US Needs Strong Regulatory Framework For Stablecoins, Crypto Investors Feds Powell Warns

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Federal Reserve Chairman Jerome Powell said on Wednesday that the United States was at a critical juncture for the regulation of digital currencies, arguing for new rules on certain digital payment tools similar to those applied to bank deposits and money market mutual funds.

He made special mention of stablecoins like Tether USDTUSD and the USD USDCUSD coin, + 0.01%, which are pegged to the US dollar and are used to facilitate trading between various cryptocurrencies, including bitcoin BTCUSD, + 1.02% and the ether ETHUSD, + 2.70%. .

We have a tradition in this country where public money is held in what is supposed to be a very secure asset, Powell said in a virtual hearing before the House Financial Services Committee. That doesn’t exist for stablecoins, and if they’re going to be an important part of the payments universe, we need a suitable framework, which we frankly don’t have.

Cryptocurrencies like bitcoin have not become widely used as a means of payment, in part because their values ​​are so volatile against the US dollar or other government backed currencies. Because stablecoins are pegged to the dollar, many crypto enthusiasts see them as an essential tool to promote the use of digital currencies for everyday purchases.

Critics of stablecoins say they pose significant risks to financial stability, especially after it was revealed that some of these dollar-indexed tokens are not backed by actual US dollars, but a combination of riskier assets. In February, New York State Attorney General Letitia James banned the use of Tether and an associated crypto exchange, Bitfinex, in the state for making false claims about currency support.

Tim Swanson, founder of the Frim Post Oak Technical Advisory Labs, wrote in January that stablecoins were parasitic because they functioned as non-bank financial intermediaries that provide services similar to traditional commercial banks, but outside normal banking regulation. .

This type of behavior not only endangers the holders of stablecoins, but could potentially threaten financial stability in general, if a run on a stablecoin causes the prices of assets and other cryptocurrencies to collapse, he said. he argued. Such a collapse could also disrupt the market for bitcoin and other popular cryptocurrencies, according to crypto services company FlowBank.

Powell said the Federal Reserve plans to release a report in late summer or early fall that would outline the risks and rewards associated with cryptocurrencies, stablecoins as well as a potential digital dollar. supported by the Fed. Proponents of a so-called central bank digital currency have argued that a CBDC could work the same as a stable coin, but with reduced risk.

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