Do you want an innovative crypto future? It requires regulation.

Stablecoins have come under fire since the dissolution of the UST triggered crypto’s lingering bear market, leading to mixed results of industry views when it comes to the role of regulation.

But the reality is that all crypto can benefit from clear and fair regulation.

Without clarity around how cryptocurrencies will be treated, decentralized applications (dapps), financial institutions and users must navigate the potential for sudden changes that could upend their business and hinder innovation and growth.

Governments take action on standards

If regulators strike a healthy balance between supporting innovation – while protecting users from high-risk and negligent projects – rulemaking will greatly enhance DeFi’s growth.

President Biden’s administration recently followed up its March executive order with a framework for how the United States intends to responsibly approach cryptocurrencies. A fact sheet recognizes major potential benefits derived from digital assets. Indeed, protecting users and investors – while taking steps to guarantee financial stability – can only help Web3’s long-term viability.

Although the fact sheet contains little detail on what form policies related to digital assets should take, global payments and settlements regulators issued guidelines in July proposing to treat stablecoins like other assets that perform a transfer function.

The maneuver would require stablecoins to meet the attributes outlined in the Principles for Financial Market Infrastructure (PFMI), if financial watchdogs choose to enforce it. PFMI includes guidance on risk management, financial strength and clear recovery plans in the event of a sudden downturn.

While we will never know whether such policies would have prevented the collapse of the Terra ecosystem, they form a solid baseline for building stronger, more resilient stablecoin rails.

Protect users and promote innovation

Clear and fair rules for stablecoins may well promote a market where innovation increases exponentially.

For example, privacy-preserving stablecoins leveraging zero-knowledge proofs can play an important role in improving and expanding stablecoin use cases, privacy and stability.

Institutional TradFi players have been hesitant to dive headfirst into crypto, in no small part due to the radical openness inherent in the bulk of blockchains.

The likes of banks and hedge funds don’t necessarily like the idea of ​​competitors witnessing how much capital they move, when – and via which financial instruments. The privacy-preserving properties of zero-knowledge proofs can help alleviate TradFi concerns, bringing that much more liquidity into DeFi.

The need to get the regulations right

The stakes are high. If laws governing stablecoins are not properly designed, they will inevitably weaken America’s position as world economic leader.

The formation and adoption of regulations will inevitably determine the future of finance, as DeFi becomes synonymous with TradFi and Web2 evolves into Web3.

Attend DAS:LONDON and hear how the biggest TradFi and crypto institutions see the future of crypto’s institutional adoption. Register here.