U.S. Regulators Target Stablecoins, Strengthen Cryptocurrency Regulation

Written by: Andrew Ackerman

Edit: Southwind

Edit: Southwind

Concerned about the potential risks of stablecoins to financial stability, U.S. regulators are targeting stablecoins and starting to lay the groundwork for stricter cryptocurrency regulation. This could shape the future of digital currencies.

Stablecoins are a form of digital currency issued by companies such as Tether Ltd. and Circle Internet Financial Inc., which are often designed to combine the stability of national currencies (such as the U.S. dollar) with the fast pace of cryptocurrencies (such as Bitcoin). Combining online trading capabilities.

Stablecoin issuers often say that since stablecoins are made by safeasset reserve(such as U.S. Treasuries), they should be able to maintain a tight peg to the dollar and be easily convertible into dollars, which makes them in stark contrast to highly volatile cryptocurrencies that are not backed by assets such as Bitcoin.

But current and former regulators worry that,If a large number of investors suddenly rush to redeem stablecoins for fiat currency, stablecoins may face a similar risk of "bank runs", forcing issuers to sell these assets at low prices and possibly putting pressure on the financial system.You know, that's exactly what happened to some money market mutual funds during the 2008 financial crisis(i.e. money market funds suffer a run)Until then, these funds have long been viewed by investors as safe as cash in the bank. The government then moved to support the money fund, and again in March 2020, as part of a broader effort to stabilize markets disrupted by the coronavirus outbreak.

According to Sheila Bair, former head of the Federal Deposit Insurance Corporation (FDIC),If the stablecoin issuer has no funds and the value of its stablecoin reserves has high volatility, then "this creates operational risk in the Mainland". To this end, "strict regulations are formulated,Requires issuer to invest in stable, true cash equivalent (reserve) assets, which is the best way to solve this instability. "

Currently, startups issuing stablecoins tend to invest in assets that would make them significant players in capital markets, but there are no clear rules on how to manage these assets to ensure their stability.

But that may be about to change.This week, SEC Chairman Gary Gensler spoke at a virtual event hosted by The Washington PostLikening cryptocurrencies to the Wild West, he said: "There are many casinos in this western world, and the poker chips on the table are these stable coins.” 

Central banks around the world are currently experimenting with central bank digital currencies (CBDCs), a potential new form of money, and the Federal Reserve (Fed) is due to issue a report on the issuance ofdigital dollardiscussion paper on the potential benefits and risks of theExplain your views on stablecoins. Some officials informally described the document as a blueprint for the "future of money." It is expected that the agency will alsoSeeking public opinion on whether a digital dollar that could rival stablecoins should be issuedNext,

Next,The Biden Administration's Financial Markets Task Force (Working Group on Financial Markets) Will make recommendations for a framework to regulate stablecoins. Members of the working group include SEC Chairman Gary Gensler, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell.

U.S. government officials said,In the coming months, a smaller group of bank regulators, including the Federal Reserve and the U.S. Administration of the Currency, will likely decide whether U.S. banks are legally allowed to hold cryptocurrencies on their balance sheets.And there may be a capital treatment framework for banks' exposure to such instruments, namely cryptocurrencies.

"Overall, these regulatory measures will help determine how financial innovation and technology will be integrated into the banking industry over the next few years," said David Portilla, who served on the Treasury Department staff during the Obama era and now represents banks and Partner at Cravath, Swaine & Moore LLP, the law firm for fintech companies.

Stablecoin issuers often say they look forward to working with officials to support transparency and compliance.For example, Jeremy Allaire, CEO of Circle, the USDC issuer, said the focus of the president’s financial task force is a good thing for stablecoins, and he supports clearer regulatory standards.

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Above: Circle (USDC) co-founder Jeremy Allaire. Credit: Andrew Winning/Reuters

USDT issuing companyTether Also in a statement, the firm said it would “continue to work with peers around the world to increase transparency and engage in dialogue about the current and future benefits of stablecoins.”

Stablecoins, which are based on the same blockchain technology as assets like bitcoin, are a relatively small but fast-growing sector in the $2 trillion cryptocurrency world. Currently, the three largest stablecoins with the largest market value——TetherandUSDCandBinance USDC—— The circulation value of the$110 billion。 

Currently, stablecoins are mainly used by investors toCoinbaseAnd other exchanges to buy and sell other encrypted assets, Coinbase processes transactions 24 hours a day. Stablecoins are also used as collateral for cryptocurrency derivatives (essentially contracts to buy or sell an underlying asset at a specific price), many of which are settled in stablecoins.

U.S. government officials said,If stablecoins are more widely used as a fast payment method for consumers and businesses, this will put stablecoins in competition with banks, payment companies such as Visa and Mastercard.Additionally, the Diem Association, a group backed by Facebook and 25 other members, is preparing to leverage the social network's 3 billion users to launch a stablecoin (formerly calledLibra, later renamedDiem)。 

Risks could be exacerbated by the rapid growth of the stablecoin industry, they said. To address these concerns,They are considering whether to propose bank-like capital and liquidity requirements for stablecoin issuers, and they are also considering whether to regulate stablecoins like money funds,image description

Above: USDT issued by Tether pegged to 1 USD. Credit: Tiffany Hagler-Geard/Bloomberg

Stablecoin issuers say they can meet users' redemption needs. Circle (USDC), the second largest stablecoin by market capitalization, said,Beginning this month, 100% of the reserve assets backing USDC will be transformed into more liquid assets, namely cash and short-term U.S. Treasuries. Circle also said it would seek to become a federally regulated bank.

The U.S. government official responsible for the report of the Financial Markets Working Group said,Even with reserves backing stablecoinsGold (such as cash held in commercial banks)Seems safe, but it could also pose a risk to U.S. banks if stablecoin issuers are forced to withdraw those reserves due to a flood of redemption requests from investors.