The stablecoin market is about to explode. This is something we covered in great detail over the last few months.
In spite of the recent delay with the GENIUS Act in the United States Congress, I am confident there will be legislation passed which outlines the regulations that issuers will have to adhere to.
This is something that is a mixed blessing. As stated in the past, this will be hundreds of companies into the arena. We will see banks, social media platforms, and others all bring out their own stablecoin.
Overall, this is likely to be a positive.
The other side tells a different story, especially to long time crypto advocates who value freedom and censorship resistance.
None of that exists with regulated stablecoins. There is a lot of debate about Central Bank Digital Currencies (CBDC). These are not relevant if the stablecoin issuers are all under government control.
It is precisely what is taking place.
For this reason, we will look at what is being called "dark stablecoins" and how these will likely see a similar trajectory.
The Rise of Dark Stablecoins Like HBD
What is a dark stablecoin?
Basically it is a stablecoin that is not under government control. The present model appears to be an asset backed token, with the backing coming from government bonds (T-bills). Issuers are required to have full KYC and AML capabilities. Also, the ability to freeze funds due to sanctions and other government actions is necessary.
The issuers are essentially becoming banks in the sense they have to adhere to the same rules, ones the government sets forth.
Cryptoquant CEO Ki Young Ju brought up this point recently. He feels that censorship resistant stablecoins will come into favor as the present ones lose some allure.
Young Ju stated that as today’s stablecoins become regulated, they will lose the allure that has led many to use them as a substitute for the U.S. dollar. He explains that companies like Circle and Tether have been able to hold their custody assets in banks and with institutions, with the government not interfering unless for crime-related purposes.
As governments realize the technological capabilities, it will use those to their advantage.
Nonetheless, with the possible implementation of onchain direct scrutiny methods, including tax collection through smart contracts, and freezing of funds based on government rules, this is poised to change, giving rise to dark stablecoins that could satisfy different use cases.
He categorizes them as follows:
Young Ju explains that dark stablecoins can be programmed in two different ways: using algorithms to maintain the U.S. dollar peg, although most of these stablecoins (including TerraUSD) have failed before; and using stablecoins issued by countries that don’t censor financial transactions.
I would add to the list synthetic stablecoins which can be similar to its algorithmic counterparts but also combine factors such as asset backing.
The key takeaway is they cannot be censored. Unlike a coin such as USDC, which is issued by Circle, governments cannot stop transactions or shut down wallets.
Hive Backed Dollar (HBD)
Since rumors about stablecoin legislation started, I stated that HBD would never be "legal" in the sense of centralized exchanges allowing them. They will be banned.
This is what is meant by "dark stablecoins". HBD resides on the base layer of the blockchain. It is not run by a company, overlaying it on different networks. Instead, the block validators approve any transactions, the same as any other blockchain. There is no group or individual behind the coin.
How it operates is dictated by the code. It is programmed in and can only be changed through consensus of the block validators. There is no KYC or AML. Sanctions cannot be applied. Wallet access is limited only by having the keys and enough "gas" to interact with the network. If those two conditions are met, then the wallet owner can transact.
Of course, we can see how governments hate this. It instantly usurps their power. That is something they are going to have to get accustomed to. Since the Internet became popular, we saw a variety of areas where government impotency reared its head. Probably the most public was the file sharing of music. Napster created quite a stir in the day.
Ultimately, we are dealing with data. The challenge for governments is there is nothing they can do with a peer-to-peer system. To exert power, governments need intermediaries they can control. That is what Circle, Tether, and Bank of America are.
With a stablecoin like HBD, there is no third party intermediary. This role is filled by the blockchain. That means a group of unassociated node operators take turns validating transactions. Even if a number of these are targeted, there are other that operate in different parts of the world. At the same time, the source code is open, with anyone able to spin up a node.
As stablecoin legislation roles out around the world, we will see people coding around that. We are likely to also see a rise in "dark stablecoins" as government begin to exert even greater control over blockchain and digital networks.