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US regulators call on Congress to quickly pass new stablecoins laws

By Robert Davis

21:16, 1 November 2021

USD coin, PAX Gold and Tether stablecoins
Stablecoin use has ballooned 500% in the last year - Photo: Shutterstock

US regulators called on lawmakers to swiftly pass new laws requiring stablecoins to be issued by banks and overseen by the Federal Deposit Insurance Corporation (FDIC), according to a report the President’s Working Group (PWG) released on Monday.

The regulators said the new laws could help stablecoins – such as PAX Gold and USD Coin – become widely adopted by households and businesses alike.US Treasury secretary Janet Yellen said the current fragmented and inconsistent regulatory framework in which stablecoins exist presents great risks to their users.

“While Congress considers action, regulators will continue to operate within their mandates to address the risks of these assets,” Yellen said in a press release.

New regulations

The PWG’s report recommends lawmakers enact new regulations to address three areas of concern. First, the rules should address the risks of stablecoin “runs”—whereby the value of a coin begins to deviate from the fiat currency or other asset its price is tied to.

Securities and Exchange chair Gary Gensler described these coins as “the Wild West” back in August because they offer illicit actors the ability to side-step traditional banking and lending safeguards.

Instead, lawmakers should require stablecoins to be registered with the FDIC to provide “appropriate supervision and regulation” of the assets, according to a Treasury Department fact sheet.

Regulators should also enact new rules to safeguard current payment systems and protect against an economic concentration of power through stablecoins, the report said.

Federal oversight

To address risks to the payment system, PWG suggested writing new laws that require custodial wallet holders to be subject to federal oversight. They should also empower the federal regulators to compel actions of stablecoin holders, the report said.

Meanwhile, regulators should also enact restrictions that limit wallet holder relationships with commercial entities.

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“The rapid growth of stablecoins increases the urgency of this work. Failure to act risks growth of payment stablecoins without adequate protection for users, the financial system, and the broader economy,” the report concluded.

Stablecoin market

The proposed regulations would have an immediate impact on the nearly $127bn stablecoin industry, according to data from the Treasury Department.

Over the past 12 months, use of stablecoins has surged more than 500% with most transactions being used to trade cryptocurrency among holders, said Nellie Liang, US under secretary for Domestic Finance.

Looking ahead, Liang said stablecoins could support faster, more efficient, and more inclusive payments options for households and businesses if they are regulated properly.

“Currently, prudential oversight of stablecoins is inconsistent, with some stablecoins effectively falling outside the regulatory perimeter,” Liang said in a statement.

Other federal agencies

Several federal agencies are currently working on new regulations for cryptocurrencies but the results of which are unlikely to suffice compared to a whole-of-government regulatory framework, Liang added.

“All told, the authorities of the regulatory agencies may be able to address specific concerns, but they are unlikely to be a substitute for Congressional action establishing a prudential framework,” Liang said.

Read more: Global banking risk group warns of cryptocurrency threat

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