Cryptocurrency markets have come under renewed pressure after top US officials including Treasury secretary Janet Yellen said they expect to issue recommendations on stablecoins, important assets in the digital economy, in the coming months.
Bitcoin has slipped about $2,000 over the past two days to about $29,500, leaving the most actively traded coin flirting with lows it reached late last month. Other major coins such as ether and Binance have also come under selling pressure.
The crypto retreat comes as global financial watchdogs have been clamping down on the sector after years of almost unrestrained growth.
Yellen “underscored the need to act quickly to ensure there is an appropriate US regulatory framework in place” at a president’s working group on financial markets she convened on Monday to discuss the tokens, according to details released from the meeting.
Participants discussed the rapid growth of stablecoins and their potential use as means of payment, as well as potential risks to consumers, the financial system and national security, the Treasury said.
Attendees of the meeting included the heads of the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Treasury, as well as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
Buying cryptocurrencies such as bitcoin or dogecoin directly with standard currencies like dollars or sterling can be a cumbersome process. Stablecoins aim to make it easier. They are privately issued digital tokens pegged to other assets, and many claim to be backed one-to-one with dollars.
Tether is the biggest, and half of all bitcoin trades are transacted using it, according to CryptoCompare. Its closest competitor, USD Coin, has grown more than 3,400 per cent since January, according to operator payments technology company Circle, which announced plans to list on the New York Stock Exchange this month.
But the gathering of top US watchdogs this week reflects rising concern among governments and central banks about potential risks ranging from stablecoins’ potential use in money laundering to their impact on monetary policy.
The vast reserves that stablecoin operators need to maintain to honour their pledge of one-to-one backing also pose potential risks. Tether’s reported holdings of short-term debt known as commercial paper make it one of the largest holders in the world. Rating agency Fitch has warned that any rapid liquidations of such substantial reserves could destabilise the short-term debt markets.
Last month, Eric Rosengren, president of the Boston Fed, named tether as a possible challenge to financial stability. Earlier in July, Fed chair Jay Powell told the Senate banking committee that stablecoins were “growing incredibly fast” but lacked sufficient regulation.
Late last year, a group of US members of Congress proposed legislation that would require stablecoin issuers to obtain a banking charter, follow banking regulations and receive approval from the Federal Reserve and FDIC.
Bank of England governor Andrew Bailey said in June that stablecoins should face “difficult and pertinent questions”. The BoE warned that operators should not enjoy “regulatory arbitrage” through looser rules than traditional banks.
International bodies have also called for more action on this corner of the cryptocurrency market. Last month, the Basel Committee on Banking Supervision, the world’s most powerful banking standards-setter, said stablecoins would qualify for existing rules if they were fully reserved at all times.
A paper released this month by Yale professor Gary Gorton and Fed attorney Jeffery Zhang explored similarities to historical examples of private money, which were often subject to runs.
“If policymakers wait a decade, stablecoin issuers will become the money market funds of the 21st century — too big to fail — and the government will have to step in with a rescue package whenever there’s a financial panic,” they wrote.
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