Financial regulators turn their attention to stablecoins

Assets like USDC and USDT are priced off traditional financial assets, meaning they might soon fall under the same securities laws.

Financial regulators turn their attention to stablecoins

The third quarter of 2021 might go down as the moment in which financial regulators increasingly grow concerned about the systemic role stablecoins play in the global financial markets.

Some days ago, Gary Gensler, the leader of America’s Securities and Exchange Commission, stated crypto assets fall under the category of being linked to traditional financial assets, and might fall under their securities laws.

Speaking to the American Bar Association, the SEC chairman disclosed service providers offering digital assets “that are priced off” securities and similar to derivatives, in his opinion are security-based instruments thus will have to comply with the trade reporting rules and other regulatory law.

Although Gensler didn’t specify by name, his statements underlined digital assets like stablecoins that are usually backed by cash, corporate/government bonds, and commercial papers, will likely face regulation amid increased scrutiny.

Concerns about their systemic risks are not far-fetched. The market value of USDT and USDC, two biggest stablecoins by market value, has surpassed $85 billion in the span of four years.

This type of digital asset — which operates on the blockchain but attempts to maintain a one-for-one peg with fiat currencies — now forms an important part of the crypto-verse, often acting as the collateral behind DeFi and enabling transfers between digital asset exchanges.

Experts are also concerned major disruptions in the stablecoin market could reverberate into financial markets, thus raising questions of financial stability given that stablecoin issuers are not regulated.

In addition, U.S. Treasury Secretary Janet Yellen assembled a meeting of Joe Biden's Working Group on Financial Markets to deliberate on the regulation of stablecoins.

The team comprised of the Federal Reserve Bank, the U.S Treasury, the Commodities Futures Trading Commission, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.

Yellen used the gathering to underscore the importance of ensuring there is an appropriate regulatory framework in place in a timely manner at the world's largest economy.

Financial regulators' major objective is to ensure these digital assets are actually backed by financial instruments assets they’re supposed to have.