You are currently viewing Opinion | 'Stablecoins' claim to be a safer cryptocurrency — but they're far from risk-free – The Washington Post

Opinion | 'Stablecoins' claim to be a safer cryptocurrency — but they're far from risk-free – The Washington Post

Nellie Liang is the undersecretary for domestic finance at the Treasury Department.
A relatively new class of digital assets known as “stablecoins” has the potential to offer Americans a cheaper, more efficient way of making purchases and payments. And the market for these digital assets is booming: The current market capitalization of stablecoins is approximately $180 billion, up from just $5 billion at the start of 2020, and they account for roughly 10 percent of the value of all digital assets, which include cryptocurrencies.
But stablecoins are not yet subject to consistent regulatory safeguards — meaning they pose an elevated risk to consumers and might even threaten the stability of the financial system.
Unlike other digital assets, which often fluctuate dramatically in price, stablecoins are intended to be what their name implies: stable. Many are pegged to the U.S. dollar, meaning each coin is supposedly backed by a dollar in cash, Treasury securities or other safe assets, and thus redeemable on demand.
Today, stablecoins are mostly used to facilitate the trading of other, more volatile digital assets, such as bitcoin. But companies around the world are working to create stablecoins that businesses and households can use to make payments — which in turn could help make the payment system faster, more resilient and more inclusive. For instance, paying with stablecoin could reduce the costs and delays involved in sending and receiving remittances. But stablecoins also pose major risks — risks that would be best addressed by new legislation.
Opinion: Stablecoins may not be stable. That’s a problem.
Ironically, it is the expectation that stablecoins will maintain a constant value that could make them dangerous during periods of stress. If at some point holders of stablecoins worry they won’t be able to convert their stablecoins into dollars, they might try to cash out quickly — perhaps a few owners at first, then many more, and soon there could be a widespread run on the coin. To satisfy demand, issuers would have to sell the assets backing their coins. That could result in a fire sale of traditionally safe securities that would harm critical parts of the financial system.
This isn’t hypothetical. History is rife with runs on financial institutions, including the run on banks that preceded the Great Depression. In 2007 and 2008, runs on “shadow banks” — companies that perform banklike activities without being subject to bank oversight — helped fuel a crisis that engulfed the United States and much of the world.
Given their potential use for payments, stablecoins present another concern. Payment instruments such as checks and credit cards are the lifeblood of the economy. If stablecoins replace those systems to a significant degree, disruptions related to digital wallets or other mechanisms supporting the use of stablecoins for payments could have devastating effects.
Then there are risks related to the possible links between stablecoin issuers and large retailers or other commercial businesses. For almost a century, U.S. law has prevented commercial companies from controlling banks — a wise approach, as too much economic power concentrated in one place can limit competition and harm consumers. But today, nothing prevents commercial companies from creating and issuing stablecoins.
The Treasury Department and U.S. financial regulators are prepared to use the tools we have to protect consumers from these potential risks, and know that many state regulators are working to do the same. But we urge Congress to enact legislation to ensure that stablecoins are subject to appropriate, comprehensive regulation.
Last year, the President’s Working Group on Financial Markets (PWG) joined the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to produce a report including recommendations for congressional action.
Specifically, the PWG recommended legislation requiring stablecoin issuers to obtain a bank charter, which would ensure they are subject to prudential standards that reduce the risk of a run, and which would prevent a stablecoin issuer from being controlled by a commercial company.
Recognizing that the use of stablecoins for payments is likely to depend on digital wallets and other services, the PWG recommended that wallet providers be subject to federal oversight. Federal supervisors should be able to require any entity providing services critical to the function of a stablecoin to meet appropriate risk-management standards.
Finally, to address concerns about the concentration of economic power, the PWG recommended that Congress consider whether other protections — such as data privacy standards or affiliation limits for wallet providers — are necessary to protect consumers.
We know the dangers of risky financial products. Fifteen years ago, they helped ignite the deepest recession since the Great Depression, and nobody wants to see a replay.
Stablecoins that are well-designed and appropriately regulated could deliver important benefits for our payments system. But guardrails to ensure responsible use and innovation are essential — and Congress must act quickly to help ensure that these risks do not harm consumers and the broader economy.
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