Businesshala News Exclusive | Biden Administration Seeks to Regulate Stablecoin Issuers as Banks

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The move is aimed at allaying concerns that digital currency could fuel financial panic.

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The move is intended to allay regulators’ fears that stablecoins—digital currencies pegged to national currencies such as the US dollar—could fuel financial panic and need to be more tightly regulated.

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Stablecoins are issued by companies such as Tether Ltd. and Circle Internet Financial Inc. and are designed to combine the stability of national currencies such as the dollar with the ability to trade increasingly online, like bitcoin. But some policymakers have said that stablecoins could promote volatility if users doubt the value of their underlying assets that keep their prices stable.

The people said a Treasury-led group also plans to recommend that a separate panel of senior regulators charged with overseeing financial system risks – the Financial Stability Oversight Council – consider whether Stablecoin activities should be considered systemically important. Such a process could eventually prompt the Federal Reserve to write more stringent risk-management standards for companies if they are not already regulated at the federal level.

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But the FSOC route is not the Biden administration’s preferred method, the people said. The largely decade-old panel’s process of targeting firms for tighter regulation has historically been cumbersome and in this case covering stablecoin-related payments activities rather than targeting a specific group of non-bank financial firms. To do this, it has to be implemented in a new way.

The administration’s recommendations are expected to be included in an upcoming report by a Treasury Department-led group called the President’s Working Group on Financial Markets, which is now expected to be published in late October, the people said. The group includes Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and Securities and Exchange Commission Chairman Gary Gensler.

Officials cautioned that the report is not yet finished and its recommendations are still being discussed. It is unclear how some of the recommendations might be implemented—a potential weakness of an upcoming report.

While the report is likely to focus primarily on the risks posed by stablecoins and how to apply a bank-like framework around the firms that issue them, other key issues are likely to remain unresolved, such as those around trading of stablecoins. Apart from investor protection, regulation of the companies that issue them.

From an administration point of view, it would be better if Congress implements or authorizes a bank-like regulatory framework for stablecoins, as well as a range of investor protections for cryptocurrencies. If Congress doesn’t act, and its other recommendations go unheeded, the administration will be reluctant to use the FSOC, one of the people said.

Currently, many stablecoins are viewed lightly at the state level, although some companies, such as Circle, have said they want to be banks. And at least some members of Congress, such as Sen. Cynthia Lumis (R., Va.) have indicated recently that stablecoins may need to be regulated in this way.

“It may be that stablecoins should only be issued by depository institutions” or by firms regulated such as mutual funds, Ms Lumis said in a Senate speech this week.

Stablecoins, which are based on blockchain technology similar to assets like bitcoin, are a relatively small but rapidly growing corner of the $2 trillion crypto world. The three biggest – Tether, Circle’s USD Coin and Binance USD – have risen in value from around $11 billion a year ago to around $110 billion.

Issuers say that since stablecoins are backed by safe assets such as Treasuries, they should maintain a tight link with the dollar and be easily redeemed for dollars. This is in contrast to cryptocurrencies like bitcoin which are not backed by assets and can fluctuate wildly in value.

Current and former regulators worry that if large numbers of investors suddenly rush to capitalize on them, sponsors are forced to sell assets at fire-sale prices and potentially put pressure on capital markets as well. Is.

For now, however, stablecoins are primarily used by investors to buy and sell crypto assets on exchanges such as Coinbase.,

The process which trades 24 hours a day. They are also used as collateral for derivatives — contracts to buy or sell an underlying security at a specified price — and many of those contracts are settled in stablecoins.

Administration officials say that if coins become more widely adopted as a quick means of payment for consumers and businesses, it could put them in competition with banks and card networks such as Visa. Inc.

and Mastercard Inc. The Diem Association, a group supported by Facebook Inc.

and 25 other members, want to launch a stablecoin that will take advantage of the social network’s three billion users. Diem is partnering with a Fed-regulated bank on the project.

Andrew Ackerman at [email protected] and Annamaria Andriotis at [email protected]

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