Yellen Tells Regulators to ‘Act Quickly’ on Stablecoin Rules
(Bloomberg) -- Treasury Secretary Janet Yellen pushed top U.S. financial regulators to accelerate their consideration of new rules to police so-called stablecoins, a type of cryptocurrency that’s seen rapid recent growth and remains largely unsupervised.
“The secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” the Treasury Department said Monday in a statement following a meeting of the President’s Working Group on Financial Markets. The group “expects to issue recommendations in the coming months,” according to the statement.
The statement said meeting participants “discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment and potential risks to end-users, the financial system and national security.”
A stablecoin’s value is fixed to a national currency or commodity and backed by reserves of that underlying asset. While cryptocurrencies like Bitcoin have evolved essentially into investment assets, stablecoins represent a more attractive option for those looking for a digital form of money that retains a steady value.
The market value of U.S.-dollar-backed stablecoins has jumped in the past year, surpassing $100 billion in May. That has alarmed regulators, worried especially by the lack of oversight and transparency over how issuers manage reserves they purport to have.
“There’s not a lot of disclosure about how stablecoins work and what’s backing them,” said Matthew Frankle, a partner at law firm Haynes & Boone LLP.
As such, the main drive by regulators, said Frankle, will likely aim to provide safety for consumers. New rules would cut into profit margins earned by issuers, he added, but in the long-run should help them attract more users.
Last week, Federal Reserve Chair Jerome Powell compared stablecoins to bank deposits and money market mutual funds -- two products that are heavily regulated to provide consumer protection and protect the stability of the financial system. Banks can lend out deposits but must keep a portion as reserves and meet specific lending standards. Money funds are restricted to investing in highly rated short-term debt. Both also must meet extensive reporting and auditing requirements.
“If they’re going to be a significant part of the payments universe,” Powell said of stablecoins, “then we need an appropriate regulatory framework which, frankly, we don’t have.”
The Fed is expected to publish a paper as early as September unveiling additional research on emerging payment methods -- including cryptocurrency, stablecoins and central bank digital currencies -- and laying out related policy questions.
In a paper published over the weekend, Yale School of Management Professor Gary Gorton and Jeffery Zhang, an attorney at the Fed, argued that stablecoins will require clear regulation if they ever hoped to be widely used. Otherwise, consumers may discount their value and the products will be subject to runs, the authors said.
The paper represented the author’s own views and not the Fed’s policy on stablecoins.
Formed in 1988 in the Reagan administration, the president’s working group includes the Treasury secretary plus the heads of the Fed, Securities and Exchange Commission and Commodity Futures Trading Commission. Two additional banking regulators -- the heads of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. -- were also invited to the stablecoin session.
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