Kowala (kUSD) Talks on Algorithmic Stablecoin Legal Uncertainties, Getting Stuck in “Regulatory Limbo”
With more crypto projects tilting towards being stablecoins, there’s the need for clear legal guidelines that will aid regulatory compliance, and make sure that these tokens are operating and functioning within the confines of the law.
Currently, the legal framework for algorithmic stablecoins is lacking, thus creating a sense of uncertainty among project founders and their communities. This is of particular concern in the US where the SEC has clamped down on scam crypto projects and created a regulatory framework for security token offerings and initial coin offerings.
As a result, founders of stablecoins are in a quagmire as to how to move forward. One of them states that this has been a major source of worry and concern for him and the team, as it has stalled their growth financially and developmentally.
Most founders are of the opinion that the absence of a legal framework is creating a significant bottleneck that’s made it very difficult to comply with any regulations.
One of the individuals with this concern is Eiland Glover, Cofounder and CEO of Kowala (kUSD). He stated that the lack of regulations is the reason his stablecoin project hasn’t grown like it should. According to him,
“Compliance issues have affected Kowala and its investors and token holders significantly,” […] “First, the direct costs of compliance have been enormous. The indirect costs are probably bigger, however, because regulatory compliance decisions impact the design of the protocol itself, making an already complex platform even more complex to build. Complexity leads to delays and greater development expense.” […] “Like Basis, Kowala also remains in regulatory limbo,” He concluded.
The Basis Problem
Recently, Basis, one of the most successful stablecoin projects announced its decision to close down and reimburse investors to the tune of the $130 million it raised through them. Their decision was based on the regulatory uncertainty plaguing all algorithmic stablecoins in the US.
“It is not clear exactly what regulatory agency is putting pressure on Basis,” stated an independent observer. “Nor is it clear the exact reason why regulators have a problem with their business model or token project.”
Reports from sources indicate that the founders had to terminate the project because there were doubts about it being able to sustain the 1:1 peg with the dollar. The project itself had contingency plans in the form of issued bonds for scenarios like the price of the coin falling below $1.
While this sounded good on paper, there was the real problem of finding ways to get potential investors to take the bonds instead of dumping the coins. As a result, this meant that the contingency plan wasn’t foolproof.
Basis and Kowala are different from other stablecoins like TrueUSD (TUSD) or Tether (USDT) in the sense that the former depend on their various algorithm to regulate the token supply and keep their prices stable –reason they’re called algorithmic stablecoins-, while the latter solely relies on their real world US Dollar backing.
Kowala’s Model and Current Issues
kUSD, Kowala’s tokens are given as a reward for mining the token on the ethereum blockchain. Once the value of the token starts exceeding the $1 price, the algorithm will automatically increase the volume of the supply to counter the increase in value.
This way, the price of the token will remain stable and constant. And in the event of a loss in value, the algorithm will automatically burn off extra coins, lowering supply and getting the price back up to the $1 peg.
Kowala’s model for its algorithmic stablecoin project differs from Basis’ in the sense that tokens can be added or removed on an as needed basis. The ultimate goal of the project is its intent to be used as an alternative to fiat currencies.
This is why it is very big on price stability and security. These two features therefore, put significant control back in the hands of users. Unfortunately, regulatory issues have stymied the company’s growth and prevented it from getting more of these stablecoins into circulation. In Glover’s words,
“Regulatory uncertainty also makes it harder to raise non-institutional money since sales of ‘pre-functionality security tokens’ to qualified investors only limits the market for such tokens. It also makes the purchase process long and a bit scary.”
In spite of these major challenges, the company has kept working at the project, in the hopes that when the regulations are eventually established, they will adapt as necessary. There are currently no regulatory framework for algo based assets, and even that may take some time.
In fact, it appears that the SEC has no immediate or future plans to regulate algorithm based stablecoins. Maybe it’s because there aren’t enough of them to warrant an official stance.
However, while regulatory uncertainties are enough for projects like Basis to close its doors, the reality is that others can wing it, and deal with any regulatory issues that come later.