One of the top Treasury Department officials responsible for financial oversight suggested that Congress take swift action to regulate stabilizecoins, citing their risk to individual investors and the U.S. economy.

“If Congress does not enact legislation, the regulators [SEC, Fed, Treasury, etc.] will try to use what authority they have,” but they will be left without sufficient oversight powers, said Nellie Liang, Treasury undersecretary for domestic finance in an interview with Bloomberg. “They can do a little here and a little there, but if these are foundational to crypto assets and they aren’t stable, that could potentially be a big risk.”

Stablecoins are a form of cryptocurrency that are issued and traded on blockchains, which are pegged to a “stable” off-chain asset such as gold, fiat currencies, or government bonds. The digital currency can be staked to tangible assets, making it less volatile and safer than other crypto currencies.

Crypto users typically convert the proceeds from selling various crypto assets into stablecoins to store their profits. These stablecoins can provide both a safe store of value as well as liquidity that is quick and easy to use for investment funds.

Last month’s U.S. Federal Reserve Financial Stability Report ranked stablecoins in its Top Threats to U.S. Financial Stability Over the Next 12-18 Months. The Fed report is printed twice a year, once in the spring and again in the fall, and its current edition includes a chart on page 67 that ranks crypto/stablecoins as the fifth most serious risk to financial stability — tucked between U.S.-China tensions and climate issues.

Report section on the risk noted also that stabilitycoins’ value increased by fivefold over the past twelve months, to $130 Billion as of October 2021.

Here are the main reasons for concern cited in the Fed’s publication:

• Although the largest stablecoins in market capital promise to be redeemable at anytime at a steady value of U.S. dollar, each token does not have to be backed by a fiat equivalent. Some stablecoins have commercial bonds backing them, which could lose their value or make them illiquid. These assets may lose their value and issuers could not meet redemption demand.
• Stablecoins share structural weaknesses with certain money market funds, making them vulnerable to liquidation by investors. This could lead to all-out bankruptcies.
• According to the report, these deficiencies could be amplified by insufficient transparency and poor governance standards in relation to some assets supporting stablecoins.
• Last but not least, stablecoins’ potential use in payments as well their growth rate can pose risk to financial and payment systems.

No matter if the stablecoin-related threats are overblown or real, members of the Fed felt they were important enough to be included in this report.

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