A sigh of relief poured over cryptocurrency investors when Federal Reserve Chair Jerome H. Powell stated this week that he had no plans to prohibit them. Bitcoin, the most popular digital currency, increased by more than 10% to its highest level in nearly two weeks.
But there’s a growing anxiety behind the scenes: after enabling the sector to develop from obscurity to a $2 trillion behemoth in less than a decade, Washington officials are ready to unleash a slew of new legislation aimed at bringing crypto under control.
Regulators have just issued a warning to the business. In the same speech, Powell stated that he wanted to put federal guidelines on stablecoins, a sort of digital asset that has risen in popularity in recent months and is often pegged to a national currency to maintain a stable price. His remarks came as details about a crucial Biden administration report leaked, which is anticipated to suggest that regulators create bank-like stablecoin rules.
Others are collaborating with Washington politicians, believing that the technology’s potential to simplify banking and payment alternatives for consumers is too big to ignore — and that it may be time to bring order to the digital currency turmoil.
“In so many respects, these technologies are enabling whole new markets and new capacities of what you can do with a dollar if it were on the Internet,” Circle’s chief strategy officer Dante Disparte said in an interview. “It’s beginning to shift from being ‘too big to fail,’ to being ‘too big to ignore.'”
By focusing on stablecoins, the Biden administration’s next report will begin to chip away at the idea of regulating crypto.
The value of dollar-denominated stablecoins has increased from $29 billion at the start of the year to $126 billion now. Investors have mostly used them to settle trades between different crypto assets so far, but their issuers claim they have the ability to alter payment processes for normal customers.
Stablecoins, according to top authorities, risk inciting a bank run if the reserves underpinning them aren’t large enough or liquid enough to meet a rapid demand for redemptions.
The President’s Working Group on Financial Markets, which includes Gensler, Powell, and Treasury Secretary Janet L. Yellen, is nearing completion on proposals for asset regulation.
According to a senior administration official, the report’s final drafts have been circulated to relevant agencies and are expected to recommend that stablecoin issuers be subjected to rules derived from banking regulations. This could include requiring the companies to obtain a new type of charter, which would necessitate the creation of one by Congress.
The group will also suggest that the Financial Stability Oversight Council, a supercommittee of regulators formed in the aftermath of the 2008 financial crisis, study stablecoins.
If the panel determines that the assets could expand to represent a threat to the financial system’s stability, the Fed will be responsible with adopting measures to mitigate the risk. The Wall Street Journal was the first to report on the report’s details.
According to the senior administration official, a third option would be to use a provision of a 1933 banking law to regulate stablecoins as deposits, though this approach would require Justice Department approval. All of the regulators involved in the process declined to comment on the situation.
The report will most likely not be made public until the Federal Reserve publishes a second document that examines whether the US government should launch its own digital currency. Powell, who stated last week that the document will be released “soon,” believes that such a currency will eliminate the need for private crypto goods.
“If you had a digital US currency, you wouldn’t need stablecoins, you wouldn’t need cryptocurrencies,” the central bank chief said in congressional testimony this summer, calling it “one of the stronger reasons in its favor.”
The proposals for stablecoins and the Federal Reserve’s study on its own digital currency “are profoundly related,” according to Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, because the two assets “may easily become competitors.” A digital dollar, on the other hand, might be used for government services like as taxes and stimulus, while a well-regulated private stablecoin may be utilized in retail. But it all has an affect on one another, and the end goal, which is difficult to achieve, is to create a healthy digital currency ecosystem.”
To make matters more difficult for regulators, they are attempting to create a framework of regulations for the industry from the ground up. “There is no regulatory structure in place to identify who does what or what counts as what,” according to Andrew Park, senior policy analyst for Americans for Financial Reform.
“It’d be better if the FSOC started looking into it, and that’s where I’m hoping the [President’s Working Group] report lands,” Timothy Massad, former chairman of the Commodity Futures Trading Commission, said. “They have the right to knowledge, and they’d consider the ramifications of a disruption in this activity.” “Right now, we don’t have a lot of information.”
Suex, a crypto exchange that allows individuals to purchase and trade digital assets with credit cards, was sanctioned by the Treasury Department last month as part of a push to disrupt the conduits that criminal hackers use to collect ransomware payoffs. Other exchanges, according to national security authorities, could follow. According to Elliptic, a crypto research business, federal regulators have fined corporations in the crypto sector more than $729 million this year for violating current market regulations and other breaches.
State regulators have also gotten in the way of some major crypto firms. Tether, based in Hong Kong and issuing the world’s most widely used stablecoin, reached a settlement with the New York attorney general this year after a two-year fraud investigation by that office. Attorney General Letitia James said her agency discovered the firm misled investors about the stablecoin’s reserves.
In a statement announcing the settlement in February, she said, “Tether’s assertions that its virtual currency was fully backed by US dollars at all times was a deception.” Tether admitted no wrongdoing, but agreed to stop conducting business with New York customers and begin publishing quarterly reserve reports.
Meanwhile, regulators in five states accused BlockFi, a business that offers standard banking services like loans and interest-bearing accounts but transacts in bitcoin, of selling unregistered securities this summer. BlockFi CEO Zac Prince commented in a blog post that the company was following the law and that the measures were “an opportunity for BlockFi to assist define the regulatory framework for our ecosystem.”
Some in the sector are attempting to avoid a crackdown in response to the threat in Washington. USD Coin, the second-largest dollar-pegged stablecoin, is issued by Circle, which says it is open to federal regulation.
The company is applying for a bank license and said last month that all reserves for its stablecoin would be held among the most liquid assets.
Coinbase, the largest crypto exchange in the United States, is also attempting to establish itself as a regulator’s buddy. Executives at the company stated that they wanted to cooperate with the SEC to ensure that Lend, a proposed product that would allow investors to receive interest on their stablecoin holdings, would be approved. Coinbase stopped the project when the SEC threatened to sue if it went ahead with the launch.
The corporation is planning to roll forth its own proposal for regulating the sector. And like many other crypto players, it has been on a lobbying hiring binge in Washington. It has recently increased the number of hired guns on its roster. Andrew Olmem, the Trump administration’s deputy director of the National Economic Council; Rich Feuer Anderson’s team, which includes two former Senate aides and a former Treasury worker; and Tiger Hill’s Milan Dalal, a former top Senate Banking Committee assistant
The Blockchain Association’s executive director, Kristin Smith, expressed cautious optimism about the stablecoin report.
“There’s a chance they’ll misunderstand how stablecoins work,” she cautioned. “We’re concerned about it, but we’ve also had encouraging discussions, and I’d like to believe this is a vehicle for advancement.”