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- The US Treasury is urgently taking steps to create a regulatory framework for cryptocurrencies, especially stablecoins.
- The framework seeks to regulate the cryptocurrency market before it leads to another financial crisis.
Cryptocurrencies are a hot topic in Washington. The rapidly expanding cryptocurrency market is worth over $2 trillion, roughly equivalent in value to all US dollars in circulation.
They are volatile, but their wide adoption and growing interest in their underlying blockchain technology have created a new investment class. Cryptocurrencies are transforming the banking and finance sector, attracting hundreds of millions in investments from some of the world’s top financial institutions like JP Morgan, Citi Bank, and Standard Chartered.
The increasing number of onboarding of both retail and institutional investors, even from the traditional market, has made it impossible for regulators to only warn about volatility from the sidelines.
Federal regulators in the US, Europe, and other countries are now racing to address the potential impacts of cryptocurrency on consumers and financial markets. In the US, the Treasury Department is working with other agencies to urgently introduce tighter regulations for the budding industry, the New York Times reports.
Why Stablecoins first?
Bitcoin, the top Crypto asset by market capitalization, is responsible for about half of the industry’s market cap, but it’s notably also the most volatile cryptocurrency. Therefore, investors in the market introduced Stablecoins, a type of cryptocurrency pegged to fiat currencies like the dollar on a one-to-one ratio or to other baskets of traditional assets like unsecured debts in corporations.
Stablecoins protect investors from wild price swings common in the cryptocurrency market. They enable them to make payments and preserve the value of their initial investments in case of rapid downward market movement.
Investors can also use Stablecoins to switch between different cryptocurrencies while trading without having to convert them into cash. Such use cases have given a tremendous rise in the value of Stablecoins. The most popular Stablecoins, Tether and USD Coin, are jointly worth approximately $100 billion.
However, as authorities have found out, Stablecoins might not be so stable after all. This is because private companies behind these Cryptocurrencies are mostly unregulated, posing major threats to the US economy, especially as more people adopt them.
For instance, if a company lied about the validity of its reserve assets, this would lead to inflation. Similarly, it would be catastrophic to the economy if Stablecoins investors made a bank run and withdrew all their assets at once due to various reasons, such as fear, doubt, and uncertainty (FUD).
“Regulators should move quickly.”
Federal regulators are playing catch-up to prevent such scenarios before it is too late. Michael Hsu, the acting comptroller of the currency, recently said that if they remained unchecked, Cryptocurrencies will trigger another financial crisis.
It feels like we may be on the cusp of another with Cryptocurrencies.
Nellie Liang, secretary of the Treasury, who is working on the regulatory framework efforts, said that it is paramount for agencies to “act quickly to ensure there is an appropriate U.S regulatory framework in place.”
Treasury’s Potential rules for Cryptocurrencies
The first step that Treasury will take towards the effort is to issue a comprehensive report with recommendations in the fall that will form the template for regulations likely to be drafted in 2022. Treasury has been gathering information from various industry experts on the subject.
Cryptocurrency investors and blockchain developers have been very receptive to talks with regulators for two main reasons. First, they want regulators to make informed decisions about cryptocurrency that will benefit the industry. Secondly, they believe that moving forward, the industry does indeed require proper oversight to introduce order, thereby attracting more investors and increasing adoption globally.
The potential rules in the expected recommendations include a mandate for Stablecoins issuers to always have sufficient liquid reserves enough to meet investor withdrawal demands at all times. Similarly, the technology behind the currencies should be robust enough to handle heavy and simultaneous traffic without crashing, unlike what recently happened on the Solana blockchain.
The process of creating new Stablecoins will also be put under the radar to ensure sufficient security and data privacy protection for consumers. The US Treasury also plans to introduce a mechanism for preventing the use of cryptocurrencies to launder money or evade taxation.
Meanwhile, in Europe, the Bank of England announced Thursday that it is considering implementing new tough rules on British banks to limit their exposure to Cryptocurrencies. The Bank’s Deputy Governor Sam Woods said Basel’s proposal on Cryptocurrency capital requirements for banks seeking exposure to Crypto-assets is “quite sensible.”
