DealBook
The Treasury Department wants to rein in stablecoins.
Seeking stability
Financial regulators have urged lawmakers to act fast on legislation to address the rising risk of stablecoins. This type of cryptocurrency — ostensibly backed one-to-one by a stable asset like the dollar, making it more practical as a means for trades and transactions — is booming, with some $130 billion now in circulation. Stablecoin issuers, such as Tether and Circle, are not banks and they are not simply tech companies that sell online services: They operate as both and have few rules to guide them.
In an eagerly anticipated report that the Treasury Department released Monday, officials warned that without more oversight, the rise in reliance on stablecoins could result in bank runs, consumer abuse and payment snafus, and potentially threaten the wider financial system.
Stablecoin issuers should be treated like banks, the report recommended, subjecting them to the same reserve requirements as traditional financial institutions to ensure they can meet the demands of customers to cash out quickly. Others involved in the stablecoin transfer process should be subject to more rules, too, regulators said, including companies that provide services for holding stablecoins. Currently, federal law cannot prevent retailers and other commercial companies from issuing their own stablecoins, potentially creating risky overlaps between commerce and banking.
Delay is dangerous, the regulators said. Stablecoins have not always been as securely backed as issuers claim. “A run occurring under strained market conditions may have the potential to amplify a shock to the economy and the financial system,” the report warned. The S.E.C., C.F.T.C. and other agencies have the power to police certain stablecoin issuers, but the report identified regulatory gaps that only legislators could address. If Congress does not act quickly, the Financial Stability Oversight Council, a body created after the 2008 financial crisis, could step in and designate stablecoins as a potential systemic risk, granting regulators new powers.
Some say legislation isn’t a speedy path to rein in crypto. Tyler Gellasch, a former S.E.C. lawyer who now leads the Healthy Markets Association, questioned whether Congress would take the necessary steps. “Given the incredible growth of the industry and its lobbying prowess, there’s no guarantee that new legislation will lead to more oversight, and frankly, it’s likely to lead to less,” he said. “This report is unquestionably the starting gun for the crypto lobbying games.”