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Thursday, December 2, 2021

The top U.S. regulatory agency says that it is “urgent” to legislate on stablecoins

A group of U.S. regulators stated that there is an “urgent need” for stable currency legislation supported by the core dollar of the $2 trillion cryptocurrency market, stating that operators of digital tokens should essentially be regarded as banks.

In a report, the President’s Financial Markets Working Group, composed of the Secretary of the Treasury and the heads of all major U.S. financial regulators, stated that stablecoin issuers should become “insured depository institutions,” the same customers as banks that provide savings accounts.

The proposal reflects the Stability Act, which is a legislative proposal submitted to the U.S. Congress in December last year that requires stablecoin operators to obtain full banking licenses.

This move will significantly strengthen the supervision of stablecoin issuers, who have been working on the fringes of the financial system so far, putting this $130 billion industry under strict supervision in exchange for regulators to obtain emergency liquidity in times of stress. Customer deposits of insured financial institutions are also supported by the U.S. government up to a certain dollar amount.

The report stated: “The rapid growth of stablecoins has increased the urgency of this work.” “If sufficient protection is not provided for users, the financial system, and the wider economy, inaction may lead to the growth of payment stablecoins.”

Other proposals include strengthening federal oversight of wallet providers (groups that provide products that allow users to hold their encrypted tokens) and requiring stablecoin issuers to restrict their affiliation with commercial entities.

A senior government official said that if Congress does not take urgent action, the organization is prepared to take direct action. This may include seeking designation by the Financial Stability Oversight Board for certain stablecoin activities, which will allow appropriate institutions to establish risk management standards related to them.

At present, stablecoins are mainly used to buy and sell more volatile cryptocurrencies such as Bitcoin, although some operators are keen to increase their use as a fast and cheap global transfer tool.

The President’s Working Group previously described stablecoins as a potential threat to financial stability and even national security. Various regulatory agencies around the world have expressed concerns about its potential illegal use, inadequate supervision, and low transparency of tokens designed to be backed by hard currency assets (mainly U.S. dollars) on a one-to-one basis.

A senior government official said that the organization rejected the proposal that stablecoins should be treated differently from banks based on the use of distributed ledger technology. Cryptocurrency exchange Coinbase and payment company Circle jointly operate USD 33 billion worth of stable currency USD Coin, and last month proposed the establishment of a new cryptocurrency regulator.

Some cryptocurrency groups are keen to operate within the scope of traditional financial supervision, but others are good at circumventing these rules by setting their businesses overseas.

With the surge in the number of coins in circulation, regulators around the world are increasingly seeking to control stablecoins. In the United Kingdom, the Bank of England warned in June that stablecoins must face “tricky problems.”

Other institutions are seeking alternatives to stablecoins, leading the Financial Stability Board to raise concerns about regulatory arbitrage. A report by an international regulatory agency in early October recommended that stablecoins be regulated in accordance with payment systems and clearing houses.

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