walls are closing in the $ 2.8 billion crypto market

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The United States appears more concerned with the implications of cryptocurrencies for financial stability and consumer protection than with imitating China’s attempt to eliminate digital currencies.

The recent hack of Coinbase, one of the world’s largest digital asset exchanges, which resulted in the theft of cryptocurrencies from more than 6,000 customers, can only add momentum to Gensler’s efforts to gain authority. regulation on the sector in order to protect consumers.

It seems a given that major central banks and financial regulators will act to neutralize threats to their own position and the stability of their systems by issuing their own digital currencies while forcing digital challengers into the regulated financial system.

However, the main concern of the Fed and the US Treasury appears to be the potential threat that stablecoins, in particular, could pose to the stability of the financial system.

Cryptocurrencies like bitcoin are so volatile that they are poor mediums of exchange and therefore do not pose a great threat to currencies issued by the central bank, whether physical or virtual.

Stablecoins tokens backed by baskets of physical assets or tied to US dollar reserves could pose a far greater threat to central bank-issued currencies, even though they only represent around $ 125 billion on the market. $ 2 trillion crypto asset market today.

US authorities are said to be particularly aware that the Facebook-sponsored Diem (formerly Libra) consortium has not abandoned its cryptocurrency plans.

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Its ambition to create a global digital payments network evolved the original plan for Diem tokens to be backed by a basket of multi-currency assets was replaced by a peg to the US dollar but was not abandoned despite regulatory opposition. important international.

The US focus on stablecoins is driven by the theoretical stability of the value of digital tokens, which would make them a much more viable alternative to central bank issued currencies than Bitcoin.

However, backing the tokens to real financial assets would also introduce vulnerabilities that banking regulators are very familiar with.

Banks and other regulated financial institutions are required to hold capital and minimum levels of high quality liquid assets to protect against leakage from their depositors and lenders.

China is set to launch a digital yuan program.Credit: AP

It is evident that US regulators are considering imposing similar regulations on stablecoin sponsors in order to protect investors and level the playing field for regulated institutions. Some stablecoin promoters have sought to offer banking-type financial products.

The authorities’ response to the growing acceptance of cryptocurrencies as an investment class and the ambitions of some, Facebook’s most menacing, to leverage their vast consumer bases and infrastructure to disrupt physical currencies and existing payment systems, turns into a sort of pincer strategy. It is evident that governments will regulate crypto assets, although perhaps not as drastically as China. It’s also almost inevitable that China isn’t the only major economy to issue its own digital currency.

The UK set up a task force earlier this year to explore the potential of a Britcoin, the US has asked the Boston Fed and the Massachusetts Institute of Technology to research a digital dollar for more than ‘a year and the BIS has commissioned and released ever more detailed information and granular research from its member central banks (including the Reserve Bank) on digital currencies issued by central banks.

It is not just perceived threats to financial stability and consumers, or even the challenge to existing currencies and central banks’ authority over monetary policy, that are driving the efforts.

Where promoters of crypto assets today see themselves as establishment disruptors, the establishment sees digital currencies and the blockchain technologies that underpin them as a path to a more efficient, innovative and inclusive financial system.

Western governments are likely to be more concerned about privacy concerns than China, but, even so, central bank-issued digital currencies are likely to give banks and their governments greater control over their financial systems. , Not less.

The design of these systems, the role of existing institutions and the extent to which privately issued crypto assets should be allowed to exist and, if allowed, how they are regulated will be important.

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However, it seems a given that major central banks and financial regulators will strive to neutralize threats to their own position and the stability of their systems by issuing their own digital currencies while forcing digital challengers into the system. regulated financial. Both aspects of this response are now being accelerated with increasing urgency.

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