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Popular Stablecoin Headed for Trouble

The SEC's "crypto czar" has hinted that Dai and other stablecoins could be classified as securities, which would be bad news for their supporters.

Popular stablecoin Headed for Trouble iBase Trading.
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The SEC’s “crypto czar” has hinted that Dai and other stablecoins could be classified as securities, which would be bad news for their supporters.

Popular Dai

Dai is one of the most talked-about topics in the blockchain world right now. To keep its value consistent and tethered to the US dollar, the Ethereum-based crypto-token employs smart contracts to manage its own supply. It is seen as a critical component of a decentralized financial system by proponents. In theory, a system like this would make financial services like lending available to people who don’t have access to the existing system. This includes those who don’t have a bank account or a credit history.


However, while Dai, created by MakerDao, is clearly fashionable right now, recent developments show that its future is far from assured.

On Friday, Valerie Szczepanik, a senior advisor for digital assets at the Securities and Exchange Commission’s section of company finance, proposed. It is said that some so-called stablecoins could be securities. As a result, they would be subject to stringent—and costly—regulatory restrictions.

Stablecoins Categorized

According to Szczepanik, there are three types of stablecoins. Some are backed by tangible assets such as gold. On the other hand, others like Dai, are backed by fiat money deposited in the issuer’s bank account.

Szczepanik didn’t claim any of the categories were perfect, but she made a point of highlighting the third. She said coins that rely on “some form of pricing mechanism” to preserve their value may fall within the SEC’s jurisdiction. The protecting investors from fraud and scams charges it. If a stablecoin has “some central party controlling the price variation over time,” Szczepanik believes it is “going towards the region of security.”

The founders of an “algorithmic” stablecoin has a project called Basis. This had garnered $133 million from high-profile venture capital companies, abruptly shut it down in December. It has cited securities law as the cause. They claimed that having to apply US security regulations to the system greatly impeded their ability to implement Basis. Though Dai operates differently, and its supporters say that it is not at all centralized. Szczepanik’s description was broad enough to imply that it could face legal concerns similar to those that Basis did.

Dai dealing with regulatory uncertainties

Is it possible for it to remain steady indefinitely? It employs Ether as collateral instead of fiat money. That’s hazardous, because Ether’s price might drop at any point, bringing the stablecoin down with it. Dai compensates for this by employing an “overcollateralization” technique. Specifically, the system is required to retain at least $150 worth of ether locked up as collateral for every $100 worth of Dai in circulation.

The MakerDAO community, which includes Maker token holders, can also vote to adjust the stability fee, which is the cost of minting new Dai. This is if the price of Ether falls below a particular threshold.

In Conclusion

The coin has struggled to maintain its $1.00 peg in recent weeks, fluctuating as low as $0.96. The community has already voted three times to increase the stability fee in response. The episode implies that the question of whether Dai is a security risk is less significant than whether its sustainable. And if it isn’t, let’s hope we can figure out why before it becomes the foundation of a new global financial system.

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Tanya Smith is an editor at iBaseTrading. With M.A. in Journalism and Mass Communication, she is pursuing her dream of creating a positive difference in the media industry. She also enjoys Fashion and Travelling.