Treasury Says New Law Only Way to Fully Contain Stablecoin Risks

Bloomberg — The U.S. Treasury’s top official for financial oversight said government regulators need action from lawmakers to adequately protect investors — and the wider financial system — from risks posed by stablecoins.

“If Congress does not enact legislation, the regulators will try to use what authority they have,” but they will be left without sufficient oversight powers, Nellie Liang, the Treasury undersecretary for domestic finance, said Friday in an interview with Bloomberg News, referring to what agencies can do without congressionally mandated authority.

Stablecoins are used by cryptocurrency investors to enter and exit trades. They can also be used as digital money. This highlights the importance of regulation.
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Liang, who formerly led the Federal Reserve’s financial-stability division, said of regulators: “They can do a little here and a little there, but if these are foundational to crypto assets and they aren’t stable, that could potentially be a big risk.”

After a report by top federal regulators highlighting threats to the U.S. banking system, She spoke just after it was published. The Financial Stability Oversight Council stated in that annual report it was ready to make its own steps to tackle stablecoins, if Congress does not pass legislation.

There is no Plan B

But Liang readily conceded that’s “not a good Plan B. We wouldn’t call it a Plan B.”

“We need congressional action to address the prudential risks of stablecoins,” she said.

In November, a smaller group of federal agencies, including the Fed, appealed to Congress to act because of “key gaps” in regulatory authority over stablecoins. They asked legislators for the requirement that stablecoin-issuers be insured depository institutions and to subject them to banking regulator oversight.

Liang also agreed that such oversight would enable agencies to inspect them for operational risk, establish safety standards, and evaluate their potential to present system-wide threats.

The stablecoins, a type of cryptocurrency that is rapidly growing in popularity, are tied to assets such as traditional currencies or commodities. Most, like Tether — the largest, with about $76 billion in outstanding tokens — are pegged to the U.S. dollar.

Strengthening Role

By promising equal reserves to liabilities, the tokens will maintain their value. But regulators worry those aren’t reliable, making investor runs possible. Stablecoins’ rapid growth could make such run more dangerous for investors.

At the moment, they are primarily used as a digital currency bridge by investors looking to trade in cryptocurrency like Bitcoin. However, their value can vary greatly. However, their adoption as an everyday payment tool could increase their popularity.

Liang expressed hope that U.S. politicians are now beginning to seriously consider the issue.

“Fortunately, Congress is thinking about this, and working on these issues and holding hearings,” she said.

At Tuesday’s hearing, Senator Pat Toomey, a top Republican from Pennsylvania, spoke out about the potential of stablecoins for faster payments and lower costs. On Tuesday, Toomey also presented a blueprint to guide future legislation.

However, a Republican proposal will face a difficult battle in the equally divided Senate. Additionally, key Democrats like Sherrod Brown (Ohio) and Elizabeth Warren (Massachusetts), have very critical views on tokens.

Treasury Securities Market

Separately, Liang said that a group of agencies had made “considerable progress” on reforms to the structure of the market for Treasury securities. The market is now more susceptible to periods of low liquidity in times of stress.

Investors have been forced to flee the market several times over the years. Just as the Covid-19 pandemic hit the U.S. in March 2020, liquidity in Treasuries almost vanished, potentially threatening global credit markets, and necessitating an enormous buying intervention by Fed.

Worries about the market are only growing, particularly as the Fed plans to end its Pandemic Treasuries Purchase Program next spring.

Continue reading: Federal Regulators Get Closer to Treasuries Market Reforms

Liang said the regulatory group had “a pretty aggressive work plan for the next year” covering all five areas identified in a November report, but would not give any timeline for when to expect concrete proposals.

SEC proposal

Meantime, the Treasury undersecretary reacted positively to new rules proposed this week by the Securities and Exchange Commission for money market funds, calling them “a great step.”

Proposed changes would allow for a higher minimum liquidity threshold and swing-pricing to institutional funds. Investors who wish to withdraw from funds that are experiencing net redemptions would be subjected additional costs.

“If swing-pricing is executed appropriately, it should reduce the advantage of redeeming first and therefore should prevent runs or reduce significant runs,” Liang said.

The money funds are designed to protect the holdings’ value and offer daily liquidity. In the 13 years since then, there have been two run-offs that led to the collapse of short-term credit markets. This forced the Fed into being an emergency buyer for fund holdings. After the financial crisis in 2007-09, rule changes were not enough to prevent another run on March 2020.


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