Stable Cryptocurrency Risks Grab Attention From Yellen, Fed, SEC


Stablecoins, digital currencies pegged to national currencies like the US dollar, are increasingly seen as a potential risk not only for crypto markets, but also for capital markets.

Treasury Secretary Janet Yellen is scheduled for Monday hold a meeting of the president’s financial markets task force to discuss stablecoins, the Treasury Department said on Friday. The group includes the heads of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

“Bringing regulators together will allow us to assess the potential benefits of stablecoins while mitigating the risks they could pose to users, markets or the financial system,” Ms. Yellen said in a statement.

Stablecoins are a key source of liquidity for cryptocurrency exchanges, their biggest users, who must process transactions around the clock. In decentralized financial and derivatives markets, stablecoins are used by traders and speculators. as collateral, and many contracts pay in stablecoins.

Stablecoins have exploded over the past year as cryptocurrency trading has taken off. The three largest stablecoins – tether, USD Coin and Binance USD – are worth around $ 100 billion, up from around $ 11 billion a year ago.

Jeremy Allaire, managing director of USD coin issuer, Circle Internet Financial Inc., said the chairman’s task force meeting was good for stablecoins and that he supports the development of clear standards. . “I think this is good news,” he said.

Tether Ltd., the issuer of tether stablecoin, said it looks forward to working with officials to support transparency and compliance. Binance Holdings Ltd., issuer of Binance USD, said it views the meeting as a positive move. The involvement of regulators will bring more legitimacy and clarity to stablecoins, said Samuel Lim, Binance’s chief compliance officer.

Stablecoins and the companies that issue them have been criticized as not being trustworthy.

“There are many reasons to believe that stable coins – at least most stable coins – are not particularly stable,” Boston Federal Reserve Chairman Eric Rosengren said in a June speech.

While the startups issuing these stablecoins, notably Circle and Tether, are responsible for assets that make them important players in traditional capital markets, there are no clear rules on how assets should be regulated. to ensure stability.

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In December, the president’s task force released a statement on regulatory issues regarding stablecoins. Among other things, he suggested that best practices would include a 1: 1 reserve ratio and that issuers should hold “high quality US dollar denominated assets” and hold them in regulated entities in the United States.

Stablecoins assume that their reserves are liquid and easily redeemable. On the surface, a stablecoin should be redeemable for national currencies at all times, and the amount held in reserve should equal the amount in circulation: currently $ 64 billion for Tether, $ 26 billion for USD Coin, and $ 11 billion. for Binance USD.

Stablecoin reserves, however, are not based solely on interest-collecting bank accounts. Circle and Tether manage the reserves to provide a certain level of income.

Neither Circle nor Tether provide a detailed breakdown of where their reserves are invested and the risks that token users take. This lack of information has alarmed central bankers and lawmakers in the United States and abroad. Binance said its stablecoins reserves are backed at 1-1 US dollars held by New York-based crypto services firm Paxos.

Circle and Tether have both separately defended the level of information they share with the markets.

Stuart Hoegner, general counsel at Tether, said the company has a very liquid portfolio that has been stress tested. He said the company takes a cautious approach to managing its reserves and operates in a way that ensures its peg to the dollar is maintained.

“Our transparency allows people to decide whether they are happy to hold this token or not,” he said.

“Bringing regulators together will allow us to assess the potential benefits of stablecoins while mitigating the risks they could pose to users, markets or the financial system.”

– Secretary of the Treasury Janet Yellen

What the companies have revealed is that they have invested the reserves in corporate debt, commercial paper and other markets that are generally considered liquid, and in cash equivalents.

Tether, according to a report released earlier this year, held about half of its reserves in commercial paper, short-term loans used by companies to cover expenses. The credit ratings of the commercial paper and whether it came from the United States or overseas could not be determined.

In 2019, New York Attorney General Letitia James revealed in an investigation that executives at Tether, who also own and operate the Bitfinex exchange, took at least $ 700 million from the reserve d ‘ties to consolidate Bitfinex’s balance sheet.

The case was settled in February. As part of this settlement, Tether agreed to publish quarterly reports on the composition of its reserves.

Regulators don’t have to look far for examples of what can go wrong in the financial world. Money market funds came under pressure during the pandemic liquidation last year and required Fed support. Dozens of money market funds had to be backed up during the 2008-2009 financial crisis to keep them from “racking their brains” or falling below their norm of a net asset value of $ 1 per share.

Building trust was one of the main reasons Circle decided it would go public, according to Allaire.

“It’s about being a public company and being an open and transparent company,” he said in an interview earlier this month.

Write to Paul Vigna at [email protected]

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