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Stablecoins, a fast-growing part of the crypto market, could be facing rules akin to those that govern money-market funds, as well as new banking rules, as U.S. regulatory agencies step up scrutiny of these digital currencies.
The Treasury Department is working with other financial agencies under the President’s Working Group on Financial Markets to present a report within the next month with recommendations for a possible regulatory framework for stablecoin. From there, officials will know how much authority they have at the agencies and whether they need to seek further authority from Congress to regulate stablecoins.
Stablecoins are cryptocurrencies whose values are tied to fiat currencies like the U.S. dollar, precious metals, or short-term securities as a way to mitigate the inherent volatility of cryptocurrencies. They are used by traders to get in and out of trades, settle trades, and are increasingly being used for more traditional banking products like savings accounts – yet there’s little regulatory oversight or FDIC backing. Some of the more popular stablecoins are Tether (USDT-USD), TrueUSD and Paxos. Stablecoins in circulation are now worth more than $120 billion, according to coinmarketcap.com.
The key risks being examined revolve around stablecoins’ susceptibility to runs like money-market funds. Stablecoin issuers hold massive amounts of commercial paper or other short-term securities like Treasuries or certificates of deposit, and investors could choose to pull their money out suddenly if cryptocurrencies plunge, leading to losses for investors, or worse, potential runs on the financial system.
Officials are evaluating whether stablecoins can be a reliable form of payment for people and if regulators need to reduce risk for payment structures. For instance, if someone pays for goods or services today in stablecoin, the question for regulators concerns the amount of volatility and whether that volatility can cause a run. Officials have been diving into the speed and volume for which settlement occurs within payment networks and how different payment systems interact with one another.
Another rule under consideration: mandating transparency for stablecoins and what they’re backed by — whether U.S. dollars or short-term securities like Treasuries or certificates of deposit.
Regulators are considering new rules just as SEC Chair Gary Gensler testified this week that stablecoins should be considered securities. Ranking Senate Banking Committee Member Sen. Pat Toomey (R., Pa.) grilled Gensler about how the SEC decides whether a certain cryptocurrency is a security, and asked for more transparency into the SEC’s decision-making process. Toomey said he doesn’t think stablecoins meet the two-tier test for being classified as a security.
Shining a light on illegal activity
Treasury and other regulators also want to bring more sunlight to illicit activity. Many stablecoins are used off-shore by entities that can’t gain access directly to the U.S. dollar or want to hide illegal financial activity. Cracking down and pushing for transparency is also Treasury’s way of reining in some of that illegal activity.
Regulators are also thinking about the connections between stablecoins and other parts of the crypto universe, whether that’s crypto trading platforms or so-called decentralized finance.
As officials look to craft recommendations for new regulations, the Treasury Department has been holding roundtables the past few weeks, with the industry’s top issuers and service providers of stablecoin, including Visa, as well as trade associations that represent the banking industry, and academics.
No decision has been made on whether the Financial Stability Oversight Council would take up an examination of stablecoin. Sen. Elizabeth Warren this summer strongly urged FSOC to use its authority to address cryptocurrency risks.
Treasury Secretary Janet Yellen urged regulators this summer to move quickly to establish a regulatory framework for stablecoins.