Treasury Secretary Janet Yellen told regulators on Monday that the U.S. government must quickly establish a regulatory framework for stablecoins, a rapidly growing class of digital currencies.
She suggested this in a closed meeting session of the President’s Working Group (PWG) with a few other regulators in attendance like Federal Reserve Chair Jay Powell and Securities and Exchange Commission (SEC) Chair Gary Gensler, Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), and Treasury officials—among them Acting Comptroller of the Currency Michael Hsu.
Together with Janet Yellen on Monday, these regulators discussed the rapid growth of stablecoins, which have seen phenomenal growth within the past twelve months since DeFi and other aspects of the cryptocurrency exploded in activities. Although some stablecoins like deriving their value from precious metals and algorithmic price settings, most stablecoins like Tether and USD Coin are cryptocurrencies that attempt to peg their values to a conventional currency, like the U.S. dollar, according to the Treasury. Regulators discussed their potential uses, as well as risks to end-users and the financial system.
From the transcript of the meeting held by Yellen and others, the Treasury Secretary "underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place" for stablecoins.
Stablecoins play a pivotal role in the cryptocurrency industry by bridging the gap between crypto and fiat currencies. As a result, investors can quickly obtain a one-to-one trade for the USD without being exposed to the volatility of other cryptocurrencies. For context, the combined market cap for the top three stablecoins - Tether (USDT), USD Coin (USDC) and Binance USD (BUSD) have exceeded $100 billion as of the second week of July 2021. As a result of this growth, regulators prefer not to play catch up but roll out an extensive framework for monitoring and enforcing relevant financial guidelines where necessary.
For instance, Federal Reserve chair Jerome Powell, who testified before Congress last week, thinks stablecoins should be regulated just the same way bank deposits and money market funds are regulated. In his appearance at the Congressional hearing, he waded in on the subject of Tether being primarily backed by commercial papers.
“Most of the time, they're very liquid, but during financial crises, the market just disappears. And that's when people will want their money."
Meanwhile, Gary Gensler and the Acting Chair of the CFTC, Rostin Behnam have been relatively passive compared to Powell’s and Yellen’s tone on the subject of stablecoins and their need for aggressive regulations. Perhaps it is because commodities that are the concerns of the CFTC are tradable goods such as gold and oil with stablecoins not fitting into their spectrum.
However, these financial instruments (stablecoins) have become the easiest way for investors looking to profit from cryptocurrencies to get exposure to digital assets without any need to touch or hold fiat. And when the mainstream financial sector is bypassed, these have untold ramifications for the regulators, most of which revolve around taxation and other macroeconomic forces that may arise.
Hence, the readout from the PWG meeting states that:
"Participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security."
The group aims to issue its recommendations for stablecoins "in the coming months."