June 10, 2021 at 05:02PM

All eyes may be on cryptocurrencies, with the wild gyrations in price of bitcoin and other offerings, and headlines swirling around ransomware. On the one hand, El Salvador has embraced bitcoin as legal tender, on the other hand, nations such as China have all but banned cryptos from being traded, and certainly from being used in mainstream commerce.

Now, it may be stablecoins’ turn in the regulatory spotlight.

In broad terms, stablecoins are digital coins that are pegged to some underlying asset value — perhaps most visibly the U.S. dollar — in a way so that the value of the stablecoin itself reflects moves in the underlying assets’ pricing.

Conventional wisdom holds that that stablecoins will trade, then, with far less volatility than has been seen with cryptos that do not feature such pegs.

But at least some observers are sounding some alarms over the coins, arguing that they need some guardrails and may not be as safe as has been claimed.

As reported in this space, former Commodity Futures Trading Commission Chairman (CFTC) Timothy Massad has said, per an interview with CNBC, that there should be more transparency around the trading of those coins. He pointed to Tether, which has been pegged to (but not backed by) the U.S. dollar or by loans. A document released earlier this year by Tether Limited, which issues the stablecoins, shows that roughly 65 percent of reserves are held in commercial paper. The Financial Times reported that Tether may in fact be one of the largest investors in the commercial paper market (at roughly $30 billion in holdings, while cash is only about 3 percent of holdings).

The document, as reported by Coindesk, represents part of Tether’s bid to remain compliant with a settlement reached in February with the New York Attorney General’s office after an investigation into Tether and a crypto exchange, Bitfinex, over $800 million in losses.

In the interview with CNBC, Massad said that transparency should go beyond such disclosures. “We need a better framework of regulation for tether and other stablecoins,” he said. “We need a better framework so that we can just be sure that there can’t be a run on something like this.”

A Range Of Regulatory Approaches

And, separately, in a nod to what might happen in the halls of Congress regarding digital currencies, a Senate Banking Committee hearing this week shows that lawmakers’ regulatory gaze is tightening on the sector.

As reported by Yahoo Finance, Sen. Elizabeth Warren said at the hearing, “If you want to send money to somebody else, digital currency can be easier and faster. But in order for those advantages to be realized, the digital version needs to be secure, stable and accepted everywhere.”

The site noted that the witnesses before the hearing — which included Columbia Law’s Lev Menand, Stanford University’s Darrell Duffie and Digital Dollar Foundation Director Chris Giancarlo and MIT Digital Currency Initiative Director Neha Narula — said a digital U.S. dollar would be beneficial to the U.S., particularly for companies holding large amounts of cash on their balance sheets.

The comments in recent days seem to flash warning lights to the stablecoin community that assets that back the coins themselves will be subject to more analysis and disclosure — especially if they do not trade one to one with, for example, the U.S. dollar.

As reported here, there are a number of regulatory approaches starting to shape how stablecoins might be governed and to more narrowly define their use.

At the end of last year, a number of congressional representatives issued the Stablecoin and Bank Licensing Enforcement Act, which will make banking charters part of the process. Issuers will have to receive approval from the Federal Reserve and from the Federal Deposit Insurance Corp. The legislation would limit who can issue the stablecoins, noting that “it shall be unlawful for any person to issue a stablecoin other than an insured depository institution that is a member of the Federal Reserve System.”

The question remains, then — and remains unanswered, as of now: Whither stablecoins?

Next up: The role of stablecoins in banking 

Stablecoins Face Unstable Regulatory Path With Cryptos In Federal Spotlight …

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