Leading U.S. financial regulators met on Monday to discuss stablecoins, asset-backed digital currencies that are gaining popularity so quickly the government is struggling to keep up – and economic officials increasingly as a risk to financial stability look at.
Stablecoins are cryptocurrencies that derive their value from an underlying currency or basket of assets, and they have long been a matter of particular concern. When news broke in 2018 and 2019 that Facebook was looking to create a stablecoin, the Federal Reserve and other regulators took notice, fearing the project could quickly grow in scope. The pressure to develop a framework for their surveillance has increased recently as prominent stablecoins such as Tether and Binance have grown in popularity.
The Treasury Department announced Friday that Secretary of State Janet L. Yellen would convene a meeting of the President’s Working Group on Financial Markets to discuss the work of regulators on stablecoins. That group includes Jerome H. Powell, chairman of the Federal Reserve, as well as the leaders of the Securities and Exchange Commission and the Commodity Futures Trading Commission. Monday’s session was expanded to include the Heads of the Auditor’s Office and the Federal Deposit Insurance Corporation.
The meeting’s attendees “discussed the rapid growth of stablecoins, the potential use of stablecoins as a means of payment, and potential risks to end users, the financial system and national security,” said a Treasury Department statement released after the meeting on Monday. Ms. Yellen “underlined the need to act quickly to ensure that an adequate US regulatory framework was in place.”
Mr Powell has been particularly open about the need for better oversight of stablecoins, repeatedly saying at two appearances in Congress last week that they are inadequately regulated.
“If we want something that looks like a money market fund, or a bank deposit, a narrow bank and it’s growing really fast, we really need proper regulation – and today we don’t,” he said while giving evidence to the banking committee Senate.
Eric Rosengren, the president of the Federal Reserve Bank of Boston, has similarly warned about Tether, arguing that it relies on underlying financial assets that could see investor runs during troubled times. The New York attorney general said earlier this year that Tether misled investors by claiming it was fully backed by US dollars at all times.
The Treasury Department said the working group expects to issue recommendations on stablecoins in the coming months. The group previously warned stablecoin operators that they must hold adequate cash reserves to cover their offerings.
The Fed could also try to crowd out digital offerings by offering its own alternative.
The central bank is looking at a digital currency offering that would likely work similarly to the digital cash you spend when you swipe your debit card. But where that debit card money is tied to the commercial banking system, the central bank’s digital currency would be backed directly by the Fed, as would physical cash.
Mr Powell told lawmakers last week that going without stable coins could be one of the stronger arguments in favor of a digital dollar.
But Mr Powell remains undecided whether central bank digital currency makes sense, he told lawmakers. The Fed plans to release a comprehensive report on the possibility of a digital dollar, expected in September.
