“There are certain benefits for consumers that are worth exploring; that is, facilitating faster payments, ”FDIC President Jelena McWilliams said in an interview. “But there are also risks if stable coins are adopted more widely.”
Since their value does not fluctuate much, stablecoins could gain credibility as a common payment method, especially if adopted for use on e-commerce platforms. Regulators want to make sure that the companies issuing these stablecoins have assets that are strong enough to back up the tokens, so if users are looking to trade them for cash, they won’t be caught off guard.
Their use has exploded over the past year. Transactions directly using stablecoins, which were tiny in 2017, have grown from around $ 250 billion in 2019 to $ 1,000 billion in 2020, according to data from crypto research firm Messari. This growth has accelerated; Trading volume in the first three months of this year roughly matched that of last year, and in the second quarter jumped to $ 1.7 trillion.
Currently, stablecoins are mainly used as a medium of exchange on cryptocurrency networks, rather than replacing more traditional payment methods like credit or debit cards. But that could change under the vision of organizations like the Diem Association, which is associated with Facebook and could take advantage of the social media giant’s nearly 3 billion users as a marketplace where its Diem stablecoin could be used to buy. goods and services.
The Treasury, along with other regulators such as the Federal Reserve, Securities and Exchange Commission, and FDIC, will issue a report in a few weeks on the next steps in regulating these crypto assets. The FDIC insures bank deposits in the event of default, but stablecoin issuers say they don’t need such support, arguing they have adequate assets as reserves.
“What you can worry about from a financial stability standpoint are not the riskiest things, but the things that are generally safe, and what can happen to them in a crisis when the thing you were thinking sure turned out not to be. so be it, ”said a treasury official, who asked not to be identified because the report has yet to be released.
Coins are popular on decentralized crypto networks where they can be borrowed in exchange for cryptocurrency-based collateral or used as a form of payment in self-executing “smart contracts” that look like loans or other products. financial.
But their wider appeal is speed. Under the traditional American system that handles card payments and direct deposits, transactions are settled en masse three times a day and only during business hours – a costly reality for the millions of Americans living on paychecks in paycheck.
The Fed, along with the banks, is working to reduce the time it takes for people to get money into their accounts, but in the meantime, outdated U.S. infrastructure has already spawned businesses and products designed to close the gap, like Venmo, Square’s Cash app. and Zelle.
Stablecoins solve a similar problem, as tokens can be transferred quickly, rather than having to wait for the underlying dollars to hit someone’s account.
But despite the technological advantages, a key question for regulators will be whether these assets look more like unregulated bank deposits or disguised mutual funds, which only thrive because they aren’t subject to the same types. of rules that these companies.
“The ‘stablecoins’ we see in the market today are anything but stable and, in their current form, lack transparency about what sustains them, pose an increased risk of financial crime, and claim to be much safer than they actually are, ”said Paige Paridon. , Deputy General Counsel at the Bank Policy Institute, which represents major banks.
Treasury officials say they would like to create a regulatory framework that would allow stablecoins to be reliable, efficient and inclusive, which means looking for loopholes where current financial rules wouldn’t apply.
Financial companies that issue dollar-indexed stablecoins invest in a variety of assets to back up their tokens. Some, like the largest stablecoin, Tether, invest heavily in short-term corporate debt, a practice reminiscent of money market mutual funds. This has caught the attention of the SEC and raises questions about what role these types of coins could play in the markets where businesses and the U.S. government itself obtain funding.
But even more secure stablecoin structures could pose problems for regulators, especially the Fed, which manages the underlying infrastructure for traditional payments.
“There is a risk that the widespread use of private funds for consumer payments will fragment parts of the US payments system in such a way as to impose burdens and increase costs for households and businesses,” said the governor of Fed Lael Brainard, whom many progressive groups are supporting to become the next central bank chief, said in a speech earlier this year.
Avanti Financial CEO Caitlin Long, who runs an as yet non-operational crypto firm that received a ‘special purpose’ banking charter in Wyoming, said it was actually a selling point for stable coins, whose arrays are relatively easy to connect.
“The winner will be the one who is easiest to integrate with,” she said.
Several key companies plan to back their stablecoins only with dollars and US government debt, which is more like a bank. Indeed, some issuers of stable coins seek banking-type privileges. Paxos received preliminary approval this year to become a national trust bank. Avanti plans to issue what it considers “a cash equivalent” once it opens.
Circle, which issues the second-largest stable coin, USD Coin, applies to become a national bank and says it might not even need deposit insurance as its digital currency is in the process of being fully backed by US government liquidity and debt. unlike traditional bank deposits.
These trends put pressure on the Fed to determine whether these unorthodox financial institutions should be allowed to access traditional payment rails; that is, whether to give them accounts where they can deposit reserves directly to the Fed.
Such a move could encourage stablecoins to be backed by more secure assets by making it cheaper for them to hold cash reserves rather than interest-bearing assets. It could also give the Fed more regulatory control over those stablecoins and prevent them from being based overseas, as Tether already is.
“Becoming a new digital currency bank in the United States recognizes not only the importance of the US dollar as the benchmark asset underlying these innovations, but frankly, the importance of the United States as a global standard-setter. recognized, ”said Dante Disparte, director of global policy at Circle.
But having large amounts of reserves at the Fed could encourage further development of these assets at a time when the central bank is simply considering issuing its own digital currency instead, which could replace many of the same. technological attractions than stablecoins.
Fed Chairman Jerome Powell told lawmakers this summer that “one of the strongest arguments” for a central bank digital currency is the idea that “you wouldn’t need coins stable “.
Some issuers like Circle and Paxos are also eyeing that future, believing the payment networks they are building for their stablecoins could be used as routes a digital dollar from the Fed could lead.