Stablecoins face crackdown as US discusses risk council review

Washington

US OFFICIALS are discussing launching a formal review into whether Tether and other stablecoins threaten financial stability, scrutiny that could lead to dramatically ramped-up oversight for a fast-growing corner of the crypto market.

After weeks of deliberations, the Treasury Department and other federal agencies are nearing a decision on whether to launch an examination by the Financial Stability Oversight Council (FSOC), said three people familiar with the matter who asked not to be named in commenting on closed-door discussions.

FSOC has the power to deem companies or activities a systemic threat to the financial system - a label that typically sets off tough rules and aggressive monitoring by regulators. Such a designation would likely be a gamechanger for stablecoins, which are considered crucial to the crypto market because traders widely use them to buy Bitcoin and other virtual currencies.

Stablecoins have thrived in the unregulated shadows, with tokens in circulation now worth more than US$120 billion, according to CoinMarketCap.com. And they are increasingly being used for transactions that resemble traditional financial products - like bank savings accounts - without offering anywhere near the same level of consumer protections.

A hallmark of stablecoins is that they are pegged to fiat currencies, meaning they are supposed to be immune to the wild price swings that have plagued Bitcoin. Tether and other firms achieve that by backing their tokens with assets like US dollars and corporate debt.

The President's Working Group on Financial Markets (PWG), which is led by Treasury Secretary Janet Yellen, has been particularly focused on Tether's claims that it holds massive amounts of commercial paper - debt issued by companies to meet their short-term funding needs. In a private meeting that US officials held in July, they likened the situation to an unregulated money market mutual fund that could be susceptible to chaotic investor runs if cryptocurrencies plunge.

The PWG plans to issue stablecoin recommendations by December, and a consensus is building among regulators involved that an FSOC review is warranted, the people said.

The groups overlap, as Ms Yellen, Federal Reserve chair Jerome Powell and Securities and Exchange Commission chair Gary Gensler are members of both the PWG and oversight council. A Treasury spokesman declined to comment.

The FSOC process includes a lengthy study and an assessment of which federal agencies should respond and how. In the end, the council could direct those agencies to intervene in the market and reduce the dangers posed by stablecoin transactions.

While Tether is the most popular stablecoin, there are multiple rivals, including Coinbase Global's USDC token and a dollar-linked offering from Binance Holdings. Scrutiny has been ratcheting up as stablecoins proliferate.

Coinbase made headlines recently by disclosing that the SEC had threatened to sue if the crypto exchange launched a product that would allow customers to earn 4 per cent yields for lending out their

USDCs to other traders. The SEC believes the Coinbase proposal is an investment contract that should be registered with the agency, a view the company aggressively contested in a blog post and a series of tweets.

Watchdogs have also privately expressed worries about Diem, a stablecoin being developed by an association that includes Facebook. A top concern is that the token's market impact could be massive because of its potential for widespread adoption - Facebook's social media network has almost three billion active users.

Stablecoins already face another threat from the US government, as the Fed is discussing whether to launch its own digital currency. Mr Powell told lawmakers in July that a central bank token would make stablecoins obsolete. "That's one of the stronger arguments in its favour," he said. BLOOMBERG