Regulators tighten focus on Stable coins: what this means for the crypto market

Stablecoins were the focus in a meeting assembled this past week by U.S. Treasury Secretary, Janet Yellen, together with Federal Reserve chairman Jerome Powell, SEC chair Gary Gensler and CFTC chair Rostin Behnam.

In a continued move by government officials to raise alarms over stablecoins, Yellen told regulators that it was crucial for the U.S government to formulate a framework for stablecoins.

Bringing together top financial watchdogs, the Monday meeting confirms that regulators are increasing scrutiny over stablecoins as the group touched on the rapid popularity of stablecoins such as USDT with a value pegged to the dollar.

In the meeting, the group of regulators also talked about the potential uses of stablecoins as a means of payment as well as the risks of stablecoins to end-users, national security, and the financial system.

 

The current state of stablecoins

Stablescoins, Tether USD in particular, have been growing rapidly in popularity within the crypto market, with speculators using them as a means to move between altcoins and while trading them against cryptocurrencies such as Bitcoin and Ethereum. Pegged in a ratio of 1:1 to the USD at a value of $1.00, stablecoins provide a more stable market for investors, offering a stable store of value beyond the volatility that is to be expected from cryptocurrencies.

Tether, for instance, has long been suspected of printing USDT tokens out of thin air and used to buy other cryptocurrencies, thus raising market prices and artificially inflating the value of Bitcoin while the issuing company continues to print more tokens.

This practice, by design, creates an opportunity for large-scale manipulation that could result in price crashes if left unchecked.

 

Increasing regulatory scrutiny

In the recent past, the new SEC chair Gary Gensler has warned that more investor protection is needed in the crypto markets to prevent fraud and other issues.

In relation to stablecoins, Federal Reserve chair suggested a Fed-backed Central Bank Digital Currency (CBDC) as a solution that could undercut the need for private stablecoins such as USDT. Despite the unease and ambiguity among lawmakers over cryptocurrencies, even as a number of central banks outside the US embrace the idea of CBDCs, Powell’s argument suggests that a government-issued CBDC would be a viable alternative.

Sharing his criticisms about cryptocurrencies in particular stablecoins, Powell said “Really the question is stablecoins, and my point with stablecoins is they’re like money funds, they’re like bank deposits, and they’re growing incredibly fast but without appropriate regulation,”

 if we’re going to have something that looks just like a money-market fund or bank deposit … we really ought to have appropriate regulation and today we don’t.” he added.

 

Is there a changing tide?

Recently, Tether has promised an official audit that has been a long time coming for years.

After some pressing questions in a rare CNBC interview with Tether’s CEO, Paolo Ardoino, and Tether’s general counsel Stuart Hoegner, the response was that the company is working towards getting “financial audits which no one else in the stablecoin sector has done yet.”

In the interview, Hogner claimed that Tether was backed 1:1 with reserves but admitted that not all its reserves are in USD.

 

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