The rise of cryptocurrencies, one of the biggest financial trends to emerge in years, has raised the stakes for regulators to exert more influence over the sector, while protecting investors.
The rapid adoption of digital tokens has made the development of a central bank digital currency (CBDC) a more “urgent” proposition, a top official told Yahoo Finance recently, especially as a .
“We absolutely support an urgent study of CBDC,” Treasury Under Secretary for Domestic Finance Nellie Liang said in a Yahoo Finance interview last week, but stopped short of outright endorsing one.
“There are many ways in which it could be implemented, which have important implications for the financial system. We support the work in this across all dimensions.”
Liang’s remarks, made just before an appearance before the House Financial Services Committee Tuesday on regulating stablecoins, mark some of the first from the Biden administration on a CBDC. Recently, a Presidential Working Group (PWG) , but threw the issue to Congress to decide.
The official believes a Fed coin will probably determine how stablecoins coexist with a CBDC, which she thinks can happen. Still, Liang said it’s possible a CBDC could supplant stablecoins, depending on the kinds of features the Fed would choose for it, .
“Our goal with the PWG report was that the private stablecoin, in fact, be stable and can function as a constant unit of value,” said Liang. “But there are questions in the future as to how it would coexist with the CBDC and whether that’s the best financial system in the future.”
But Liang says it could be years before a theoretical digital dollar is even introduced. whereas stablecoins are active now. Their current use leaves regulators no choice but to regulate, lest they mushroom into a systemic risk to the economy.
The Federal Reserve is of issuing a CBDC after releasing a report last month. Analysts are postulating what impact it could have on stablecoins and financial markets.
According to Chainalysis, a digital dollar could be in a strong position versus non-CBDC stablecoins, arguing that a CBDC would be characterized by “essentially zero credit and liquidity risk and would be the most desirable form of holding cash, especially during periods of market turbulence where a financial institution’s creditworthiness might be called into question.”
The money market question
The Treasury is looking at stablecoins as a form of payment. Liang explained stablecoins combine a bank-like product with a securities product, but noted that investors don’t invest in stablecoins for yield they’ll earn on assets, since stablecoins don’t pay interest like money market funds.
“The money market funds regulations of the SEC are designed for an investment asset, not designed to ensure that the payment system continues to function at all times under stress,” Liang told Yahoo Finance. “So that’s, that’s like a key distinction of what a stable coin is versus the money market.”
Liang, however, insisted Treasury is not taking a stand on whether stablecoins could be considered securities or commodities, but have “features of serving as payment form, money, a security or a commodity…That’s why it’s not surprising that after reviewing the potential risks that could arise from stablecoins being used at payments, that there are gaps in the current regulatory structure.”
While transparency of assets backing stablecoins is important, but Liang said that alone isn’t sufficient to guard against runs in stablecoins. She pointed to instances in 2008 (the financial crisis) and 2020 (the start of the COVID-19 outbreak), when money market funds saw investors stampede out of the sector.
Capital requirements could be lower for stablecoin issuers that hold high-quality assets as backing, Liang said. If stablecoins only issued coins for payments and did not make commercial loans like a commercial bank they could be subject to a different supervisory regime, she added.
“So there’s a degree of flexibility in the proposal. Depending on the quality of assets and capital and liquidity standards that could be applied to a stablecoin issuer they may not need deposit insurance,” said Liang.
During Tuesday’s Congressional hearing, Democratic and Republican lawmakers questioned Liang on how to best regulate stablecoins, but found no consensus on the issue of treating them like bank instruments. Questions from both parties ran the gamut, from quality of reserves to disclosures and liquidity requirements.
However, some think the hearing may clear the way for Democrats to push through legislation this spring that will address reserves and issuers.
“As Democrats have the majority in the House, it should be able to advance out of this committee and through the full House,” according to Cowen analyst Jaret Seiberg.
“What it won’t do is put any pressure on the Senate to act as we see this as a partisan push. It is why we increasingly see the door closing for stable coin legislation this year,” he added.
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube
Source: https://finance.yahoo.com/news/crypto-stablecoin-boom-makes-digital-dollar-push-more-urgent-treasury-official-160904185.html