very few writers who sell their work as NFTs.

Environmental effect

Another pain point of using NFTs is the effect the cryptocurrency industry has on the environment. The current mining practices for the most popular cryptocurrencies use proof-of work techniques, which require a vast amount of energy from powerful computers.

The way forward: bubble or future

The NFT markets are booming. And every day new use case are entering the NFT market attracted by the various benefits and the incredible profits that can be made.

But the risks and challenges this market is confronted with will ask for regulatory intervention. The importance of reflecting on the legal and regulatory NFT risks is clearly evident. As this NTF market continues to grow and expand into different use cases, this raises the importance of having an international regulatory body of Non-fungible tokens for its better regulation and legalization. The outcome could have a great impact and will be decisive for the future of NTFs.

It is however still uncertain how that will proceed.


Carlo de Meijer

Economist and researcher






Binance and regulatory scrutiny: changing times for the crypto market

28-09-2021 | Carlo de Meijer | treasuryXL

Long-time regulators were not sure on if at all or how to handle the crypto ecosystem. But that has changed fundamentally with the crypto industry witnessing massive growth and interest from traditional institutions and major investors.

This year has been a year of increased regulatory focus of the booming crypto market. The potential for crypto exchanges to launder money has worried regulators all over the world, with US Treasury Secretary Janet Yellen and ECB President Christine Lagarde among those to voice concerns. As a result regulators and law enforcement agencies worldwide have begun to scrutinise suspect players and started to write regulations to bring those players within the blockchain arena to take control of them.

Recently the world’s largest crypto platform, Binance has come under regulatory fire. Regulators across the world are concerned over the potential for crypto to be used to launder money as well as the risks to consumers from volatile crypto trading. Most recently also DNB, the Dutch Central Bank, joined forces, saying Binance was not compliant with anti-terrorism financial law. It is unclear if this is a coordinated effort by regulators or something closer to a domino effect.

Regulatory scrutiny

Financial regulators across the world have now targeted major cryptocurrency exchange Binance. The platform has come under increased scrutiny from a growing number of regulators worldwide, including regulatory authorities from the UK, US, the Netherlands, Canada, Japan, Malaysia, Thailand, Germany, Cayman Islands, Lithuania, Hong Kong. And this group is growing.

The platform has faced warnings and business curbs from financial watchdogs who are concerned over the use of crypto in money laundering and the high risks of their products to consumers. Binance has also been accused of accepting ‘gigantic tips’ from creators of                  ‘questionable’ cryptocurrencies in exchange of receiving a privileged place on their platform.  Several countries have announced investigations in Binance and its products. While a number of countries have banned the platform from certain activities, quite a few countries have started banning it completely.

Banks are delisting Binance

Not just countries, but also a growing number of banks are cutting ties with the crypto exchange as well. Several banks or payment processors, primarily in Europe and the UK, have subsequently cut off the exchange, potentially freezing its customers’ accounts. Major banks began to ‘delist’ Binance in June and July of 2021, leading the exchange to suspend withdrawals and/or limit withdrawals dramatically on most accounts.

A number of banks, including Barclays, Nationwide, HSBC and Santander pulled Binance’s access or announced reviews of their approach to crypto at large. HSBC banned its UK customers from making any further payments to Binance, while Barclays suspended UK card payments to Binance, citing the FCA warning to customers. Also the European Union’s Single Euro Payments Area appears to have (temporarily) cut off Binance. SEPA payments to Binance were halted.

Regulators and Binance: some approaches

The largest of investigations is perhaps be through the US Commodity Futures Trading Commission  (CFTC), with the regulator seeking to determine whether cryptocurrency derivatives were bought and sold by US citizens on the Binance platform.  Binance is also reportedly under investigation by the US Justice Department and Internal Revenue Service (IRS). 

Cayman Islands
The Cayman Islands also challenged the lack of authorization of the exchange. Cayman Islands Monetary Authority (CIMA) said that all the entities associated with Binance are not registered, licensed, or regulated and thus not authorised to operate a crypto exchange from or within the Cayman Islands“.

Last week UK’s Financial Conduct Authority (FCA) stated that it is ‘not capable’ of effectively supervising the world’s largest crypto currency exchange, Binance. They also reiterated the risk its products could pose to customers. The FCA decided to ban the exchange from conducting all regulated activity in the UK for failing to report in line with its ant-money laundering (AML) regulation. The FCA also stated that Binance has refused to answer questions about its wider global business model, and ‘refused or was unable’ to provide (high-risk financial) products offered on Binance, such as their Binance Stock token.

De Nederlandsche Bank (DNB), the Dutch Central Bank, announced that Binance is providing crypto services in the Netherlands without the required legal registration. As a result the platform was not in compliance with the Dutch anti-money laundering and anti-terrorist financing Act. And thus Binance is illegally offering services for the exchange between virtual and fiduciary currencies as well as illegally offering custodian wallets. This may increase the risk of customers becoming involved in money laundering or terrorist financing.

Considered to be among the most crypto-forward countries, Japan’s Financial Services Agency (FSA) also warned Binance. It mentioned that the crypto exchange is not registered to accept business from Japanese residents, within the country, ordering to suspend operations.

Hong Kong
Hong Kong’s Securities and Futures Commission (SFC) notified that Binance’s offering of investing in Stock Tokens is not a regulated activity. Binance has not taken any license to offer the services to HK residents.

In June Binance was subject to enforcement actions by the Securities Commission Malaysia for alleged illegal operations. It was ordered specifically to disable Binance.com and mobile applications in the country from June 26 onwards. It was also told to stop media and marketing targeting Malaysian consumers and to restrict access to Binance Telegram group.

Thailand’s Securities and Exchange Commission (SEC) notified that it has filed a criminal complaint against Binance. It stated that an investigation has been launched against the exchange for operating its business without a license.

What is Binance?

Binance is the world’s largest cryptocurrency exchange platform by trading volume according to data from CryptoCompare. Notwithstanding the various measures taken it still boasts a daily trading volume of more than $25 billion, which is significantly more than its nearest competitor Coinbase ($3,5 billion). Binance also leads crypto derivatives trading, in large part by allowing people to trade crypto derivatives using high levels of leverage, or borrowed money.
Crypto exchange Binance was established in 2017 by Chinese-Canadian entrepreneur Changpeng Zhao. Binance offers trading in over 500 cryptocurrencies and virtual tokens. Thanks to its own cryptocurrency BNB the Binance platform has a large group of loyal customers. They get a discount when trading/using BNBs.The crypto exchange offers a wide range of services to users across the globe, from cryptocurrency spot and derivatives trading to loans and non-fungible tokens. It also offers services around trading, listing, fundraising and de-listing or withdrawal of cryptocurrencies. Binance’s corporate structure is ‘opaque’ (non-transparent), though its holding company is registered in the Cayman Islands, according to British court documents and Malaysia’s watchdog. This might have contributed to today’s massive regulatory scrutiny.

Measures taken/announced

Binance is undergoing big changes to appease regulators, who are unhappy with some of the exchange’s products and their compliance with local rules. Therefore they have made regulatory compliance its top priority. In the wake of the regulatory pressure from various countries

Binance announced that they will be taking drastic steps to better meet financial regulations, improve user protection and manage risks, including strengthening their compliance and legal teams, banning or scaling back products, demand stricter background checks, change the business model and improve relations with regulators.

Focus on regulatory compliance

Binance is focusing on regulatory compliance as ‘the exchange pivots from a technology start-up into a financial services company’ CEO Zhao explained.

For that they unveiled a series of measures it is going to take to become what it says is a fully compliant and licensed institution in all countries it operates in, as fully licensed competitors continue to appear.

“Compliance is a journey – especially in new sectors like crypto. The industry still has a lot of uncertainty. We also recognize that with the growth comes more complexity and more responsibility”. CEO Zhao

Strengthening compliance and legal teams

Binance is strengthening their compliance and legal teams, by hiring more staff who have relevant regulatory compliance experience as well as very senior people ‘that can bring teams in’.  Binance highlighted that the exchange has increased its international compliance team and advisory board by 500% since 2020.  Binance declared that they are planning to double the size of their compliance team within this year.

Recent appointments

Binance recently announced it was hiring a number of former regulators to its compliance and executive teams. They recently announced the appointment of Richard Teng – former chief executive officer (CEO) of Financial Services Regulatory Authority at Abu Dhabi Global Market (ADGM) – as its new CEO, Singapore.

This announcement comes barely a week after the hire of former US treasury criminal investor, Greg Monahan, as its global money laundering reporting officer (GMLRO) – a move that seeks to clear up Binance’s ongoing money laundering issues. Binance also appointed Samuel Lim, who has over 10 years of experience in compliance in investment banking, as chief compliance officer and Jonathan Farnell, with over 20 years of experience in the UK financial and payments sector, as director of compliance.

Banning or scaling back products

Binance is shifting its commercial focus to other product offerings that will better serve its users for the long term. Binance has scaled back some of its range of crypto products that regulators may oversee. To make sure that all their products are fully compliant, Binance has been limiting their futures, derivatives products in most of Europe,  with users in Germany, Italy and the Netherlands among those first affected. It has also restricted the trading of derivatives in some parts of Asia as well such as by Hong Kong users. Binance also would stop offering crypto margin trading involving the Australian dollar, euro and sterling.  

“We need to make sure that all of our products are fully compliant … This is why we’ve been limiting our futures, derivatives products in most of Europe and some parts of Asia as well.” CEO Zhao

In July, Binance also stopped offering/selling digital tokens linked to shares like Apple Inc. and Tesla Inc. after regulators raised concerns about the products for appearing to violate local securities regulations. Hong Kong’s markets regulator became the latest regulatory body to warn investors about Binance’s stock tokens. These crypto products will be unavailable for purchase on Binance effective immediately. Customers who own the tokens may sell them over the next 90 days, and Binance will cease to support the products on Oct. 14, the exchange said.

Reduce withdrawal limits

Orders from regulatory authorities in different nations have caused Binance to reduce its non-KYC withdrawal limits. In an official announcement, Binance notified customers that the withdrawal limit for users with basic verification will drop to 0.6 Bitcoin in mid-August. This is in an effort to prevent money laundering and curb broader criminal activities happening through the platform.

Stricter background checks

Pressure from regulators globally also forces Binance to demand stricter background checks on customers to bolster efforts against money laundering, with immediate effect. This should further enhance user protection and combat financial crime. Until now, document-based ID checks at Binance were only required for users seeking higher limits on trading.

Steps taken by crypto exchanges to make identity and background checks remain varied, with some demanding full documentation and others allowing users to sign up for accounts with as little as an email address. Many large platforms also require users to submit ID documents, while others only require personal information for limited access to trades.

From now on, Binance users will have to complete a verification process to access its products and services. Users will now have to upload an ID card, driver’s license or passport to prove their identity. Those who have not done so will only be able to withdraw funds, cancel orders and close positions. The move represents a major shift by Binance.

Changed business model

Binance also plans to make a series of fundamental changes in its corporate structure to ‘get back into the good books’ of the regulators in the various regions to handling increased scrutiny from regulators. The company is going to have to totally overhaul its business model by institutionalising and centralising its digital asset operations. The crypto exchange has until now had decentralized operations, meaning it doesn’t have headquarters of any sort. Instead, they will now add headquarters around the world and work towards being licensed everywhere and become compliant as much as it can in every region where it plans to operate. Each of these headquarters would have regional CEOs as well leading to a centralized authority controlling all these subsidiaries. While this goes against what cryptocurrencies stand for, it is necessary for Binance to stay relevant in many countries.

Improve relations with regulators

Binance CEO Zhao also wanted to improve relations with regulators. Zhao’s focus on regulation is seen as a sign of the changing times in the crypto world. The CEO asserted that new laws are necessary for the crypto ecosystem to support its further development.

The firm is willing to work and communicate with regulators to bring compliance into the crypto ecosystem. For that Binance will expand the team dedicated to working with authorities to ensure services are compliant with local regulations. Binance is also willing to meet regularly with regulators to proactively update them on what the firm is doing. To start, Binance would share some user data with local regulators.

“We aim to work more collaboratively with policy-makers to improve global standards and discourage bad actors,” Binance CEO Changpeng Zhao

Is this enough?

Notwithstanding the various measures announced or taken by Binance there is still a lot of sceptics around Binance real intentions. In the crypto world it is still like the Wild West with many ‘ cowboys’ operating that are averse to rules. Some argue ‘the exchange is playing smart by trying to be compliant, having multiple entities, making influential hires, and more’. Others say ‘It is a nice marketing statement, but from the regulators’ perspective, this is not enough”. For them ‘it is a questionable approach to reportedly evading rather than complying with jurisdictional regulations’.

Still, some lawyers are skeptical over whether Binance move to tighten checks would convince regulators. Regulators would need to know which of Binance’s local entities run the know-your-customer process to audit and check if it complies with local laws. “Since they are doing it on a voluntary basis, regulators do not know whether they have the authority to supervise the identity check, and no one can look whether they are doing it properly.”

It is questionable if Binance is able to face the regulatory actions from so many countries and financial watchdogs at the same time. While Binance says it is intent on cleaning up its compliance image, it will take more than a few give-ins to the regulators to resolve the numerous bans and restrictions that it currently faces.

What may we further expect?

It is tough to say whether it is a coordinated attack on Binance with all the regulatory bodies are coming together against the exchange. Considering it is the biggest crypto exchange in the world and due to its sheer size, it may be expected that many more crypto platforms will come under intensified regulatory scrutiny.

Is this the beginning of a worldwide approach to regulate the whole crypto market? As one of the oldest and largest crypto platforms Binance symbolizes for the whole crypto ecosystem. What is sure,  what happens to Binance may signal how regulators will approach crypto, with enforcement actions against the exchange hinting at what other platforms should expect.

In my mind, this is not a step-change in regulation of the ‘crypto world’. It is part of a growing trend of worldwide and collaborated regulatory intervention in crypto markets. As a consequence regulations are quickly becoming the most important aspect of any company in the cryptocurrency industry. As governments around the world continue to work towards developing regulatory frameworks for crypto, companies are constantly needing to adapt to continue operating.


Carlo de Meijer

Economist and researcher






Stablecoins are not that stable: what regulatory approach?

09-08-2021 | Carlo de Meijer | treasuryXL

Stablecoins are one of the newest hot spots on the crypto market. They  have the potential to enhance the efficiency of the provision of financial services including payments, and to promote financial inclusion. They might offer a new way to transact and retain value, starting to redefine modern finance. We all have seen their incredible growth in 2020 and 2021 under the DeFi market influence as I described in my former blog. Stablecoins however bear a number of risks that could harm. They are not that stable as is suggested. And think of the systemic risks when stable coins are being used all over the world. Disruptions in the value of a stablecoin could not only have damaging impact on the broader crypto market, but also on the real financial world, unless regulators step in. Main question is: what kind of regulatory oversight would work best without harming innovation?

What are stable coins?

Stablecoins are a type of cryptocurrencies that are pegged to and/or backed by the underlying real-world assets what can be anything from fiat money, commodities or even another cryptocurrency. Like their name suggests, stablecoins are designed to have value that stays (rather) stable with traditional currencies or the underlying commodities. Many stablecoins are collateralized at a 1:1 ratio with their peg, which can be traded on exchanges across the world.

Stablecoins have been created to overcome the price volatility of crypto currencies such as Bitcoin or Tether, which stems from the fact that there is no robust mechanism to determine their real-world value. Given high levels of distrust in those cryptocurrencies, investors tend to resort to safer options like stablecoins. These may leverage the benefits of cryptocurrencies and blockchain without losing the guarantees of trust and stability that come with using fiat currencies. Currently, there are more than 200 stablecoins. At the time of writing of this blog the total value of stablecoins issued on public blockchain networks has surpassed $110 billion, compared to $28 bn at the start of 2021, which reflects the high institutional and retail demand in unstable times.

Types of stable coins

Based on design, we can split stablecoins into a number of major types: fiat-collateralized, crypto-collateralized, commodity-collateralized, and algorithmic or non-collateralized.


Fiat-collateralized stablecoins are the simplest and most common type. They are pegged to fiat currencies like the US dollar or the Euro, and usually backed at a 1:1 ratio, by holding a basket of dollar- or euro-denominated assets. This means that for each of such stablecoin in existence, there is a fiat currency in a bank account. Traders can exchange their stable coins and redeem their dollars directly from the exchange at any time. The most popular fiat-collateralised stablecoins are Tether (USDT) (market cap $62 bn) and USD Coin (USDC0 (market cap $ 27,3 bn).


These are stablecoins that are backed by commodity assets, like precious metals, gold, silver, real estate, or oil. This theoretically indicates to investors that these stablecoins have the potential to appreciate in value in parallel with the increase in value of their underlying assets, thereby providing an increased incentive to hold and use these coins. One example of these stablecoins is PAX Gold (PAXG) (market cap $330 mio), that relies on a gold reserve.


Another type are crypto collateralized stablecoins. These are pegged to other cryptocurrencies as collateral. Because the crypto values themselves are not stable, these stablecoins need to use a set of protocols to ensure that the price of the stablecoin issued remains at $1. They are often collateralized by a diversified reserve of cryptocurrencies that can sustain shocks and yet remain stable. Another mechanism involves over-collateralization, which means for a crypto-backed stablecoin that is pegged 1:2, for each stablecoin, cryptocurrency worth twice the value of stablecoins will be held in reserve. Since everything occurs on the blockchain, these crypto-backed stablecoins are much more transparent, have open source codes, and can be operated in a decentralized manner, unlike their fiat-backed counterparts. However, they are also more complex to understand, and therefore lack popularity. The most popular crypto-backed stablecoin is Dai (market cap $56.8 mio), created by MakerDAO, whose face value is pegged to the US dollar, but is collateralized by Ethereum.

Algorithmic or non-collateralized Stablecoins

A fourth class are so-called algorithmic stablecoins, also known as non-collateralized stablecoins. This is a very different design as it is not backed by any collateral. It operates in the way fiat currencies work, in that it is governed by a sovereign such as a country’s Central Bank. Given the evident difficulties these stablecoins have at maintaining value stability their usefulness is limited.

Algorithmic stablecoins use total supply manipulations to maintain a peg. The basic mechanism is creating a new coin, setting a peg, and then monitoring the price on the exchange. This can be done algorithmically, in a decentralized way, with open source code that is visible and auditable by everyone. This so-called rebasing is a speculative investment asset where the probability of gain and the probability of loss are both greater than zero. A second category of algorithmic stablecoins are coupon-based coins. The difference from rebasing coins is that holders don’t see their number of tokens change unless they do specific actions. The downside, however, is that coupon-based coins seem to be much more unstable. Some of the more known ones include Ampleforth (AMPL), Based, Empty Set Dollar (ESD) and Dynamic Set Dollar (DSD).

How do stablecoins work?

Some central stablecoins, such as Tether, require a custodian to regulate the currency and then reserve a certain amount of collateral. Tether holds the US dollar in a bank account. The amount held must be equal to what they issue to maintain the order of the system. In this way, price fluctuations should be prevented. However, there are other stable decentralized cryptocurrencies, such as the crypto-backed stablecoin Dai that achieve this goal without a central authority figure. They use smart contracts on the Ethereum blockchain to manage the collateral and maintain order. Stablecoins automatically adjust the number of tokens in circulation to keep the price stable. This means that the value of stable coins should (in theory) not fluctuate frequently, as in normal crypto assets.

Why are stablecoins used?

Stablecoins are used in the crypto market for a number of reasons. Crypto currency owners may turn profits into stablecoins in the short term with the intention of investing in other cryptocurrencies when opportunities arise, rather than turning profits into fiat money and transferring them to their bank account.

Stablecoins are also invested in cryptocurrency exchanges or decentralised finance (DEFI) applications to return interest and yield. Investing in crypto currency exchanges in particular offers a safe and attractive alternative to traditional savings methods offered by legacy finance. They empower more people to harness the benefits of the blockchain without the risk of large market fluctuations. In the event of a local fiat currency crashing, people can easily exchange their savings with US dollar backed or Euro-backed or even gold-backed stablecoins, thereby preventing the further depreciation of their savings.

Where are stablecoins used?

With the growing number of stablecoins the use cases keep growing.

Switch between volatile cryptocurrencies and stablecoins

Stablecoins are most popularly used to quickly switch between a volatile cryptocurrency and a stablecoin, while trading, to protect the value of holdings. They provide traders with a ‘safe harbor’, which allows them to reduce their risk to crypto-assets without the need to leave the crypto ecosystem.

Allow the use of smart contracts

Stablecoins allow for the use of smart financial contracts that are enforceable over time. These are self-executing contracts that exist on a blockchain network, and do not require any third party or central authority’s involvement. These automatic transactions are traceable, transparent, and irreversible, making them an ideal tool for salary/loan payments, rent payments, and subscriptions.

Mainstream commerce

Because these stablecoins are seen as relatively less volatile compared to other cryptocurrencies like Bitcoin and Ether, the idea is that stablecoins might be more widely accepted in mainstream commerce. Consumers, businesses and merchants would therefore be more comfortable with using stablecoins as true units of exchange.


Stablecoins allow payers to get as close to the benefits of cash as possible. Stablecoins are freely transferable just like cash; anyone on the blockchain network can receive and send coins. The coins are structured as bearer instruments, giving the holder the rights to redeem the coins for US dollars at any time. This is especially relevant in the decentralized finance (DeFi) segment, where stablecoins play an important role to enable the ecosystem. Mainstream applications with stablecoins are also picking up in cross-border payments, where they are being used to facilitate cross-border trade and remittances.

Risks of stable coins

While stablecoins have the potential to enhance the efficiency of the provision of financial services, they may also generate risks to financial stability, particularly if they are adopted at a significant scale. Some stablecoins are actually riskier than they may seem. Stablecoins may bear risks in terms of asset contagion, collateral and accountability. We also shouldn’t ignore the risks that stablecoins potentially pose to the financial system in terms of systemic risks thereby undermining sovereign currencies.

Not all stablecoins are stable

Notwithstanding their name and the suggestion that their value is quite stable,  not all stablecoins are really 100 percent price-stable. Their values are dependent on their underlying assets. Stable coins can only be truly stable if they are 100% backed by cash. The reason for that is that the issuers of fiat-collateralized stablecoins need to manage the supply of their coins through issuing and redeeming to ensure the value of their coins maintains roughly 1-to-1 with the fiat currency. This stands true for commodity-backed and crypto-backed stablecoins as well. The promise can only work if the stablecoin issuer properly manages the reserves. Since cryptocurrency prices can fluctuate violently, crypto-backed stablecoins are more susceptible to price instability than other collateralized stablecoins.

Asset contagion risk

The rapid growth of stablecoin issuance could, in time, have implications for the functioning of short-term credit markets. Certain stablecoins are today’s economic equivalent of money-market funds, and in some cases their practices could lead to lower values, creating significant damage in the broader crypto market. There are potential asset contagion risks linked to the liquidation of stablecoin reserve holdings. These risks are primarily associated with collateralised stablecoins, varying based on the size, liquidity and riskiness of their asset holdings, as well as the transparency and governance of the operator.
Fewer risks are posed by coins that are fully backed by safe, highly liquid assets.
One of the most known and most widely traded stablecoin is Tether. Each Tether token is pegged 1-to-1 to the dollar. But the true value of those tokens depends on the market value of its reserves. Tether has disclosed that as of 31 March  it held only 26.2% of its reserves in cash, fiduciary deposits, reverse repo notes and government securities, with a further 49.6% in commercial paper (CP).

Collateral consequences

Also further collateral consequences, particularly because the recent rise in crypto prices, has been fuelled in significant part by debt. It is questionable whether stablecoins could liquidate sufficient investments quickly to satisfy the demand if needed. The consequences of such an inability to meet a sudden wave of withdrawals could be significant in the larger crypto ecosystem.

Lack of accountability

The drawback of fiat-collateralized stablecoins is that they are not transparent or auditable by everyone. They are operated just like non-bank financial intermediaries that provide services similar to traditional commercial banks, but outside normal banking regulation. They therefor may escape accountability. In the case of fiat-backed stablecoins traders need to blindly trust the exchange or operator to trade in these currencies or try to find and examine out its financial disclosers by themselves to ensure that the stablecoins are fully backed by fiat, even if they do not release audit results.

Financial stability and systemic risk

Stablecoins may also generate risks to financial stability. Some of these fiat currency-pegged tokens are not backed by actual fiat currencies, but by a combination of riskier assets. This puts not only stablecoin holders at risk but could potentially threaten financial stability in general, if a run on a stablecoin causes the asset and other cryptocurrency prices to collapse. And there is the systemic risk issue. A widely adopted stablecoin with a potential reach and use across multiple jurisdictions (so-called “global stablecoin” or GSC) like Facebook’s Libra, now called Diem, could become systemically important in and across one or many jurisdictions, including as a means of making payments.

Why is regulation needed?

These issues underline there is a large regulation gap concerning stablecoins that contributes to weak investor protection and fraudulent activities. There is no legal framework for regulating stable coins, so no requirements on how reserves must be invested, nor any requirements for audits or reporting. This lack of regulatory clarity also creates confusion when new products related to stablecoins are brought to market.

The activities associated with “global stablecoins” and the risks they may pose can span across banking, payments and securities/investment regulatory regimes both within jurisdictions and across borders. Especially if stable coins would become a significant part of the payments and finance universe there is urging need for a regulatory framework. Ensuring the appropriate regulatory approach within jurisdictions across sectors and borders will be important.

Regulatory scrutiny of stablecoins

A range of regulatory bodies, from the G7, the Federal Stability Board (FSB) to the BIS, have started publishing guidelines. They mostly highlighted risks and challenges, including issues such as financial stability, consumer and investor protection, anti-money laundering, combating financing of terrorism, data protection, market integrity and monetary sovereignty, as well as issues of competition, monetary policy, cybersecurity, operational resilience and regulatory uncertainties.

G7 Summit

At the recently held 2021 G7 Summit in Cornwall (UK) delegations concluded that common standards would be maintained through international cooperation, as well as, standards from the Financial Standards Board. They concluded that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements through appropriate design and by adhering to applicable standards.

Basel Committee on Banking Supervision

Also released recently was a consultation paper from the Basel Committee on Banking Supervision on prudential treatment of stablecoin exposures. While the paper notes that bank exposure is currently limited the continued growth and innovation in crypto assets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.


The BIS’ Basel Committee ‘posited’ in a recent announcement that the crypto classes would be divided between offerings such as stablecoins and tokenized assets that would be eligible for treatment under the Basel Framework, which provides standards for banking supervision. The proposed roadmap hints at more regulation such as stablecoins being governed by stricter capital reserve policies.

FSB recommendations

The Financial Stability Board (FSB) has agreed on 10 high-level recommendations to address the regulatory, supervisory and oversight challenges raised by “global stablecoin” arrangements. They thereby respond  o a call by the G20 to examine regulatory issues raised by “global stablecoin” arrangements and to advise on multilateral responses as appropriate, taking into account the perspective of emerging market and developing economies.

According to the FSB, the emergence of global stable coins (GSCs) may challenge the comprehensiveness and effectiveness of existing regulatory and supervisory oversight. They therefor proposed some principles for regulating stablecoins, including restrictions on reserves, limits on risk and transparency requirements. That should promote coordinated and effective regulation, supervision and oversight of GSC arrangements These arrangements should address the financial stability risks posed by GSCs, both at the domestic and international level. The recommendations call for regulation, supervision and oversight that is proportionate to the risks. They thereby  support responsible innovation and provide sufficient flexibility for jurisdictions.

The final recommendations., including the feedback from the public consultation, will be published in October 2021, while the completion of international standard-setting work is planned by December this year.

Regulatory approaches

Notwithstanding the active work of the various international regulatory and oversight bodies it is still far from sure what regulatory approach would be chosen. There still remains uncertainty as to how they will regulate, either by proposing a bespoke regime for stable coins, banning it outright or assimilating the asset class into their existing regulatory frameworks. There is a number of regulatory approaches starting to shape how stablecoins might be governed and to more narrowly define their use. Most advanced are the EU where the EU Commission came up with their MICA proposal, though the timetable and details of planned changes remain unclear or subject to change. But now also in countries like the US and the UK regulatory activities are accelerating.

EU Market in Crypto-Asset Regulation (MICA)

Europe is currently assessing the large number of comments received during the consultation period on its proposed Market in Crypto-Assets regulation (MICA) that was issued last year September. MICA especially focuses on rules that regulate stablecoins, particularly those that have the potential to become widely accepted and systemic and crypto asset providers such as exchanges. Aim is to provide a comprehensive and transparent regulatory framework and establish a uniform set of rules that should provide investor protection, transparency and governance standard, while allowing the digital asset ecosystem to flourish.

The regulation thereby separates stablecoins into categories such as e-money tokens (stablecoins whose value is pegged to a single fiat currency) and significant asset referenced tokens’, which purport to maintain a stable value by referring to the worth of fiat currencies. These significant asset-referenced tokens are subject to strict regulatory standards of transparency, operation, and governance. Unlike other cryptocurrencies, stablecoins need to be authorised by regulatory institutions to be traded within the EU. The authorisation requirement applies also to stablecoins already in circulation. Except for existing credit institutions, everyone else that wishes to engage in stablecoin activities will also have to gain prior permission from their national supervisory authority.

MICA regulation makes it a legal obligation for stable coin projects to issue a white paper and submit it to their national financial supervisory authority. That supervisory body has the power to prohibit the issuer from releasing their planned stable coins. Most importantly, the regulation prohibits the issuance of interest to e-money tokens. With the interest ban, the EU legislator is arguably aiming to disincentivise the investment of crypto profits in stablecoins, and consequently to protect the interests of the European banking sector.

UK Bank of England

Though the UK is well behind with its regulatory activities around stablecoins compared to the EU, regulators in the UK are now also speeding up their steps to regulate stablecoins. Earlier this year the UK HM Treasury issued a general consultation and a call for evidence on crypto assets and stablecoins generally. The UK’s proposals however are narrower than the UK MICA proposals, reflecting an intention to take a ‘staged and proportionate approach’. In particular, the UK proposes to regulate only ‘stable tokens used as a means of payment’ initially.

The Bank of England Discussion Paper that was recently launched kicked of a conversation regarding digital money, stating that stablecoins, typically backed by fiat or another asset, but issued by a private firm, need to be regulated in the same way as payments currently handled by banks if they become widespread and can impact financial stabilities.

US Biden government

With the new Biden government also in the US activities surrounding regulating stablecoins are speeding up, and there is a growing optimism that 2021 will ‘bear witness to material progression’ from US regulators and law makers to better understand this technology and clarify the regulatory framework.

Stable Act

In December last 2020, just before the end of the US Congress tenure, a draft of the Stablecoin and Bank Licensing Enforcement Act (Stable Act) was introduced. The law would approve the use of stablecoins and cryptocurrencies as legitimate alternatives to other real-time payment systems. This Act however proposed significant increases in the regulatory oversight of stablecoins. It would limit who can issue the stablecoins, requiring that stablecoins be issued by a bank and would impose certain standards. It is however questionable if this Act in this form will really be approved by the US Congress.

US Fed

The US Fed is now also taking note of the rising usage of stablecoins. They announced it will issue a report later this year to begin a ‘major public consultation’ on crypto regulation, especially stablecoins, laying out the risks and benefits associated with stablecoins as well as a potential digital dollar.
Federal Reserve Chairman Jerome Powell said that the US is at a ‘critical point’ for regulation of these digital currencies, advocating for the application of new rules on stablecoins that are similar to those applied to bank deposits and money-market mutual funds, where the US has a pretty strong regulatory framework. The issuance of a stablecoin should be conditioned on following risk-limiting practices designed to ensure that the tokens are in fact worth that price. There should be liquidity requirements as well.

The President’s Working Group for Financial Markets

The President’s Working Group for Financial Markets, the nation’s top financial regulators in the US, last week met to discuss stablecoins and how to react. This is marking the first publicly-announced meeting of this group of regulators since Joe Biden took office earlier this year. Topics of discussion included the rapid growth of stablecoins, potential uses of stablecoins as a means of payment and potential risks to end users, the financial system and national security. This conversation is clearly only just starting. The meeting promised that the group, would publish recommendations for stablecoin regulation within the next few months. From this discussion it is not yet clear what sort of regulatory framework we might see, and which one would make the most sense for stablecoins.

The regulatory way forward

Stablecoins present peculiar challenges to regulators that ask for narrow cooperation between regulators and the stablecoin industry and global regulatory cooperation.

Stablecoins do not stand for a uniform category but represent a variety of crypto instruments that can vary significantly in legal, technical, functional and economic terms. In order to be effective in limiting risks and not disturbing innovations the stablecoin industry must work together with the regulators to come up with a framework that helps put them at ease while protecting this nascent industry from overregulation.

Another major regulatory challenge relating to global stablecoins is international coordination of regulatory efforts across diverse economies, jurisdictions, legal systems, and different levels of economic development and needs. There is not (yet) a uniform regulatory approach of regulators worldwide relating to stablecoins. Calls for the harmonization of legal and regulatory frameworks include areas such as governing data use and sharing, competition policy, consumer protection, digital identity and other important policy issues.

This all should contribute to more stability of stablecoins.


Carlo de Meijer

Economist and researcher