Treasury Secretary Janet Yellen announced recently plans to convene a group of the top U.S. financial-market and bank regulators to discuss rules for so-called stablecoins, a key part of the cryptocurrency market where government officials are increasingly fretting about a lack of oversight.
Should investors be worried?
Maybe. Or maybe not.
What are Stablecoins? Stablecoins are a new, rapidly growing digital currency or cryptocurrency. The market value of Stablecoins surpassed $100 billion in May.
The problem: Stablecoins are unique from other cryptocurrencies in that they have a fixed price and are backed by real-money reserves. Because Stablecoins are tied to an asset, the value of a Stablecoin in theory shouldn’t decline below the asset that it’s linked to. Without regulation, however, the “backing” of Stablecoins can amount to little more than smoke and mirrors. The largest of the Stablecoins, Tether, for example, has fallen short of the backing that it has made claims to.
Why regulate? This lack of oversight poses risk beyond individual investors to the entire financial system, according to warnings by Federal Reserve Chair Jerome Powell. Even more, because Stablecoins allow for huge U.S. dollar-equivalent sums to be exchanged outside of the U.S. banking system, they create a loophole for potentially illicit financial transactions.
According to the government: “In light of the rapid growth in digital assets, it is important for the agencies to collaborate on the regulation of this sector and the development of any recommendations for new authorities,” according to Treasury Secretary Janet Yellen.
As such, Yellen has convened a working group that “will examine the current regulation of Stablecoins, identify risks, and develop recommendations for addressing those risks.” The working group includes the heads of the Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission, as well as two bank regulators: the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp.
The takeaway: Cryptocurrencies are here to stay, leaving regulators with a host of issues to figure out. The OCC, formerly led by Trump Administration appointee Brian Brooks, has previously moved to accelerate digital currencies in U.S. banking. Under the agency’s current temporary chief, Michael Hsu, however, that momentum is expected to slow.
As for the future of cryptocurrencies and regulation: Will the Fed one day launch its own digital currency? According to Powell, that would likely only happen at the hand of a legislative directive passed through Congress. For now, the Fed plans to release a report on digital currencies is expected as early as September, 2021. In the interim, we should expect further guidance from federal regulators on the use of Stablecoins.