Source: ThePrimediaDAO

Author: Jerry@TPDAO, BeeGee

The U.S. House of Representatives voted on the stablecoin bill this week, marking the first time that cryptocurrency regulation has been put to a vote in Congress. This is a milestone in Congress' compilation of federal regulatory rules for the digital asset industry. The bill discussion from a week ago was dragged out until now. This is not just a cautious attitude, but also ambitious strategy. This is about the layout of a new era of encryption, which will determine the position of sovereign states in the integration process with the crypto world.

Therefore, this article discusses the constructive and destructive aspects of the stablecoin bill for "DeFi+RWA" within the context of the integration process between sovereign states and the crypto world. This is the perfect time - the geek spirit of the crypto world is constantly pushing the boundaries of the real world, Web 3 technologies and applications are beginning to enter industrial development, the real-world financial market and order are stagnating, and the crypto market, especially DeFi, is also facing a lack of drive problem. The fusion of the two worlds is the best solution, which is naturally conducive to the development of both parties.

Let's first start with the destructive aspect - when the draft of the stablecoin bill was released, the crypto world was full of vigilance. For example, discussions in the crypto market about the requirements that stablecoin issuers must comply with and who will regulate them are specific and meaningful:

If the bill is passed, the requirements for approval may bring more problems. It could directly undermine the composability of DeFi, for example:

• If USDC has already obtained approval from relevant regulatory agencies, does Compound need the same approval to issue cUSDC (a yield-generating asset) for its lending platform?

• If I run a bridging protocol, do I need approval for the bridged version of USDC?

• How would the implementation of wrapped versions of stablecoins to connect real-world assets be achieved?

Since the release of the draft, discussions on how the stablecoin bill will affect top-tier decentralized stablecoins have been a recurring topic for every stablecoin project participant. But this is still a narrow perspective. Now, behind the differences of opinion between Democrats and Republicans, there is a high degree of strategic unity - as the crypto market continues to evolve and the crypto world becomes increasingly digitized, the United States is attempting to strengthen the influence of the U.S. dollar in the traditional financial order and the crypto-economic system based on stablecoins.

Therefore, we have to face the layout of sovereign government power in the encrypted economic system, including the efforts of the Stablecoin Bill in the United States to establish the issuing status of the US dollar. This may deviate from Satoshi Nakamoto's original intention, but in fact, this deviation has been happening all along, especially now that stablecoins dominate the system - much to Satoshi Nakamoto's surprise, cryptocurrencies have not only failed to replace the US dollar, but have made it the biggest beneficiary. In the encrypted economic system, mainstream stablecoins are based on the traditional US dollar. The Federal Reserve has not issued a single coin, yet it has taken control of the crypto market and used it to transition from "gold, power, dollar" to "power, dollar" and finally to the world of cryptocurrencies - the "power, digital dollar". The era of the "digital dollar" dominance is approaching unless there is a strong counterforce.

As we face this integration process, we not only see the ambition of sovereign governments trying to regulate and control the crypto market but also the process of integration and empowerment between traditional financial markets and the crypto economy. Obviously, the impact of the Stablecoin Bill goes beyond the billion-dollar stablecoin market; behind it lies the trillion-dollar DeFi market, the tens of trillions of RWA market, and the entire crypto economic system.

In the analysis "Why 'Integration' Becomes the Value Research Theme for the Next Bull Market" at the end of last year, we concluded that after the arduous efforts of early builders in the blockchain world, the infrastructure of the crypto world is constantly improving, and the crypto ecosystem is moving from the active domain of investments/speculation such as ICOs, DeFi, and NFTs to the level of industry and financial integration. We believe that the key to the next bull market is integration - the integration of web 3 technology with various industries' industrial ecosystems; the integration of the crypto economy with the financial systems of sovereign states; and the integration of DeFi with non-financial use cases of web 3.

Now, RWA is gradually becoming the most valuable narrative in this integration process. In the article "Decoding RWA: The Most Valuable Cryptocurrency Narrative in the Compliance Context" at the beginning of this month, we concluded that Ethereum and other public chains' application ecosystems will be the strongest fundamental support in this cycle, but it is more about giving us confidence. We believe that the biggest support at the market level is RWA.

Returning to the US Stablecoin Bill and the US dollar's layout, we need to focus on the financial landscape of physical world sovereign governments in the process of integrating sovereign finance and the crypto economy, and the layouts of the Chinese yuan and Hong Kong become more urgent. In the RWA system with a total market value of trillions of dollars, the digitization of sovereign government currencies, including the possibility of digital Hong Kong dollars from the Hong Kong government, such as the e-HKD pilot program that explores six categories of use cases, including web 3 settlement, tokenized assets, and tokenized deposits...

On a more practical level, in the context of the capital market, we can see the two directions of the US market RWA Treasury market and the Hong Kong stock market, representing the market's own process of RWA securitization. For example, Ondo Finance announced the launch of tokenized funds in January this year, bringing risk-free interest rates to the chain, allowing stablecoin holders to invest in bonds and US Treasury bonds; Matrixport, an asset management company, launched a bond platform called Matrixdock, which went live in late January this year, offering services related to treasury bonds; OpenEden, created by former employees of Gemini, launched tokenized US Treasury bonds in April this year, and stablecoin holders can mint TBILLs through OpenEden TBILL Vault to obtain risk-free returns on US Treasury bonds. Recently, with the rising interest rates, the yield of US Treasury bonds has steadily increased and now clearly exceeds DeFi yields.

ThePrimedia has been closely monitoring the connection between the Dubai RWA market and the Hong Kong market in the past month. In particular, in mid-June, CCB International, through UBS, raised some questions about the 200 million digital note RWA issued for the Hong Kong market. The "main Ethereum blockchain" mentioned in the original UBS document does not actually refer to the Ethereum mainnet, but to a centrally deployed alliance chain based on the Ethereum open-source code. Under the uncontrollable risks of policy compliance, regulation, and transaction efficiency, traditional institutions still have a long way to go to deploy businesses on public chains. Even traditional financial institutions are showing an increasing acceptance of tokenized RWAs.

It can be foreseen that traditional exchanges will play a role in the secondary trading of tokenized RWAs. For example, the Australian Securities Exchange may consider listing tokenized RWAs on its platform in the future. As this field continues to mature, regulatory development will be a driving force for mainstream adoption. However, the emerging RWA track is not only witnessing the emergence of new native projects.

In the article "Decoding RWAs: Can 'Dubai's Web 3.0 New Trends' Serve as a Reference for 'Hong Kong's Crypto Narrative'?, we introduced BG Trade as a case study with more native crypto genes and actual deployment of business on public chains. BG Trade aims to integrate multidimensional asset investments on the same platform, providing efficient connections between the traditional stock market and the cryptocurrency world. It plans to build an ecosystem that backs tokens and traditional stocks 1:1, breaking down barriers between the cryptocurrency circle and the stock market.

A brief summary: The main purposes of the US Stablecoin Bill are twofold: 1. Regulating the stablecoin industry; 2. Serving the digital dollar. For the first aspect, this bill requires stablecoin issuers to apply for licenses from the Federal Reserve, meeting capital and risk management requirements, among others. In terms of regulation, it requires qualifying custodial institutions seeking to issue stablecoins to undergo appropriate supervision from federal banking agencies, while non-bank institutions will be subject to oversight by the Federal Reserve. Failure to register could result in a maximum of five years imprisonment and a $1 million fine. Overseas issuers must seek registration to operate in the country.

Regarding the second aspect, this bill seeks to secure a new export for the US dollar and prevent the creation of stablecoins from other sources, favoring the expansion of the dollar and hindering the discovery of new value. For example, in terms of reserves, it requires applicants to have a "one-to-one reserve" comprising of currency (i.e., the US dollar), Treasury bonds, repurchase agreements, and central bank reserve deposits. These reserves are based solely on legal tender or its derivatives, with no other assets included. Additionally, the new draft of the bill includes a "two-year ban" that prohibits the issuance, establishment, or creation of stablecoins without "tangible asset backing." Essentially, this aims to remove existing barriers to the internationalization of the US dollar.

From a positive perspective, the bill clarifies regulatory boundaries, benefiting the further development of stablecoins and is expected to provide the "lifeblood" for the industry's growth in decentralized finance (DeFi). In this regard, it is highly advantageous for the development of DeFi. However, on the other hand, it also increases compliance costs and squeezes the profit margins of DeFi. Overall, it has a positive impact on DeFi.

For RWAs (Real-World Assets), it is also a positive driver as a whole. The bill requires reserves to consist of legal tender, meaning fiat currencies within RWAs will become part of the cryptocurrency at the legislative level. Consequently, projects involving the tokenization of assets such as fiat currencies and government bonds can be conducted legally and on a large scale. This is an important step for the massive expansion of RWAs and will lay down a solid foundation for the widespread adoption of cryptocurrencies.

In 2023, tokenization has been referred to as a "killer application" by JPMorgan Chase in traditional finance and labeled as "the future market" by BlackRock CEO Larry Fink. Therefore, in the market context, the diffusion of tokenized RWAs is a positive development for cryptocurrency investors. Besides offering higher yields on government bonds, introducing RWAs also brings more stable assets with increased collateral diversity to the DeFi sector.

But we have to look at the stablecoin bill from the perspective of the sovereign nation's layout in the crypto economy. In this regard, the RWA track will become the main battlefield for the integration of sovereign nation's finance and the crypto economy. We see the ambition of the United States and also look forward to Hong Kong's layout.

Note: This article was collaboratively completed by TheprimediaDAO, with the main contributors being Jerry (from @ThePrimedia) and TheprimediaDAO Builder, TigerVCDAO Investment Head BeeGee (@BeeGeeETH).