The US is dragging its heels on critical stablecoin regulations

November 10, 2021

From Yahoo Finance

A much-anticipated policy paper commissioned by former US president Donald Trump and finished on the watch of US president Joe Biden has punted the issue of stablecoin regulation to Congress—and several former regulators believe doing so amounts to a gift for the cryptocurrency industry.

Though some watchdog agencies are eager to jump in, there currently are no regulations for stablecoins, a central part of the crypto markets that’s designed to hold the value (and stability) of another financial asset, usually the US dollar. It’s a niche product today, but the policy paper was written under the pretense that the $130 billion stablecoin market could become systemically important as it grows and becomes intertwined with the real economy.

Aside from the technical advantages, stablecoins have become a critical part of the cryptocurrency markets because of banks’ historical unwillingness to take on crypto firms as clients. The heavily regulated banking industry has high standards for so-called know-your-customer and anti-money-laundering regulations, which makes it difficult for them to work with crypto firms. (A select few banks in the US have been crypto-friendly for several years including Silvergate Bank in La Jolla, California, Signature Bank in New York, and BankProv in Amesbury, Massachusetts.)
Stablecoins also have been championed by Facebook (now Meta), which aims to issue a stablecoin called Diem through Silvergate Bank. This project sparked regulators’ concerns that stablecoins could become part of payments for businesses and households more broadly.Another risk that has regulators on guard is the asset backing of stablecoins. While the coins are purported to be pegged in value to the US dollar, the most popular stablecoins (Tether and USD Coin) are actually backed by commercial paper and US Treasury debt.

As such, regulators are concerned that stablecoins look a lot more like money-market funds than currencies that can reliably be used as a means of payment—especially if there is a run on stablecoins during times of uncertainty.

Source: Yahoo Finance
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