NYT: Stablecoins May Be the Root of Turbulence, Enumerating Regulatory Options Governments Might Take

The New York Times recently published an article discussing stablecoins, delving into the risks they currently face and potential future regulatory measures. The subtitle of the article reads:

The Federal Reserve, Treasury, and other regulatory agencies are concerned that a technology designed to ensure stability could actually become a source of turmoil.

It is evident that stablecoins are viewed by the U.S. central financial authorities as a ticking time bomb, necessitating more thorough regulatory measures to be put in place promptly.

The Risks Associated with Stablecoins

With the development of blockchain technology in recent years, the era of cryptocurrencies has arrived, and stablecoins can be seen as an innovation that is quite ironic to the existing financial system. Stablecoins are usually pegged to government-issued currencies such as the US dollar or the Euro, promising holders that their investment of 1 dollar will maintain a value of 1 dollar in the long term. Companies issuing stablecoins typically hold a large amount of reserve assets such as cash, government debts, or commercial papers. However, these stablecoins are not considered bank deposits, thus the supervisory capabilities of the Federal Reserve and monetary regulatory authorities are limited.

Although the emergence of stablecoins has completely changed the way people invest in cryptocurrencies, acting as a bridge between traditional currencies and new cryptocurrencies, many stablecoins rely partially on short-term debts that may face liquidity shortages, making them difficult or even impossible to trade when in trouble. Former policy advisor at the Treasury Department, Morgan Ricks, stated:

These financial products could bring about macroeconomic disasters, the stakes are really, really high.

However, some people hold different views on the risks of stablecoins. George Selgin, Director of the Center for Monetary and Financial Alternatives at the Cato Institute, said:

As stablecoins are used as niche currencies rather than investments, they are less prone to investor runs. Even if their backing is questioned, the potential tax and paperwork involved in converting stablecoins to dollars is something people wouldn't want to deal with.

With so many types of stablecoins on the market, each faces different risks. Tether, the largest stablecoin issuer, disclosed in its June report that about half of its reserve assets come from short-term corporate debts, exposing it to a certain degree of liquidity risk. Circle, the company behind the USDC stablecoin, previously claimed that it was backed 1:1 by cash assets, but according to Circle's July report, 40% of its assets are actually in US Treasuries, certificates of deposit, commercial papers, corporate bonds, and municipal bonds.

Potential Regulatory Options for Stablecoins in the Future

As mentioned earlier, since stablecoins are not considered bank deposits, they can easily circumvent regulatory loopholes. To address current issues, several potential regulatory options and measures for stablecoins in the future have been proposed.

1. Designating Stablecoins as Systemically Risky

Given the high correlation between stablecoins and other financial markets, the Financial Stability Oversight Council could designate them as payment systems with systemic risks, subjecting them to stricter supervision.

2. Treating Stablecoins as Securities

The government could label some stablecoins as securities, subjecting them to more comprehensive disclosure requirements.

3. Regulating Them Like Money Market Funds

Many financial experts point out that the operation of stablecoins is very similar to money market funds, serving as short-term savings tools that allow for quick redemptions when investing in low-risk assets.

4. Treating Stablecoins Like Banks

Given the flaws in regulating money market funds, many financial regulatory enthusiasts prefer to treat stablecoins as bank deposits. If treated as bank deposits, these tokens would be supervised by banking regulatory authorities. Users would benefit from deposit insurance in the event of the company supporting stablecoins going bankrupt.

5. Competing with Central Bank Digital Currencies

Federal Reserve Chairman Jerome H. Powell believes that central bank digital currencies may have the upper hand in competing with stablecoins. He stated, "If you have a digital US currency, you don't need stablecoins, and you don't need cryptocurrencies." However, industry experts also point out that due to the preference of stablecoin users for privacy and independence from the government, a new form of government-backed currency may not be able to replace them.

6. International Cooperation

The Financial Stability Board is working to establish guidelines and cooperation plans related to stablecoins, aiming to promote cooperation among jurisdictions for effective stablecoin regulation and to establish common standards.

Stablecoins, not only centralized exchanges and DeFi platforms, are also important targets for international regulatory authorities. However, the regulatory measures that can be taken seem quite diverse and undecided at the moment, and further discussions are needed among regulatory agencies on how stablecoins will enter the regulatory system in the future.