November 28, 2021
  • November 28, 2021

Stablecoins: US Preps Digital Currency Framework

By on September 27, 2021 0

The Biden administration will review stricter regulations for stable coins, writes the Wall Street Journal (WSJ).

Stablecoins are a form of digital currency that tries to combine the stability of national currencies with the ability to trade quickly online.

Stablecoins are backed by safe assets like Treasuries and should theoretically be quite tightly tied to the dollar, which can be exchanged for dollars. On the other hand, cryptocurrencies like bitcoin can fluctuate wildly because they are not backed by fiat.

Sheila Bair, former director of the Federal Deposit Insurance Corp, said that if a stablecoin issuer has no capital, with reserves fluctuating in value, risk is inherent.

Regulators, current and former, worry that stablecoins may be vulnerable to something like a bank run in case many investors rush to buy them out; a similar thing happened to some money market mutual funds during the 2008 financial crisis. In this case, the government attempted to support money market funds – which it did again in March 2020 to maintain the market stability as the pandemic struck.

The Federal Reserve plans to put new rules in place as early as next week, which could result in a plan for “the future of money” in a new document from the organization. The Fed could also ask for comment on whether to create its own digital coin – it would likely compete with stablecoins, and the issue has polarized Fed officials.

The Fed is considering how it will keep relevant liquidity in a world that is rapidly losing interest in form. The WSJ reports that it is considering a new digital form of the US dollar, which would allow people to access it on their phones and eliminate slow and expensive electronic payments.

Last year, US legislation was proposed that could add more regulation for stablecoins, including making sure coins must have bank charters and regulatory approval before moving forward.

Read More: Stablecoin Outlook All But Stable As Regulatory, Legislation Loom

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