The U.S. inches toward embracing stablecoins

The White House is intrigued by stablecoins but wants lawmakers to regulate the fast-growing digital assets like they're banks to avoid financial havoc.

The news: The President’s Working Group on Financial Markets released a report offering thoughts on decentralized finance, the risks of stablecoins, and recommendations on how to regulate them. While the administration says that stablecoins hold promise for household and business use, it fears they could result in consumer abuse and spur bank runs (where large groups of depositors withdraw money simultaneously).

“Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options. But the absence of appropriate oversight presents risks to users and the broader system.” —Janet Yellen, Secretary of the Treasury

Stablecoins 101: Stablecoins are cryptocurrencies that are pegged to the U.S. dollar, another fiat currency, or a commodity such as gold. As their name implies, they’re “stable” and do not fluctuate in value. Stablecoins are primarily used to facilitate the trading of other cryptocurrencies. The most-popular stablecoins are Tether ($70B market cap) and USD Coin ($32.7B market cap).

But how? Stablecoins achieve price stability via collateralization (such as a cash reserve) or through algorithms that buy and sell their reference asset. For example, Tether’s reserves in March were 75.85% cash, 12.55% secured loans, 9.96% in corporate bonds and precious metals, and 1.64% in other investments, including digital currencies.

Recommendations: Treasury Secretary Janet Yellen urged lawmakers to pass legislation that would regulate stablecoin issuers like banks and grant more oversight on them. Such a move would require stablecoin issuers to hold adequate reserves — estimated to be around 100% reserves in high quality, liquid assets — to meet customers’ demands if they’d like to cash out quickly.

What’s the rush? In January, there was about $28B of stablecoin in circulation. Now there’s more than $138B and Tether ($USDT) is the fourth most valuable cryptocurrency. That skyrocketing value has regulators shook.

Why it matters: If congress or the White House implements significant regulations on stablecoins, it’ll undoubtedly make a huge impact on the entire crypto ecosystem. Not only would they represent the most-significant regulatory shift on digital assets — which Capitol Hill has struggled to devise for years — but it would shift how crypto businesses operate and launch coins.

Validation: Jeremy Allaire, CEO of stablecoin issuer Circle, said that if lawmakers or the White House were to regulate stablecoins, it would provide legitimacy to their potential as a payments system and crypto as a whole.

“We are fully supportive of the call for Congress to act and establish Federal banking supervision for stablecoin issuance. This is huge progress in the acceptance of stablecoins and provides a path for their adoption as fundamental infrastructure for financial and economic activity in the coming decade. .” —Jeremy Allaire, CEO of stablecoin issuer Circle

Congressional inaction: Let’s face it. Congress can barely understand what Facebook is — look at Sen. Blumenthal's Finsta fiasco — much less comprehend cryptocurrencies and their possible impact. But in the (likely) absence of Congressional action, the Biden administration notes the Financial Stability Oversight Council could designate stablecoins as a systemic risk, which would grant regulators the power to set rules on stablecoins.

Fed stablecoin? There was growing momentum for the U.S. Federal Reserve to release its own stablecoin, thereby creating a government-backed digital currency. Fed Chairman Jerrome Powell, however, really dislikes crypto and said the main case supporting a Fed-backed stablecoin would be its potential to eliminate crypto in the United States.

Unprecedented hype: Venture capital firms have poured a jaw-dropping $15B into blockchain startups so far in 2021, according to CB Insights. That’s up 384% versus all of 2020. In Q3 alone, crypto exchanges raised nearly $2B and NFT startups raised more than $1B.

Bad timing: What’s certain to rile up regulators and policymakers is the SQUID token shenanigans. Founders of SQUID — inspired by the Netflix show Squid Games — ripped off its investors with a “rug pull” scam, making off with $3.3M, per Gizmodo. The scam cost one Shanghai investor his life savings.

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