US Treasury Secretary urges federal agencies to quickly introduce stablecoin regulations

    22 Jul 2021

    Treasury Secretary Janet Yellen told regulators Monday that the U.S. government must move quickly to establish a regulatory framework for stablecoins, a rapidly growing class of digital currencies. The President’s Working Group on Financial Markets expects to deliver regulatory recommendations for stablecoins in the coming months.

    According to Reuters, Treasury Secretary Janet Yellen held a meeting on Monday with five federal regulatory agencies to discuss the rapid growth of stablecoins, a type of digital currency that bills itself as a less volatile asset class than other cryptocurrencies. The top U.S. financial regulators convened to expand discussions on a regulatory framework for this class of crypto assets.

    The meeting was attended by the heads of the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Treasury, as well as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

    The top U.S. regulators acknowledged the potential of stablecoins to be a useful means of payment, but they advocated for setting up guardrails to protect users, the financial system, and national security.

    “The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” the Treasury reported.

    Stablecoins are privately issued digital tokens pegged to other assets, as claims to be backed 1:1 with dollars. According to CryptoCompare, Tether is the biggest stablecoin. Its closest competitor, USD Coin, has grown more than 3,400% since January, by data of operator payments technology company Circle.

    The gathering of top U.S. watchdogs reflects rising concern amid governments and central banks about potential risks of stablecoins, ranging from potential use in money laundering to their impact on monetary policy.

    Before, U.S. Federal Reserve attorney Jeffery Zhang in collaboration with Yale economist Gary Gorton released a paper that discusses stablecoin risks and suggests a regulatory framework for stablecoins.

    According to the authors’ words, while stablecoins issued by private companies have met significant adoption, they need to be regulated to reduce the potential risks to the U.S. economy.

    Zhang and Gorton wrote that users may not be convinced of the value of stablecoins, similar to the bank notes in the Free Banking Era, the period between 1837 and 1863 in the U.S. They also said that stablecoins fail to satisfy the principle of no-questions-asked (NQA) due to market fears and lack of transparency surrounding the funds backing them.

    “We argue that, because of credibility issues with respect to their backing, stablecoins are not yet money because they do not satisfy the NQA principle and so cannot be efficiently used as a medium of exchange,” the authors stated.

    The authors added that the value of various stablecoins, such as Tether, remains opaque due to lack of transparency, and hence they pose risks like a bank-run. This lack of transparency is a significant concern for the fast-growing stablecoin market.

    “If the stablecoins are not perceived as safe because coin holders have suspicions about the backing, then they may be inclined to run on the issuers,” Zhang and Gorton said.

    Finally, the authors stated that the government should have a monopoly on money issuance and suggested two options for the U.S. government and the Federal Reserve to regulate the sector.

    The first suggestion involved converting stablecoins into public money backed by central bank treasuries as an “insured bank regulatory perimeter.” The second option was to tax all private stablecoins once the Fed launches its own central bank digital currency (CBDC). The paper concluded by suggesting that the Fed should hasten its plans to launch a CBDC. If such regulations become active, they leave a deep impact on the cryptocurrency market.

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