A recent article by the New York Times has called out stablecoins for being “systemically risky” and that they should be under regulatory control. The article suggested that the rush to bring stablecoins under control might be “the most important conversation in Washington financial circles this year.”
The article published by the New York Times explained the current thoughts around stablecoins and expressed the author, Jeanna Smialek’s, own thoughts on what might be the top options for US regulators.
While stablecoins claim to be linked to government currencies, such as the US dollar, many are built more like “risky investments” and are currently under-regulated, considering their huge popularity and $120 billion+ market. The nature of the funds backing these coins is questioned regularly in the industry, a circumstance that regulators often cite in their push for regulation.
The regulation of stablecoins could cause a huge shift in the crypto industry. On one hand, increased regulation could add to investor comfort and see the market value surge. On the other hand, regulation of stablecoins could make investors feel overly restricted which could reduce investments in the newly emerging industry.
You can find out more about the relationship between regulation and cryptocurrency here.
Regulation in the crypto industry has been well documented and debates over various regulatory options seem almost constant, like this article that argues the benefits of regulation for cryptocurrency growth. The main questions that people seem to be asking are how much regulation should be expected, what form the regulation will take and which part of the government will be overseeing the regulation.
According to the Times article, there are 5 likely paths of regulation that could be used to control stablecoins.
Designate them as a risk
Under the Dodd Frank Act, regulators have the power to deem payments activity as “systemically risky”, even if the activity only poses a potential risk down the road. When payments are labelled as such, they are put under regulatory control.
Call them “securities”
SEC has recently said that stablecoins “may well be securities” and could therefore be under SEC regulation. A security is a tradable financial asset.
Treat them as money market mutual funds
Money market mutual funds are open-ended mutual funds that are used to manage short term cash needs. These funds are regulated and some experts say that stablecoins resemble these funds, which could mean that they become regulated too.
Treat them as banks
One option is to potentially bring stablecoins under the oversight of the Office of the Comptroller of Currency. If this option is chosen, investors may receive deposit insurance for stablecoin, which will offer protection.
Issue a CBDC
A Central Bank Digital Currency is a virtual format of a currency that is regulated by a central bank. If a CBDC is issued for stablecoins, they will receive regulation. This option is unlikely to happen due to privacy concerns relating to CBDCs.
The US cannot be the only country that takes action to regulate stablecoins. International cooperation is needed to get a hold over stablecoins and issue effective regulation.
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