The tightening of government oversight within the crypto industry may spur the development of censorship-resistant “shadow stablecoins”, according to industry experts. Stablecoins have been favored by various groups as a store of assets, due to minimal governmental intervention. However, with impending regulations, this landscape may soon shift, opines Ki Young Ju, the CEO of crypto analytics firm CryptoQuant.
In a recent post, he noted, “In the near future, strict government regulation could apply to any stablecoin issued by a country, much like traditional banks. Transfers may trigger automatic tax collection via smart contracts, and wallets could be frozen or require paperwork according to government regulations.”
He further added that users who rely on stablecoins for large international transfers may turn to censorship-resistant shadow stablecoins.
With the recent assumption of power by the crypto-friendly administration of former US President Donald Trump, lawmakers are considering stablecoin legislation that would regulate US stablecoins for legal payment use. The European Union has already put into effect its Markets in Crypto-Assets (MiCA) regulation, which mandates that stablecoins be regulated and transparent.
Ju suggests that a shadow or private stablecoin could be created as an algorithmic stablecoin, with its value maintained via algorithmic mechanisms, making it less vulnerable to authority interference. “A potential example could be a decentralized stablecoin tracking the price of regulated coins like USDC using data oracles like Chainlink,” he said.
Another possibility is stablecoins issued by countries that do not censor financial transactions, or if Tether decides to defy US government regulations in the future. “Tether used to be a censorship-resistant stablecoin. If it chooses not to comply with US government regulations under a future Trump administration, it could transform into a shadow stablecoin in an increasingly regulated internet economy,” Ju noted.
Cryptocurrencies like Zcash (ZEC) and Monero (XMR) are already employing privacy technology. Although they aren’t stablecoins, they still mask transactions and allow users to send and receive funds without revealing their transaction data on the blockchain. Several projects, including Zephyr Protocol and PARScoin, are working on applying similar technology to stablecoins.
The market cap of US dollar-denominated stablecoins has been steadily growing, exceeding $230 billion in April, as reported by Citigroup. This marks a 54% increase from the previous year, with Tether (USDT) and USDC (USDC) accounting for 90% of the market. In 2024, total stablecoin volumes reached $27.6 trillion, surpassing the combined volumes of Visa and Mastercard by 7.7%.
