US officials are currently having closed-door discussions regarding launching a formal review into whether stablecoins threaten financial stability.
After weeks of consideration, the Treasury Department and other deferral agencies are nearing a decision, reported Bloomberg citing people familiar with the matter.
The department is examining “potential benefits and risks of stablecoins for users, markets, or the financial system,” said Treasury spokesman John Rizzo in a statement. “As this work continues, the Treasury Department is meeting with a broad range of stakeholders, including consumer advocates, members of Congress, and market participants,” he added.
The total market cap of stablecoins is now ready to surpass $124 billion, up from just over $29 billion at the beginning of this year.
This, however, doesn’t come as a surprise given that the US Securities and Exchange Commission (SEC) Chair Gary Gensler has said many times that stablecoins are one of the two areas they are focused on. The other being crypto exchanges and lending platforms, where “stablecoins are embedded.”
Over the past couple of months, Gensler has been noting that the majority of trading on all crypto trading platforms is occurring between a stablecoin and some other token.
“The use of stablecoins on these platforms may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money laundering, tax compliance, sanctions, and the like. This affects our national security, too,” said Gensler adding, these fiat-based coins may also be securities and investment companies.
Duke University finance professor Campbell Harvey, who is also the co-author of a book called “DeFi and the Future of Finance,” told Bloomberg in an interview that the US regulators face a tough balancing act when it comes to addressing “yield farming” — allowing investors to lend their crypto in exchange for interest rates — without pushing the financial innovation offshore.
Additionally, the President’s Working Group on Financial Markets, led by Treasury Secretary Janet Yellen, has also been focused on stablecoins. In a private meeting held in July, US officials likened the situation to an unregulated money-market mutual fund that could be susceptible to chaotic investor runs.
Around the same time, a paper from the Federal reserve proposed to “tax private stablecoins out of existence” as one of the options to “Taming Wildcat Stablecoins.”
At the time, Yellen urged regulators to “act quickly” in drafting stablecoin rules. The group, composed of Yellen, Gensler, and Fed Chair Jerome Powell, expects to issue stablecoin recommendations by December.
The Financial Stability Oversight Council (FSOC) process includes a detailed study, an assessment of which agencies should respond and how, and then directing them to intervene in the market.