Washington Crypto Rules Sights Set Stablecoins
Stablecoins are a rapidly growing sector of the crypto industry. This technology promises to keep the value of a currency pegged to the value of a traditional asset, such as the dollar. While many stablecoins are algorithmic, others are backed by physical assets like short-term corporate debt. Despite their growth, there is still no clear regulatory framework for this new class of digital currencies.
In order to figure out how to best regulate the sector, the Biden administration commissioned a series of studies to identify potential risks and regulatory solutions. The report found that there are several areas where further legislation is needed. Some of the more notable proposals seek to reshape the regulatory landscape.
One of the most important is the creation of a standardized disclosure for stablecoins. This would help both regulators and investors determine the risk involved with a particular stablecoin. Another approach cited by the report is the creation of a regulatory framework that requires issuers to operate like banks. However, it may prove difficult to enforce this regulation.
An interesting suggestion is the creation of a systemic stablecoin, in which a coin can become systemically important by being based on a platform. The Meta platform-native stablecoin is one such example. It could become the digital asset of choice for a large number of users quickly. There are also suggestions that a PFMI (Public Financing Market Infrastructure) could be used to monitor this type of arrangement.
A recent report from the Financial Stability Oversight Council suggests that a regulatory framework is in order for stablecoins. Issuers should be treated like banks, a requirement that has sparked some debate amongst politicians. If the stablecoins are deemed to be securities, they would be subject to the oversight of the Securities and Exchange Commission. Several federal banking agencies would also be required to monitor these institutions.
Some Democratic members of Congress are wary of compromising with Republicans over the topic. However, some lawmakers see a bipartisan opportunity to put some rules in place. Representatives Waters and McHenry are considering introducing legislation that will treat issuers of stablecoins more like banks. Others are less certain about the prospects for a bipartisan solution.
Some state-level regulators have been taking steps to regulate the stablecoin market. For example, the New York Department of Financial Services issued guidance on the regulation of USD-backed stablecoins. Although this was a modest step, it’s still an example of the sort of action that federal regulators can take.
Meanwhile, Treasury Secretary Janet Yellen has called on Congress to pass comprehensive stablecoin regulations. Until this legislation is passed, the current Office of the Comptroller of the Currency will have limited authority to oversee stablecoins. According to the report, this is due to the fact that the stablecoins are not classified as bank deposits.
Regardless of how it is done, stablecoins represent a potential threat to the financial system, and have already prompted several government officials to ask Congress for regulation. They are growing at a rapid rate, and they are already second in market share behind cryptocurrencies. As a result, stablecoins have the potential to create a rush in redemptions, which could strain the broader financial system.