The Biden administration has announced that it believes stablecoins, or digital assets linked to traditional currencies, can change the way Americans pay but need regulation, according to a report by the President’s Working Group on Financial Markets (PWG).
The report was published by the PWG with cooperation from the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of Currency (OCC). It states that while stablecoins are primarily used to facilitate trading of other digital assets, they can be more widely used in the future as a means of payment if further regulatory legislation is issued.
“Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options. But the absence of appropriate oversight presents risks to users and the broader system,” Secretary of the Treasury Janet L. Yellen stated in the release.
The PWG found that if these stablecoins were regulated, they could “support faster, more efficient, and more inclusive payment options,” according to the report. As a result, Biden’s economic advisors have asked Congress to introduce regulatory oversight and formal market structures as soon as possible to protect consumers and exchanges, according to CNBC.
In that recommendation, Biden’s team urged Congress to limit stablecoin issuance to insured banks, which would grant regulators much more power when it comes to moderating the industry. The report also stated stablecoin issuers could be declared as “engaged in systemically important activities to the financial system by the Financial Stability Oversight Council,” subjecting them to even more supervision by regulators at the Federal Reserve.
This is likely an attempt to ensure the “stable” stays in “stablecoin,” as the market watches digital assets, including cryptocurrencies, experience widespread volatility.
This is especially true considering the fact they are linked to traditional currencies. The stablecoin market has already grown 500% over the past year to $127 billion due to that link, and is expected to grow as traders increasingly utilize them to store uninvested funds, according to MarketWatch.
If investors lose confidence in assets backing stablecoins, however, it could act as a catalyst for a self-reinforcing cycle of redemptions and fire sales of reserve assets, according to the report.
““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. Risks to the broader financial system could rapidly increase as well, especially in the absence of prudential standards,” the report stated.
Stablecoins also need to be monitored to protect against criminal activity, according to a press release by SEC Commission Chairman Gary Gensler, a member of the PWG.
In other recent fintech news, RocketMortgage is partnering with Salesforce to expedite mortgage services to local banks and credit unions. Tiger Global also led a $12 million pre-Series A expand its Open Banking portfolio into the Middle East and Northern Africa (MENA) with Tarabut Gateway.