Amid an intensifying drive by the White House to formulate a wide-ranging oversight policy on cryptocurrencies, US regulators have intensified their focus on stablecoins.
As the name goes, stablecoins envisage stability and are designed to be the safest. But of late, stablecoins in general and the giant among them, Tether, have drawn increasing scrutiny amid worries that they could pose risks to cryptocurrency users and even to the global financial system.
With Tether, there’s also the question of whether the $69bn in safe assets the company issuing the currency says is backing it are really safe.
Stablecoins, with a combined market value that topped $100bn in May, are digital assets that are designed to keep their value. That is, to experience only the kind of volatility seen in traditional currencies.
Tether, for instance, sells its coins for $1 and promises to redeem them for $1 if customers want their money back. Most of those with large followings are tied to the US dollar.
The tokens have grown popular as they are seen as a bridge between the two conventionally opposing worlds: cryptocurrencies and traditional finance. That makes them useful as a way to lock in gains from crypto trading or as a safe harbour if investors think a downturn is coming.
But doubts about Tether’s backing have dogged it for years. A persistent group of critics has argued that, despite the company’s assurances, Tether Holdings doesn’t have enough assets to maintain the 1-to-1 exchange rate, meaning its coin is essentially a fraud.
A Bloomberg investigation recently found that Tether’s reserves include billions of dollars of short-term loans to large Chinese companies, something money-market funds avoid. It also reported that Tether had made loans worth billions of dollars to other crypto companies, with Bitcoin as collateral.
US officials including Treasury Secretary Janet Yellen, Federal Reserve chair Jerome Powell and the head of the Securities and Exchange Commission met over the summer to discuss Tether, which has grown so large that it potentially threatens to put the US financial system at risk.
Yellen is pushing financial regulators to “act quickly” in drafting stablecoin rules.
The US Department of Justice has also opened a criminal investigation into whether Tether executives committed bank fraud.
Regulators say the growing size of stablecoins has created a situation where huge amounts of US dollar-equivalent coins are being exchanged without touching the US banking system, potentially blinding regulators to illicit finance.
“They are like money funds, they’re like bank deposits and they’re growing incredibly fast but without appropriate regulation,” Powell said in testimony before Congress.
They’re also worried about a panic causing something like a bank run.
Money-market funds needed swift action by the Fed during both the 2008 financial crisis and the 2020 Covid-19 market crash to keep the uninsured investment pools from possible collapse.
US effort to regulate stablecoins favours policing them like lenders, which could jeopardise the future of tokens from firms that refuse to seek federal banking licenses, according to Bloomberg reports.
Over the years, the financial world has been growing warier of the highly volatile digital currencies.
Amid regular boom-and-bust cycles, longer term, regulatory scrutiny of the highly-volatile cryptocurrency market is set to
get wider.
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