The US Government Has Released Its Stablecoin Report

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Gary Gensler – chair­man of the Secu­ri­ties and Exchange Com­mis­sion (SEC) – recent­ly revealed the US government’s com­plet­ed sta­ble­coin report. It out­lines risks asso­ci­at­ed with such tokens and pro­vides “pru­den­tial” rec­om­men­da­tions to con­gress on how to address them.

Stablecoins: Benefits and Risks

The POTUS’ Work­ing Group on Finan­cial Mar­kets (PWS) pro­duced the report in col­lab­o­ra­tion with the Fed­er­al Deposit Insur­ance Cor­po­ra­tion (FDIC) and the Office of the Comp­trol­ler of the Cur­ren­cy (OCC).  It begins by describ­ing some of the poten­tial ben­e­fits sta­ble­coins pro­vide, includ­ing the use of “faster, more effi­cient, more inclu­sive pay­ment options.”

How­ev­er, it fol­lows by detail­ing a num­ber of risks sta­ble­coins may pose to finan­cial mar­kets. These include their use for trad­ing in more spec­u­la­tive cryp­tocur­ren­cies or loss of con­fi­dence in their suf­fi­cient val­ue back­ing. Teth­er com­mon­ly receives such criticisms.

There is also con­cern about their use in illic­it finan­cial oper­a­tions and mon­ey laun­der­ing. To com­bat this risk, the report encour­ages inter­na­tion­al collaboration:

“A crit­i­cal fac­tor for illic­it finance risk mit­i­ga­tion, regard­less of the fea­tures of a stablecoin’s design, is that inter­na­tion­al stan­dards for the reg­u­la­tion and super­vi­sion of ser­vice providers asso­ci­at­ed with sta­ble­coins and oth­er dig­i­tal assets are effec­tive­ly imple­ment­ed worldwide.”

The report claims that sta­ble­coins have the poten­tial to scale rapid­ly in ille­gal pay­ment net­works due to their increased liq­uid­i­ty. Fed­er­al Reserve Chair­man Jerome Pow­ell has advised in a sim­i­lar fash­ion in the past, call­ing Bit­coin a “failed cur­ren­cy” due to its volatility.

Regulatory Solutions for Stablecoins

To pro­tect against some of these con­cerns, the report sug­gests leg­is­la­tion that requires their issuers to be “insured by depos­i­to­ry insti­tu­tions.” It also advis­es that providers of cus­to­di­al cryp­to wal­lets be sub­ject­ed to Fed­er­al over­sight. Final­ly, to address issues about “con­cen­tra­tion of pow­er,” the paper calls for restric­tions of sta­ble­coin issuer’s con­nec­tions with com­mer­cial entities.

The final con­cern is anoth­er for which Teth­er has faced steep crit­i­cism, regard­ing its affil­i­a­tion with Bitfinex. Both com­pa­nies faced a $40+ mil­lion fine last month for lies relat­ing to Tether’s sta­ble­coin, and Bitfinex’s involvement.

The report con­cludes by stress­ing the urgency with which sta­ble­coins must be regulated:

“Fail­ure to act risks growth of pay­ment sta­ble­coins with­out ade­quate pro­tec­tion for users, the finan­cial sys­tem, and the broad­er econ­o­my,” it reads.

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