Stablecoins Should Not Be Issued By Tech Firms Due To Risks - US Treasury Official

Stablecoins should be issued by insured depository institutions and not technology companies like Facebook because of their systemic risks, US Treasury Under Secretary for Domestic Finance Jean Liang said Tuesday

WASHINGTON (UrduPoint News / Sputnik - 08th February, 2022) Stablecoins should be issued by insured depository institutions and not technology companies like Facebook because of their systemic risks, US Treasury Under Secretary for Domestic Finance Jean Liang said Tuesday.

Briefing the US Congress on the outcome of a Treasury study on stablecoins, Liang said there was a "high level" of regulatory gaps on stablecoins despite the notion that they were safer than other cryptocurrency.

"The report recommends that stablecoins be issued by insured depository institutions," Liang said, referring to the Treasury study. "And in that sense then, we would not recommend that stable coins be issued by technology companies."

Unlike riskier and more volatile cryptocurrency like Bitcoin, stablecoins have their price pegged to a more "stable" exchange of value such as regular paper money or to exchange traded commodities like gold and other metals.

Facebook announced its Libra stablecoin project in June 2019 to offer a new blockchain-based digital payments industry through its social media platform. The project began hitting snags when regulatory pressure and a lack of firm response from Facebook and its various Libra defenders led to Mastercard, PayPal, Stripe, and visa all bowing out of the so-called Libra Association in quick succession.

"The regulatory frameworks that apply to stablecoin issuers and service providers are inconsistent, creating opportunities for regulatory arbitrage and uncertainty among stablecoin users," Liang said in her opening statement at the Congress hearing.

She noted that Facebook attempted many times to enter the cryptocurrency market and its retreat was significant as to the risks involved.

"Some of the largest stablecoin issuers operate with limited regulatory oversight, raising significant questions about whether these stablecoins are adequately backed and other aspects of their operations," Liang said.

She said one of the most notable dangers of stablecoins was the "run risk", which refers to the potential loss of confidence in a stablecoin that sets off a wave of stablecoin redemptions, which could then be followed by distressed sales of the stablecoin's reserve assets.

"The first stablecoin run is believed to have occurred in June 2021, when a sharp drop in the price of the assets used to back the stablecoin set off a negative feedback loop of stablecoin redemptions and further price declines," Liang said.

The other danger was "payment system risk", which referred to a disruption in the mechanisms used to store or transfer value, which could interfere with the ability of users to make or settle payments.

"Even if a stablecoin itself is adequately protected against run risk, problems related to the activities or entities that support the stablecoin could still interfere with its use as a means of payment, harming stablecoin users and resulting in a loss of payments efficiency," Liang said.

The stablecoin industry grew by more than 500% in 2021 to reach a market capitalization of roughly $130 billion as users sought a less-risky digital payment to volatile cryptocurrencies such as Bitcoin, which swung from a record high of 68,925 in November to a low beneath $33,000 in January.