Biden administration hardens with stablecoins

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Months of speculation over the form of increased stablecoin regulation may be about to end. According to The the Wall Street newspaper, a Biden board of directors is working on a set of proposals that target the risks presented by stablecoins. The recommendations are expected to be released at the end of this month.

There are a few heavyweights on the committee – called the President’s Task Force on Financial Markets – such as Treasury Secretary Janet Yellen, SEC Chairman Gary Gensler, and Federal Reserve Chairman Jerome Powell.

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Why are stablecoins important?

Stablecoins are in the sights of regulators due to the potential risk they pose to the financial system. These are cryptocurrencies whose value is linked to a traditional commodity like the US dollar or the price of gold.

One of the reasons investors use them is that fiat trading (using traditional money) on cryptocurrency apps and exchanges can be expensive and time consuming. Stablecoins are also a key part of the burgeoning decentralized finance (DeFi) industry. A number of crypto platforms pay high interest rates on stable deposits.

An estimated $ 130 billion is held in stable coins at the moment, and authorities are concerned about levels of risk and transparency. The key question is, if there was a run on a particular stable coin tomorrow, would that coin have enough money in reserve to support it?

In the case of Tether (USDT), the biggest stablecoin by market cap, the answer is: maybe not. Tether holds about half of its reserves in a form of short-term debt called commercial paper. Indeed, according to Financial Time, it is the seventh largest holder of this type of debt in the world.

Lawmakers would like to see more transparency about the type of commercial paper owned by Tether – for example, the companies and countries in which this debt is located. But there’s also a bigger concern that if something goes wrong with Tether, it could have a huge ripple effect on the global credit market.

Global credit rating firm Fitch Ratings warned in July that “a sudden massive buyout of the USDT could affect the stability of short-term credit markets.”

What kind of regulation will we see?

It looks like the Biden committee will be pushing for bank-like checks on stablecoins. As Powell told the House Committee on Financial Services last week, “Stablecoins are like money market funds, they’re like bank deposits, but they’re outside the regulatory scope to some extent. and it is appropriate that they are regulated. Same activity, same regulation. “

This could mean that stablecoins actually have to register as banks. Sources also said The the Wall Street newspaper that the committee could push Congress to introduce some kind of special charter specifically designed for stablecoins.

The measures taken in the United States mirror the international measures announced this week. A report from the International Organization of Securities Commissions suggests that stablecoins should meet international standards for payment, clearing and settlement.

Despite this, given the global nature of the cryptocurrency market, questions remain as to how the new rules will be applied internationally.

What this means for investors

The good news is that there are currently no plans to ban cryptocurrencies in the United States like China did this year. Additionally, pushing stablecoin providers to demonstrate that there is enough money in reserve to support the coins they issue will likely strengthen the crypto industry in the long run. However, increased regulation can cause market fluctuations in the short term. And we could also see a reduction in the interest rates offered by DeFi platforms.

Given Tether’s size and market dominance, if the new regulations have a significant impact on its operations, it will likely have a ripple effect on the crypto industry. Regulators will be reluctant to implement measures that hurt investors. However, if you hold USDT, it may be worth converting your funds to a more transparent stablecoin to mitigate this risk.


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