Treasury report says stablecoins threaten market integrity and investor protection
In a long-awaited report, the Treasury urges Congress to take immediate action to address the risks presented by stablecoins. It presents some of the biggest dangers of stable coins and how they could be treated.
Stablecoins are cryptocurrencies whose value is tied to another asset, such as gold or, more commonly, the US dollar. They are the lifeblood of the cryptocurrency industry, providing a fast and easy way to trade and convenient support for decentralized financial applications, such as borrowing and lending.
Agencies involved in the report are the President’s Task Force on Financial Markets, a panel led by Treasury Secretary Janet Yellen, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
How stablecoins could threaten market integrity and investor protection
The 26-page report acknowledges that the total market capitalization of major stablecoins today is around $ 127 billion, up 500% from the previous year. This rapid growth shows no signs of slowing down. In theory, stablecoins backed by trust funds have enough assets in reserve to support every coin they issue. But, as the report points out, there is not enough consistency in the functioning of these reserves.
“Stablecoins differ in the risk of their reserve holdings, with some stablecoin agreements holding virtually all reserve holdings in deposits with insured depositories or in US Treasury bills, and others holding securities. riskier reserve assets, including commercial paper, corporate and municipal bonds, and other digital assets, ”he says. If you’re not sure why commercial paper is problematic, read our article on the reasons to be careful with Tether (USDT).
These potentially volatile reserves are causing further concern that the market may not be able to withstand a run on stablecoins. Let’s say that a particular coin did not meet consumers’ expectations, which caused many people to try and withdraw their funds. According to the report, this could create “a self-reinforcing cycle of reserve asset buybacks and sell-offs.”
Not only could this disrupt other financial markets, but a run on one coin could prove contagious, resulting in runs on several different stable coins. Worst scenario? This could have an impact on the economy as a whole. “A race occurring under tense market conditions can potentially amplify a shock to the economy and the financial system,” he says.
Other areas of concern regarding the stablecoins market include:
- Consumer exposure to fraud
- Market manipulation and insider trading
- Lack of price negotiation or transparency
- Potential non-compliance with anti-money laundering compliance rules
What should be done in the stablecoin market?
In the short term, the report stresses that the various agencies involved in the regulation of stablecoins must use their existing authority to face the risks that fall within their jurisdictions and collaborate on those where there is intersection.
At present, there are several agencies involved in keeping stablecoins on track. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are leading the charge. The Department of Justice, the Consumer Financial Protection Bureau (CFPB) and the Financial Crimes Enforcement Network (FinCEN) also have a role to play.
However, there are some overlaps which can confuse the issue, and some issues are beyond the purview of a single organization.
Longer term, the report’s authors believe urgent legislation is needed.
- Only authorize insured deposit institutions – banks or savings associations with FDIC Insurance – to issue stable coins. Right now, if your money is in a savings account, it is insured for up to $ 250,000 against bank failure. If you have stable coins, there is little protection in place if the platform or coin emitter fails.
- Require federal oversight for custodial portfolio providers. Crypto investors can use different types of wallets to store their assets. Custodial wallets are often managed by cryptocurrency exchanges. Investors who use custodial wallets do not control their keys and may not always know what the wallet provider is doing with their funds.
- Make sure that any organization involved in stable coins introduces sufficient risk management measures. Traditional payment processors have implemented various systems to minimize risk, whether it is to guard against human error or external failure. Similar measures would make the stablecoins market more resilient.
- Ensure interoperability between stablecoins or stablecoins and payment processors. The problem here is that a stablecoin could become dominant and then crush all competition. Enshrining interoperability in law would reduce the risks of an excessive concentration of powers.
Long road to go
While the report repeatedly emphasizes the need for swift action, legislation is not a swift process. The implementation of the above proposals could take years. In the meantime, cryptocurrency investors would be wise to exercise caution.
Don’t assume that all stable coins give you the same level of protection. Look for coins that have a decent amount of accessible funds in reserve, rather than those that tie up their assets in various forms of short-term loans.
Stablecoins can be a great way to earn high interest rates and are extremely useful for active traders. But they’re not all as stable as the name suggests.