Regulators Racing To Introduce Oversight Framework For Crypto Industry

Key Points:

• The Treasury Department is planning an oversight framework for the crypto industry, especially for the stablecoins

• This year stablecoins have jumped from $30 billion in circulation in January to about $125 billion as of mid-September

• Regulators are concerned about the potential for a digital-era bank run

After largely standing aside for years, the U.S. Treasury Department and other agencies are trying to urgently bring tighter regulation for stablecoins, a fast-growing cryptocurrency class, to address the potential risks for consumers and financial markets.

The regulators are getting concerned as both new and established firms are rushing to find ways to profit from digital currency into the traditional financial system through quasi-banking services like interest-bearing accounts and lending.

“It is important for the agencies to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” Nellie Liang, an undersecretary of the Treasury, said in a statement.

What are Stablecoins

Stablecoins are digital currencies whose value is pegged one-to-one to the United States dollar, gold, or some other stable asset, and try to stablecoins serve as a bridge between the cryptocurrency market and the traditional economy.

The basic idea for stablecoins was to make it easier for people holding cryptocurrency, which is highly volatile known for frequent price swings.

With the recent surge of the use of stablecoins, the regulators have grown increasingly worried that most of the assets are not stable and could lead to a digital-era bank run, as in 2021 alone, U.S. dollar-pegged stablecoins like Tether token, USD Coin, and Pax Dollar have jumped from $30 billion in circulation in January to about $125 billion as of mid-September, according to the New York Times.

Concerns against Stablecoins

“I have seen one fool’s gold rush from up close in the lead-up to the 2008 financial crisis,” Michael Hsu, the acting comptroller of the currency said, on Tuesday, remarking to a lobbying group Blockchain Association. “It feels like we may be on the cusp of another with cryptocurrencies.”

The ever-growing market share is generating increased concern in Washington as stablecoins are underpinning the share of crypto transactions worldwide as the total value of all the outstanding digital currencies, including Bitcoin and Ether, is about $2 trillion — roughly the same value as that of all United States dollars in circulation.

Regulators are now worried whether stablecoin issuing firms hold enough liquid assets in their depository to back up the value of the currency they issue.

Moreover, in addition to holding cash and short-term Treasury bonds, which are deemed safe and easy to redeem, some issuers of stablecoins, including the popular USDT and USDC, also held unsecured debt until recently, which is much riskier and harder to quickly turn into cash, especially in times of financial turmoil.

Upcoming oversight framework

The Treasury Department is expected to issue a report with recommendations later this year which will likely ask the stablecoin firms to have stable and liquid reserves, enough to meet redemption demands instantly.

Also, the officials want assurances that the software systems handling these transactions are robust enough to avoid crashes and have the technical capacity to handle big surges in transactions so that they do not set off a panic chain reaction and force large numbers of customers to try to cash out their holdings.

The Securities and Exchange Commission (SEC) also could use its powers to force stablecoin firms with reserves backed by equities and debt bonds to register as securities, which would require companies to provide more disclosures to investors. The agency did the same thing with the mutual fund industry in 2016 after a major fund that relied on risky debt collapsed and had to halt customer withdrawals.

“I don’t think there’s long-term viability for five or six thousand private forms of money,” SEC chair Gary Gensler said on Tuesday. “So, in the meantime, I think it’s worthwhile to have an investor-protection regime placed around this.”

Glenser earlier said that the crypto industry is “more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws.”

Picture Credit: ABC News