With a number of major stablecoins gaining momentum in the cryptocurrency market, US regulators are beginning to sound the alarm over their potential widespread adoption and the subsequent risks that may ensue.
According to Bloomberg, which cited people familiar with the matter, US Treasury Secretary Janet Yellen’s July 19 meeting with representatives from the President’s Working Group on Financial Markets discussed a number of wide-ranging topics pertaining to cryptocurrencies, but most notably sounded the alarm over Tether’s alleged holdings of vast amounts of commercial paper. The regulators said that the significant amount of outstanding debt— which Tether uses to fund its short-term needs, is similar to an unregulated money-market mutual fund that could subsequently suffer from a turbulent investor withdrawal.
Michael Hsu, Acting Comptroller of the Currency, explained that regulators have been poring over Tether’s hoard of commercial paper to determine if each token is in fact, backed by the equivalent of one US dollar. According to a company presentation, approximately half of Tether’s $60 billion worth of reserves were comprised of commercial paper at the end of March. This would make Tether the seventh-largest holder of commercial paper, wrote Bloomberg, citing JPMorgan Chase strategists’ calculations.
Stablecoins are significantly less volatile than other private cryptocurrencies like bitcoin and ethereum, because they are pegged to fiat currencies. However, US regulators have grown concerned that they may be too large and could be used to conduct illicit financial activity. The meeting’s participants also drew attention to Diem— the token developed by a variety of companies, most notably being Facebook. The regulators took issue with the potential for a broad adoption of the coin, given that the social media giant has nearly 3 billion active users per month.
Last week, SEC Chair Gary Gensler warned that security-pegged stablecoins are likely in violation of US securities laws if they are not registered with the regulatory commission. At the same time, Massachusetts Democratic Senator Elizabeth Warren has given the SEC a July 28 deadline to determine its regulatory role in cryptocurrencies, citing growing risks to consumers and financial markets.
Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.