In a significant development a U.S. Treasury Department-led regulatory body has called on the US Congress to regulate issuers of “stablecoins” saying like other financial institutions these fast-growing digital assets should be monitored before they pose any systemic risk in the country’s payments system.
A report by the President’s Working Group on Financial Markets is expected to boost lawmaker’s efforts to install guardrails around stablecoins.
Stablecoin, which include the likes of Tether, USD Coin and Binance USD, is a type of digital asset pegged to traditional currencies which the regulatory body said could pose threats to the broader financial system. They have ballooned by as much as 500% to reach a market cap of $127 billion over the past 12 months, states the report.
“The rapid growth of stablecoins increases the urgency of this work,” reads the report. “Failure to act risks growth of payment stablecoins without adequate protection for users, the financial system, and the broader economy.”
While they are primarily used to facilitate trading in other cryptocurrencies, they have the potential to become widely used by households and businesses to make payments, states the report.
Currently, though, stablecoins have a wide range of policies governing disclosures, what assets are held in reserve to back the coins, and around redemption rights, all of which could make them susceptible to runs if users lose confidence in the asset.
“Runs could spread contagiously from one stablecoin to another, or to other types of financial institutions that are believed to have a similar risk profile. Risks to the broader financial system could rapidly increase as well, especially in the absence of prudential standards,” states the report.
The report calls on the US Congress to “urgently” pass a law that would regulate stablecoin issuers akin to insured depository institutions, subjecting them to strict supervision by banking regulators while also providing some form of government backstop in the event of crises.
The President’s Working Group (PWG) has been researching stablecoins, in consultation with the financial industry, academics and advocacy groups, for the past few months following Treasury Secretary Janet Yellen telling policymakers that they must move quickly to build a regulatory regime for the asset class.
“We look forward to reviewing the paper and providing guidance to the working group,” said an official from the White House.
In the event the Congress does not act, the Financial Stability Oversight Council, a body of U.S. regulators created following the 2007-2009 financial crisis, could designate some stablecoin activities as a systemic risk, which would subject them to stricter oversight.
In a statement, SEC’s Chairman Gary Gensler said, those agencies plan to “deploy the full protections” of relevant laws to stablecoins while Congress considers legislation.