Potential U.S. Stablecoin Regulation

Secretary of the Treasury Janet L. Yellen

With an extensive experience as an electrical/software/coding engineer along with a financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech), including all areas of cryptocurrency ecosystems. 

Cryptocurrencies include Bitcoin, Ethereum, and Dogecoin (to name a few cryptocurrencies) and these currencies continue to dominate the headlines and financial markets. Bitcoin, the original cryptocurrency, is the most popular. Cryptocurrencies are a relatively new asset class evolving rapidly in an increasingly tech-driven economy. As a consequence, cryptocurrencies are subject to major volatility, which can change their value in a matter of seconds. 

A stablecoin is a digital currency that is linked to an underlying asset. Essentially, stablecoins are a type of cryptocurrency that are designed to maintain a fixed value. To achieve and maintain such a fixed value, these digital currencies are often pegged to a fiat (government-backed) security or other similar underlying asset. This underlying asset may be a national currency or a precious metal such as gold. The main types of stablecoins include fiat-backed, cryptocurrency-backed, and commodity-backed stablecoins. 

tether

For example, a popular fiat backed stablecoin is Tether (USDT). Tether was one of the first stablecoins that entered the digital currency market with both the widest adoption and largest market capitalization. While it is purportedly pegged one-to-one to the U.S. dollar, its solvency relies upon the strength of its reserves. 

Interest and investment into stablecoins has been explosive over the last year. For example, as illustrated below, as of July 22, 2021 the supply of stablecoins is approaching $100 billion:

 

Stablecoin Searches and Supply

Some critics of stablecoins argue that these coins pose a threat to financial stability. Specifically, these critics argue that many investors use stablecoins as a cash substitute, but yet these coins remain lightly regulated. This is unlike similar cash substitutes such as bank deposits or money market mutual funds which are highly regulated. 

For example, just last week, Federal Reserve Chairman Jay Powell said in a congressional hearing that regulators should treat stablecoins similarly to these other regulated instruments. As a follow-up to Chairman Powell’s concerns, the nation’s top financial regulators met earlier this week to discuss stablecoins. 

On Monday, Secretary of the Treasury Janet L. Yellen convened the President’s Working Group on Financial Markets (PWG). She was joined by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Minutes from this meeting are captured in the Readout provided by the U.S. Department of the Treasury. 

According to this Readout, the topics of the PWG discussion included: 1. “the rapid growth of stablecoins,” 2. the “potential uses of stablecoins as a means of payment,” and 3. “potential risks to end users, the financial system and national security.” Importantly, the Readout also stated that US Treasury Secretary Janet Yellen emphasized “the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” for these digital assets.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated. 

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor. 

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