Crypto market: Stablecoins face crackdown as US discusses risk board review

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U.S. officials are discussing launching a formal review to determine whether Tether and other stablecoins threaten financial stability, a review that could lead to significantly increased scrutiny of a rapidly growing corner of the crypto market.

After weeks of deliberation, the Treasury Department and other federal agencies are set to decide whether or not to initiate a review by the Financial Stability Oversight Council, said three people familiar with the matter who asked not to be named. to comment on the in camera discussions. The FSOC has the power to view businesses or activities as a systemic threat to the financial system – a label that typically sets strict rules and aggressive oversight by regulators.

Such a designation would likely be a game-changer for stablecoins, which are seen as crucial to the crypto market as traders use them extensively to purchase Bitcoin and other virtual currencies.

Stablecoins have thrived in the unregulated shadows, with tokens in circulation now worth more than $ 120 billion, according to CoinMarketCap.com. And they’re increasingly used for transactions that look like traditional financial products – like bank savings accounts – without offering the same level of consumer protection.

A hallmark of stablecoins is that they are tied to fiat currencies, which means they are said to be immune to the wild price swings that have plagued Bitcoin. Tether and other companies are doing this by backing their tokens with assets like US dollars and corporate debt.

The Presidents ‘Task Force on Financial Markets, led by Treasury Secretary Janet Yellen, has been particularly focused on Tethers’ claims that it holds massive amounts of commercial paper – debt issued by companies to meet their short-term financing needs. At a private meeting of U.S. officials in July, they likened the situation to an unregulated money market mutual fund that could be susceptible to chaotic investor races if cryptocurrencies plunge.

The task force of presidents plans to release recommendations on stablecoin by December, and a consensus is forming among the regulators involved that a review of the FSOC is warranted, the people said. The groups overlap, as Yellen, Federal Reserve Chairman Jerome Powell, and Securities and Exchange Commission Chairman Gary Gensler are members of both the PWG and the Supervisory Board.

A spokesperson for the Treasury declined to comment.

The FSOC process includes a lengthy study and assessment of which federal agencies should respond and how. Ultimately, the board could order these agencies to intervene in the market and reduce the dangers posed by stable trading.

Although Tether is the most popular stablecoin, there are several rivals, including the USDC token from Coinbase Global Inc. and a dollar-linked offer from Binance Holdings Ltd.

Surveillance has increased as stablecoins proliferate. Coinbase grabbed the headlines this week revealing that the SEC had threatened to sue if the cryptocurrency exchange launched a product that would allow customers to earn 4% returns for lending their USDC to others. tradespeople. The SEC believes Coinbase’s proposal is an investment contract that should be registered with the agency, an opinion the company has aggressively contested in a blog post and series of tweets.

Watchdogs have also privately voiced concerns about Diem, a stablecoin developed by an association that includes Facebook Inc. One of the main concerns is that the impact on the token market could be huge due to its potential for widespread adoption – Facebook’s social media network has nearly 3 billion active users.

The Treasury held meetings this week with industry representatives to question them about the potential dangers associated with stablecoins. As she and other agencies consider taking action, they face intense pressure from Capitol Hill.

I urge the FSOC to act urgently and use its statutory authority to address the risks associated with cryptocurrencies, Senator Elizabeth Warren wrote in a July 26 letter to Yellen which signaled the interconnection of the markets of the stablecoins and its susceptibility to investor races. The longer the United States waits to adapt the appropriate regulatory regime to these assets, the more likely they are to become so embedded in our financial system that there could be potentially serious consequences.

Stablecoins already face another threat from the US government as the Fed discusses whether to launch its own digital currency. Powell told lawmakers in July that a central bank token would make stablecoins obsolete.

This is one of the strongest arguments in its favor, he said.

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