Ultimate magazine theme for WordPress.

Cryptocurrencies: US regulators are running towards the first important rules for cryptocurrencies

WASHINGTON: After cryptocurrency largely stood aside for years as cryptocurrency evolved from a digital curiosity to a volatile but widely accepted innovation, federal regulators are scrambling to address the potential risks to consumers and financial markets.

Their concern has only grown as both new and established businesses have rushed to find ways to capitalize on the massive wealth in cryptocurrency being injected into the traditional financial system through quasi-banking services such as interest-bearing accounts and loans.

Now the Treasury Department and other agencies are urgently moving towards a first target for tighter regulation: a fast-growing product called stablecoin.

Stablecoins are issued by a variety of companies, currently only slightly regulated by a patchwork of government rules, and serve as a kind of bridge between the cryptocurrency markets and the traditional economy.

The value of a stablecoin is supposedly pegged one-to-one to the US dollar, gold, or some other stable asset. The idea is to make it easier for people who own cryptocurrencies – notorious for their frequent fluctuations in price – to conduct transactions like buying goods and services or earning interest on their crypto holdings.

The use of stablecoins is growing rapidly and regulators are increasingly concerned that they are in fact not stable and could lead to a bank run in the digital age. This year alone, dollar-linked stablecoins such as Tether Token, USD Coin and Pax Dollar have risen from $ 30 billion in circulation in January to around $ 125 billion in mid-September.

“It is important that the agencies act quickly to ensure there is an adequate US regulatory framework in place,” said Nellie Liang, an undersecretary of state for the Treasury Department who leads the effort, in a statement.

The Biden administration’s push to exercise some control over stablecoins marks the tip of what is likely to be a much broader debate about the government’s role in regulating cryptocurrencies – an issue that is a growing concern in Washington.

“I saw a fool’s gold rush up close in the run-up to the 2008 financial crisis,” said Michael Hsu, the currency’s acting auditor, on Tuesday. “It feels like we are on the cusp of another with cryptocurrencies.”

Widely known as a speculative instrument, cryptocurrency is increasingly starting to transform banking and finance, leading to discussions about whether governments should issue their own digital currencies to complement or eventually replace their traditional currencies.

Stablecoins are now underpinning a growing proportion of cryptocurrency transactions worldwide, at a time when the total value of outstanding crypto tokens like Bitcoin is around $ 2 trillion – roughly the same value as all of the US dollars in circulation.

The regulatory push has sparked a wave of lobbying from cryptocurrency executives. They have lined up in a series of virtual and face-to-face meetings with banking and financial regulators over the past few weeks to shape the new rules, while largely recognizing that some form of federal oversight is now inevitable.

Regulators are concerned about whether stablecoin firms have enough cash to back the value of the currency they issue.

In addition to cash and short-term government bonds – which are considered safe and easy to redeem – for example, the issuers of the stablecoins USDT and USDC, at least until recently, also held currency reserves such as unsecured corporate debt, which is much riskier and, especially in times of financial turmoil, it is more difficult to quickly convert to cash. This “commercial paper” is intertwined with other important parts of the financial system.

Treasury officials also want assurances that the stablecoin firms have the technical capacity to handle large transactional spikes so they don’t create a chain reaction of trouble when large numbers of customers try to cash out their holdings.

Problems have already occurred. The Solana blockchain, a relatively new network that has seen an “skyrocketing” number of stablecoin transactions, suffered a 17-hour outage on September 14 or sell during the crash.

Federal officials said in interviews that they are considering using the far-reaching powers created under the Dodd-Frank Act, enacted after the 2008 financial crisis, to initiate a review and potentially declare stablecoins “systemically important.” Result they would likely subject to stringent federal regulations.

“Regulators really start to worry more as the risks to society increase,” said Jeremy D. Allaire, CEO of Circle, a payments and digital currency company that helped develop USD coins. “You can of course see that the regulators want to find ways to counter these risks.”

USD Coin has grown about 750 percent this year, with about $ 30 billion in circulation. It is forecast to hit more than $ 200 billion at its current growth rate by the end of 2023, Allaire said.

The first step that the Treasury Department is likely to take is to publish a report with recommendations in the fall. In interviews, industry executives, lobbyists and regulators gave an overview of what they expect to be addressed in these recommendations, which form a template for potential regulations to be drafted in the coming year.

The rules, they said, will likely dictate that the reserves are always liquid enough to meet redemption requests, and that the software systems that process these transactions are robust enough to avoid crashes and severe slowdowns while doing bulk transactions.

They predicted that there will also be requirements for the process of creating new stablecoins, security systems to protect privacy and data, and consumer protection measures. Regardless, the Treasury Department is also preparing to enact rules designed to prevent cryptocurrencies from being used for illegal activities such as money laundering and tax evasion.

Some steps have already been taken to crack down on the sector.

The most popular stablecoin in the world is USDT, issued by Tether based in Hong Kong; it currently represents more than half of the global stablecoin supply. New York state regulators opened a fraud investigation against Tether in 2019, an investigation that concluded this year with an agreement prohibiting the company from doing business with customers in New York and instructing it to periodically disclose what types of Currency reserves prop up its stablecoin.

Circle has already announced that it will voluntarily shift its reserves into more liquid funds starting this month.

The new rules will spawn winners and losers, with some industry players better able to accept them than others who may have to change their business models to bring them into line.

The stablecoin issuer Paxos, for example, supports the step to regulate stablecoins. But it is against the use of the powers created under the Dodd-Frank Act of 2010, which allows a body called the Financial Stability Oversight Council to be made up of the Treasury Secretary, the Chairman of the Federal Reserve, and 13 other leading financial regulators Federal and state level consists of financial experts – to effectively extend its reach to stablecoins by declaring stablecoin activities or companies as “systemically relevant”.

But at Circle, the CEO said he had no objection to the designation.

“At this point, large, fully-reserve, asset-backed dollar stablecoins that can be used across the Internet will have this systemic name,” said Allaire of Circle.

Another option would be to create a new type of banking charter for stablecoin issuers that addresses many of the regulatory concerns.

Comments are closed.