US regulators concerned about digital currency Stablecoin

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Major U.S. financial regulators have said they are ready to take action to address the risks to the financial system posed by stablecoins, but first they are pushing Congress to enact comprehensive legislation to oversee the form of currency. digital.

The rapid growth of digital assets, including stablecoins – digital currencies pegged to national currencies like the US dollar – is “a significant potential emerging vulnerability,” regulators from the Financial Stability Oversight Council, or FSOC, said in their report. annual report published on Friday. The report noted highly volatile prices and the potential for fraud as possible risks in the space.

“If stablecoins are traded with the claim that they will hold a stable value, they may be subject to large-scale asset repurchases and liquidations if investors doubt the credibility of that claim,” the statement said. report.

The highlighting of stablecoins in the report is the latest sign that stricter risk management standards could be considered for companies issuing the digital asset. The annual report is a wide-ranging assessment of risks in the financial system by a panel of regulators established in the aftermath of the 2007-2009 recession. Friday’s report was the first released under the Biden administration and under Treasury Secretary Janet Yellen, who heads the council.

While the report indicates that the potential risks to the financial system from climate change, nonbank financial institutions, such as money market funds and open-ended mutual funds, and disruptions in the treasury market are the main ones. priorities of the group, he highlighted several potential risks associated with digital assets. and stablecoins in particular.

A Treasury official said the council hopes Congress will pass legislation providing an oversight framework for stablecoins, but regulators would be prepared to consider measures available to them in the future if lawmakers do not act. . Regulators have not set a timeline for when they could take their own measures in the absence of congressional action, the official said.

Stablecoins are issued by companies such as Tether Operations Ltd. and Circle Internet Financial Ltd. and are designed to combine the ability to trade quickly online like bitcoin with the stability of national currencies like the dollar.


Photo:

Tiffany Hagler-Geard / Bloomberg News

Stablecoins are issued by companies such as Tether Operations Ltd. and Circle Internet Financial Ltd. and are designed to combine the ability to trade quickly online like bitcoin with the stability of national currencies like the dollar. The board report noted that digital assets can “be subject to the risk of operational failures, fraud and market manipulation” and that prices are sometimes highly volatile due to speculative activity.

Tether and Circle did not immediately respond to a request for comment on Friday.

The board’s signal that it is willing to take a more active role in stablecoin oversight follows a November report on digital assets from a panel led by the Treasury. This report recommended that Congress impose a new regulatory framework around stable coins. He also urged the FSOC to consider measures to address the potential risks associated with stablecoins, including possibly designating activities associated with the digital asset as being or likely to become of systemic importance.

Bitcoin’s volatility limited its adoption for payments, so entrepreneurs created stablecoins: cryptocurrencies tied to assets like the US dollar. But the recent settlement of an investigation into the most popular stablecoin, tether, shows the need for transparency in the growing industry. Photo illustration: Sharon Shi / WSJ

Climate change is also high on the agenda of regulators. During their meeting on Friday, the panel also approved a resolution to establish a new committee that will coordinate climate-related efforts across regulatory agencies.

This year’s annual report is the first to identify climate change as an emerging threat to US financial stability. The report also reiterated the actions members of the expert panel are taking to address this threat, including plans to step up what some companies publicly disclose about their own exposure to climate-related risks.

Regulators have said they are also continuing to assess potential risks posed by non-bank financial institutions and periods of treasury market disruptions.

The report says vulnerabilities in these two areas were highlighted during the tensions in financial markets that arose at the start of the pandemic. The brief slowdown in March 2020 caused liquidity in the Treasury market to deteriorate as investors looking to raise funds rushed to sell U.S. government bonds. Meanwhile, money market funds and open-ended mutual funds faced liquidation pressures around this time.

Write to Amara Omeokwe at [email protected]

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Published in the print edition of December 18, 2021 under the title “Regulators Press for Stablecoin Oversight”.


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