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US Treasury says stablecoins should be regulated like banks

A potential ‘run’ on a stablecoin could threaten the economy, a new report finds

Illustration by Alex Castro / The Verge

The US Treasury Department is urging Congress to pass legislation that would require stablecoins to be issued by banks subject to federal banking laws in a new report (.pdf) from the President’s Working Group on Financial Markets, a panel headed by Treasury Secretary Janet Yellen.

The report recommends legislation that would guard against stablecoin runs, address concerns about payment system risk, and address additional concerns about systemic risk and economic concentration of power.

A stablecoin is a type of cryptocurrency typically backed by a fiat currency like the US dollar or the Euro, though it may also be backed by a basket of investments; the “stable” part comes from how the coin is pegged to its backing. Stablecoins are used mainly as payment vehicles and don’t fluctuate wildly in value — or at least, they’re not supposed to. The new report says the market cap for the most popular stablecoins has grown by more than 500 percent over the past year, to $127 billion.

“The rapid growth of stablecoins increases the urgency of this work,” the Treasury Department said in a statement.

In the report, the working group lays out some of the risks that it says stablecoins could present to the economy or to individual crypto investors. A number of scenarios could lead to a “run” on stablecoins, where holders tried to redeem them en masse because they’re worried about the currency’s viability. For instance, If a stablecoin issuer didn’t honor a request to redeem it, or if users lost confidence in the stablecoin issuer’s ability to redeem them, this could lead to a run. “Runs could spread contagiously from one stablecoin to another, or to other types of financial institutions that are believed to have a similar risk profile,” the report states, and could pose risks to the broader financial system.

The solution? Only banks should issue stablecoins. Plus, anyone providing custodial cryptocurrency wallets should be “subject to appropriate federal oversight.” Failure to act would place a lot of people at risk, the report says.

If Congress doesn’t act, the working group recommended that the Treasury Department’s Financial Stability Oversight Council take steps to designate some stablecoin activities as systemic risks, which could subject them to further federal scrutiny.

In October, the US Commodity Futures Trading Commission (CFTC) fined the issuer of the Tether stablecoin $41 million for making misleading statements between June 2016 and February 2019, falsely claiming its stablecoins were fully backed by fiat currencies.