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Stablecoins Under the Microscope as US Preps Digital Currency Framework

The Biden Administration will be looking into more stringent regulations for stablecoins, The Wall Street Journal (WSJ) writes.

Stablecoins are a digital currency form which try to combine the stability of national currencies with the ability to trade online quickly.

Stablecoins are backed by safe assets like Treasuries, and should theoretically be linked to the dollar quite closely, able to be redeemed for dollars. On the other hand, cryptocurrencies like bitcoin can fluctuate wildly because they are not backed by fiat.

Sheila Bair, former head of the Federal Deposit Insurance Corp, said if a stablecoin issuer doesn’t have capital, with its reserves fluctuating in value, risk is inherent.

Regulators, both current and former, worry that stablecoins could be vulnerable to something like a bank run in the event that numerous investors rush to redeem them; a similar thing happened to some money-market mutual funds in the ‘08 financial crisis. In that case, the government tried to prop money funds up – which it did again in March 2020 to keep markets stable as the pandemic hit.

The Federal Reserve plans to set up new rules as early as next week, which could result in a blueprint for the “future of money” in a new paper by the organization. The Fed might also look for comment on whether it should set up its own digital coin – this would probably compete with stablecoins, and the issue has polarized Fed officials.

The Fed is looking into how it will keep cash relevant in a world that is rapidly losing interest in the form. The WSJ reports that it is considering a new digital form of the U.S. dollar, which would let people access it on their phone and do away with slow, costly electronic payments.

Last year there was proposed U.S. legislation that could add more regulation for stablecoins, including making it so that the coins would have to have bank charters and regulatory approval before going forward.

Read on: Stablecoin Outlook Anything But Stable As Regulation, Legislation Loom

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