Treasury Says New Law Is The Only Way To Fully Contain Stablecoin Risks

(Bloomberg) – The top U.S. Treasury official responsible for financial oversight said government regulators need action from lawmakers to adequately protect investors – and the financial system as a whole – from the risks posed by financial institutions. stable parts.

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“If Congress does not enact legislation, regulators will try to use the authority they have,” but they will find themselves without sufficient supervisory powers, Nellie Liang, undersecretary of the treasury for national finance, said on Friday. in an interview with Bloomberg News, referring to what agencies can do without the authority mandated by Congress.

Investors in the cryptocurrency space often use stablecoins to enter and exit transactions, using them as a form of digital money, emphasizing the importance of their regulation.

Liang, who previously headed the Federal Reserve’s financial stability division, said of regulators, “They can do a little here and a little there, but if they are fundamental to crypto assets and they don’t. are not stable, this could potentially be a big problem. risk.”

She spoke shortly after a panel of top federal regulators released its annual report outlining threats to the U.S. financial system. In that report, the Financial Stability Supervisory Board said it was prepared to take action on its own to tackle stablecoins if Congress failed to pass legislation.

Not a plan B

But Liang readily admitted that it was “not a good plan B. We wouldn’t call it a plan B”.

“We need action from Congress to address the prudential stablecoin risks,” she said.

In November, a smaller group of federal agencies, including the Fed, called on Congress to act over “key gaps” in the stablecoins regulator. They urged lawmakers to require stablecoin issuers to become insured depositories, subjecting them to oversight by banking regulators.

Liang agreed, saying such oversight would allow agencies to screen them for operational risks, enforce general safety and soundness standards, and assess their ability to pose system-wide collective risk.

Stablecoins are a type of fast growing cryptocurrency whose value is tied to another asset, such as a currency or traditional commodity. Most, like Tether – the largest, with around $ 76 billion in tokens in circulation – are pegged to the US dollar.

Reinforcement role

Tokens maintain a stable value by promising to keep reserves equal to their commitments. But regulators fear these are unreliable, making investors possible. Besides the risk to investors, such races could also be more widely destabilizing if stablecoins continue to grow rapidly.

Currently, they primarily serve as a digital currency bridge for investors looking to trade cryptocurrencies like Bitcoin, the values ​​of which can fluctuate wildly. But their issuance could increase dramatically if adopted as a popular tool for daily payments.

Liang expressed optimism that US lawmakers are starting to seriously engage on the issue.

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

Sen. Pat Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, touted the potential of stablecoins to make payments faster and cheaper at a commission hearing on Tuesday. He also released draft future legislation the same day.

But a Republican proposal would face an uphill battle in the equally divided Senate, and with key Democrats including Banking Panel Chairman Sherrod Brown of Ohio and committee member Elizabeth Warren of Massachusetts taking a much more critical view of tokens.

Treasury securities market

Separately, Liang said that a group of agencies had made “considerable progress” on reforms to the structure of the Treasury securities market. This market has become increasingly sensitive to episodes of low liquidity during times of stress.

On several occasions over the past few years, investors have briefly fled the market. In March 2020, just as the Covid-19 pandemic hit the United States, treasury bill liquidity almost disappeared, threatening to freeze global credit markets and necessitating giant buying intervention from the Fed.

Concerns in the market have only grown, especially as the Fed prepares to end its treasury bill purchasing program in the event of a pandemic next spring.

Read more: Federal regulators move closer to Treasury market reforms

Liang said the regulatory group had “a fairly ambitious work plan for next year” covering the five areas identified in a November report, but would give no timeline to expect concrete proposals.

SEC proposal

Meanwhile, the Under-Secretary of the Treasury reacted positively to the new rules proposed by the Securities and Exchange Commission for money market funds this week, calling them “a big step.”

The proposals would raise minimum liquidity thresholds and introduce what is known as swing pricing for institutional funds, a mechanism that would introduce additional costs for investors who exit when a fund experiences net redemptions.

“If the swing pricing is executed properly, it should reduce the advantage of the buyout first and therefore should prevent runs or reduce large runs,” Liang said.

Money market funds, which aim to preserve the value of holdings and provide daily liquidity, have experienced two crises in the past 13 years that have crippled short-term credit markets and forced the Fed to enter as a buyer. emergency fund. Rule changes brought about after the 2007-09 financial crisis failed to prevent another race in March 2020 at the start of the pandemic.

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