Why are regulators so concerned about stablecoins?

As Reuters reported Friday, citing three unnamed sources, the US Treasury Department met with a number of industry players this week to discuss the risks and benefits posed by stablecoins – a fast-growing type of cryptocurrencies whose value is tied to traditional currencies.

But why are regulators so interested in them? With a market cap of about $125 billion, stablecoins are a tiny part of the approximately $103 trillion of assets under management, while the whole crypto market just surpassed $2 trillion in April.

Now, they are gathering information. However, Treasury Secretary Janet Yellen, speaking in July, said the government didn’t have a lot of time to set up a regulatory framework for stablecoins, the report stated.

The department also wants to assess whether major stablecoins could be backed by traditional assets, as well as how they should be structured, how they could be used, and whether the current regulatory framework is good enough.

One of the main concerns regulators have about stablecoins is that they are actually used as money. Although Bitcoin and other cruptocurrencies have proven great investments, not many people buy things with them, making them potentially a smaller part of the fabric of the financial system than, say, Tether, USD Coin, or Binance USD. With those stablecoins, you don’t have to worry about volatility in the currency’s value.

Watchdogs are concerned that the rise in privately-operated currencies could undermine their control of the financial and monetary systems, increase systemic risks, encourage financial crime, and hurt investors.

Another question Treasury officials asked industry participants was how they could mitigate the risks of too many people trying simultaneously to cash in their stablecoins. That could make it hard for the managers of the coins to maintain their peg to the dollar or whatever currency they are linked to and risk leaving investors nursing a loss. Watchdogs also asked whether major stablecoins should be backed by traditional assets.

Bloomberg reported that the Department has worked with other agencies to roll out an examination by the Financial Stability Oversight Council (FSOC), which could see stablecoins with much stricter regulations if the council determines they’re a threat, according to Bloomberg.

Yellen and the President’s Working Group on Financial Markets she leads have been focused especially on claims by Tether that it has large amounts of commercial paper, or debt issued by commercial companies to meet short-term funding needs, Bloomberg report. The information being gathered is likely to be used to shape a bigger Treasury report on stablecoins.

The Treasury is expected to detail its thinking in these reports in the coming months, but it is unlikely that the industry will remain the same unregulated domain as it is today.

As reported before, Diem, the stablecoin project of Facebook, seemingly can’t cope with regulators. A top concern is that the token’s market impact could be massive because of its potential for widespread adoption — Facebook’s social media network has almost 3 billion active users.