Decoding the Constructive and Destructive Aspects of the Stablecoin Bill on "DeFi + RWA"

Author: Jerry@TPDAO, BeeGee, ThePrimediaDAO

The U.S. House of Representatives voted this week on a stablecoin bill, marking the first time a cryptocurrency regulatory bill has been put to a vote in Congress. This is a milestone in Congress's efforts to draft federal regulatory frameworks for the digital asset industry. The discussions around the bill, which began a week ago, have dragged on until now. This is not just a cautious attitude but also a strategic ambition. It concerns the positioning of major powers in a new crypto era, which will determine the integration process between sovereign nations and the crypto world.

Therefore, this article discusses the constructive and destructive impacts of the stablecoin bill on "DeFi + RWA" within the context of the integration process between sovereign nations and the crypto world. This is a timely moment— the geek spirit of the crypto world is continually touching the boundaries of the real world, Web3 technologies and applications are beginning to enter industrial development, and the real-world financial markets and order are in turmoil. The crypto market, especially DeFi, has also exposed issues of lack of momentum. The integration of the two worlds is the best solution, as the objective conditions naturally facilitate the integration for mutual benefit and collaborative development.

We will first discuss the destructive aspects— at the outset of the stablecoin bill's draft announcement, the crypto world was filled with vigilance. For example, discussions in the crypto market regarding the requirements that stablecoin issuers must comply with and who will oversee them are specific and meaningful:

If the bill is passed, the approval requirements may lead to more issues. It could directly undermine the composability of DeFi. For instance:

• If USDC has already received approval from the relevant regulatory authorities, does Compound need to obtain the same approval to issue cUSDC (a yield-generating asset) for its lending platform?
• If I run a bridging protocol, do I need to obtain approval for the bridged version of USDC?
• If a wrapped version of the stablecoin is needed to connect real-world assets, how will that be achieved?

Since the draft, discussions on how the stablecoin bill will affect top decentralized stablecoins have permeated the agenda of every stablecoin project participant. But this is still a narrow perspective. Behind the disagreements between Democrats and Republicans lies a high degree of strategic unity— in the context of the continuously evolving crypto market and the increasingly radical digitalization process, the U.S. is attempting to strengthen the dollar's influence in both traditional financial order and the crypto economic system based on stablecoins.

Thus, we must confront the influence of sovereign government forces on the crypto economic system, including the efforts of the U.S. stablecoin bill to establish the dollar's status as a currency issuer. This may diverge from Satoshi Nakamoto's original intent, but in reality, this divergence has always been occurring, especially now that the stablecoin system is dominated— what Satoshi did not foresee is that cryptocurrencies have not been able to dethrone the dollar but have instead made the dollar the biggest beneficiary. In the crypto economic system, mainstream stablecoins are all based on the traditional dollar currency system. The Federal Reserve has not issued a single coin but has already encompassed the crypto market and completed the iteration from "Gold · Power · Dollar" to "Power · Dollar" and then to the crypto world— "Power · Digital Dollar." Without a strong counterforce, the era of "Digital Dollar" unification is approaching.

As we confront this integration process, we see not only the ambitions of sovereign governments to regulate and dominate the crypto market but also the process of empowering the integration of traditional financial markets and crypto economic markets. Clearly, the impact of the stablecoin bill extends far beyond the hundreds of billions of dollars in the stablecoin market; behind it lies the trillion-dollar DeFi market, tens of trillions of dollars in the RWA market, and the entire crypto economic system.

In our analysis at the end of last year titled "Why 'Integration' Became the Value Research Theme for the Next Bull Market," we judged that after the early builders of the blockchain world have forged ahead, the infrastructure of the crypto world is continuously improving, and the crypto ecosystem is transitioning from being limited to investment/speculation attributes in ICOs, DeFi, NFTs, etc., to the level of industrial and financial integration. We predict that the keyword for the next bull market will be integration— the integration of Web3 technology with various industry ecosystems; the integration of the crypto economy with the financial system of the sovereign world; the integration of DeFi with non-financial use cases of Web3.

Now, RWA is gradually becoming the narrative with the highest value capture ability in this integration process. In our earlier article "Decoding RWA: The Most Valuable Crypto Narrative in a Compliance Context," we judged that the application ecosystems of Ethereum and other public chains would provide the strongest fundamental support in this cycle, but it is more about instilling confidence in us. We believe that the greatest support at the market level is RWA.

Returning to the dollar and U.S. layout behind the American stablecoin bill, we need to focus on the financial landscape of sovereign governments in the integration process of sovereign finance and crypto economy. The layout of the renminbi and Hong Kong appears urgent— in the overall trillion-dollar RWA system, the digitization of currency issuance by sovereign governments, including the possibility of a digital Hong Kong dollar, such as the e-HKD pilot program exploring six use case categories, including Web3 settlement, tokenized assets, and tokenized deposits…

On a more concrete level in the capital markets, we can see two major directions in the U.S. market: the RWA treasury bond market and Hong Kong stocks, representing the market's self-generated process of RWA capitalization. For example, Ondo Finance announced in January this year the launch of a tokenized fund that brings risk-free interest rates on-chain, allowing stablecoin holders to invest in bonds and U.S. treasuries; asset management company Matrixport launched an on-chain bond platform, Matrixdock, which went live with treasury-related services in late January; OpenEden, founded by former employees of Gemini, launched tokenized U.S. treasuries in April this year, allowing stablecoin holders to mint TBILL through OpenEden TBILL Vault to obtain risk-free returns from U.S. treasuries. Recently, against the backdrop of rising interest rates, U.S. treasury yields have steadily climbed and now clearly exceed DeFi yields.

ThePrimedia has been continuously monitoring the linkage between the Dubai RWA market and the Hong Kong market over the past month. In particular, in mid-June, Bank of China International issued a 200 million digital note RWA for the Hong Kong market through UBS, which raised some questions— the "main Ethereum blockchain" mentioned in UBS's original text is not actually the Ethereum mainnet but a centralized alliance chain deployed using Ethereum's open-source code; under the uncontrollable risks of policy compliance, regulation, and trading efficiency, traditional institutions still have a long way to go to deploy businesses on public chains, even though traditional financial institutions are showing increasing acceptance of tokenized RWAs.

It is foreseeable that traditional exchanges will play a role in the secondary trading of tokenized RWAs. For instance, the Australian Securities Exchange may consider listing tokenized RWAs on its platform in the future. As this field matures, regulatory developments will become a driving force for mainstream adoption. However, the emerging RWA track is not only giving rise to new native projects.

In "Decoding RWA: Can 'New Trends in Dubai WEB3' Serve as a Reference for 'Hong Kong Crypto Narrative'?" we introduced BG Trade as a case with more native crypto genes and genuine deployment of business on public chains— BG Trade aims to integrate multi-dimensional asset investments on the same platform, providing efficient connection opportunities between the traditional stock market and the cryptocurrency world, planning to build an ecosystem that backs tokens and traditional stocks 1:1, breaking down the barriers between the crypto and stock markets.

To summarize briefly: The main objectives of the U.S. stablecoin bill are twofold: 1. Regulate the stablecoin industry; 2. Serve the digital dollar. Specifically, the first aspect requires stablecoin issuers to apply for a license from the Federal Reserve, meeting capital requirements, risk management requirements, etc. In terms of regulation, it requires that institutions seeking to issue stablecoins will be subject to appropriate federal banking agency oversight, while non-bank institutions will be under the Federal Reserve's supervision. Failure to register could lead to a maximum of five years in prison and a fine of $1 million. Issuers outside the U.S. must seek registration to conduct business in the country.

The second aspect of the bill seeks new outlets for the dollar, closing off other avenues for stablecoin creation, which benefits the expansion of the dollar and hinders the discovery of new values. For example, regarding reserves, it requires applicants to have "one-to-one reserves," including: currency (i.e., U.S. dollars), treasury bonds, repurchase agreements, and central bank reserve deposits. These are all based on fiat currency or its derivatives, with no others. Additionally, the new draft bill includes a "two-year ban," requiring a prohibition on issuing, establishing, or generating stablecoins "not backed by tangible assets" for two years. Essentially, it is still clearing existing obstacles for the internationalization of the dollar.

On a positive note, it clarifies regulatory boundaries, which is conducive to the further development of stablecoins and is expected to inject "blood" into the industry development of DeFi. From this perspective, it is extremely beneficial for the development of DeFi. However, on the other hand, it also correspondingly increases compliance costs and compresses profit margins for DeFi. Overall, it is positive for DeFi.

For RWA, it is also a positive push overall. The bill requires reserves to consist of fiat currency, meaning that fiat currency in RWA will become part of cryptocurrency at the legislative level, thus allowing on-chain projects surrounding fiat currency, treasury bonds, and other assets to be conducted legally and on a large scale. This is also an important step for RWA towards large-scale development, and the scaling of RWA will lay a solid foundation for the large-scale adoption of the crypto industry.

In 2023, tokenization has been referred to by JPMorgan as a "killer application of traditional finance" and by BlackRock's CEO Larry Fink as the "market of the future." Therefore, at the market level, the diffusion of tokenized RWAs is a positive development for cryptocurrency investors, as it not only allows for the utilization of higher treasury yields but also introduces more stable assets to DeFi and increases the diversity of collateral in this field.

However, we must elevate the stablecoin bill to the level of sovereign nations' crypto economic layout. From this perspective, the RWA track will be the main battlefield for the integration of sovereign finance and the crypto economy. We see the ambitions of the U.S. and look forward to the layout of Hong Kong.

Note: This article was collaboratively completed by TheprimediaDAO, with major collaborators including TheprimediaDAO founder Jerry (@ThePrimedia) and TheprimediaDAO Builder, TigerVCDAO Investment Head BeeGee (@BeeGeeETH).