Digital Currency Needs Regulation, Says Treasury Official

Webinar hosted by Darrell Duffie discusses the risks and importance of the stablecoin market.

November 03, 2021

A photo illustration of digitized US money. Credit: iStock/dem10

Some stablecoins are backed by traditional assets like the U.S. dollar. | iStock/dem10

Stablecoins, a digital currency that has exploded in popularity in recent months, need tighter regulation and more safeguards to protect consumers and investors, Treasury Under Secretary for Domestic Finance Nellie Liang said Monday in a webinar hosted by Stanford Graduate School of Business.

Citing “a regulatory gap,” Liang says a White House panel looking at the issue urged Congress to subject stablecoins to federal laws that govern other financial and banking institutions. Without such regulation, she said, “stablecoins present potential risks to users, the financial system, and the economy.”

Stablecoins were developed to combine the integrity and market stability of a government-backed currency with the efficiency and privacy protections of cryptocurrencies. Those characteristics could make them suitable for everyday uses like bill paying, unlike other popular cryptocurrencies such as Bitcoin whose values fluctuate wildly.

Although the total value of stablecoins is small relative to the overall market of cryptocurrencies, their critical role makes regulation both necessary and urgent, Liang said.

So far, they have mostly been used for trading cryptocurrencies, but according to Liang, they may soon enter the mainstream. “Stablecoins have the potential… for payments for households and businesses, and to be used more broadly,” she said. “A well-designed stablecoin could improve the speed and quality of payments and perhaps broaden financial inclusivity,” potentially being used by people who do not have bank accounts.

The value of popular stablecoins, such as Tether, is linked to the U.S. dollar. These currencies’ issuers claim they are backed by traditional assets. However, Liang said, the lack of transparency in the market means that regulators cannot ensure that stablecoins are adequately collateralized, which could lead to a loss of confidence and a subsequent mass selloff. That vulnerability endangers not only the future of stablecoins but other digital currencies as well, she noted.

Although the total value of stablecoins — roughly $1.3 billion — is small relative to the overall market of cryptocurrencies, their critical role makes regulation both necessary and urgent, Liang said. “We think it’s important that the foundation of digital assets be solid and resilient.”

Liang’s appearance coincided with the release of the report by the President’s Working Group on Financial Markets on stablecoins.

Liang was interviewed by Stanford GSB professor of finance Darrell Duffie. Duffie asked how federal regulators would address concerns that excessive or inappropriate regulation would “dampen entrepreneurship and innovation,” in the burgeoning cryptocurrency market. Liang responded that sensible regulation would provide welcome clarity for stablecoin issuers and promote further innovation. The new report she said, is just “a first step.”

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