(Bloomberg) -- Treasury officials have identified what they believe are the most urgent risks posed by Tether and other stablecoins as they ready recommendations for stricter oversight of cryptocurrencies.
Ensuring investors can reliably move money in and out of tokens is a top concern for officials crafting a policy framework set to be released in the coming weeks, according to people with knowledge of the matter who declined to be named because the work isn’t complete. They’re also worried that widespread, fire-sale runs on crypto assets could threaten financial stability and that certain stablecoins could scale up dangerously fast, the people said.
Crypto faces a reckoning in Washington as U.S. regulators prepare to clamp down on the rapidly-growing industry -- and the Treasury’s recommendations could act as a roadmap for the next steps. Officials are also said to be discussing launching a formal review by the Financial Stability Oversight Council into whether stablecoins pose an economic threat, a process that could trigger even more severe oversight.
Stablecoins, which are pegged to currencies like the U.S. dollar, are crucial to the crypto market because they’re used to buy other digital tokens. More than $120 billion in stablecoins are now in circulation, according to CoinMarketCap.com. The digital coins are increasingly used for transactions that resemble traditional bank products, like savings accounts, but they don’t offer the same type of consumer protections.
Treasury officials are paying special attention to how stablecoin transactions are processed and settled, and whether that changes based on market conditions, the people said. Officials are also worried about how to manage the growth of tokens that are sponsored by tech giants like Facebook Inc (NASDAQ:FB)., according to the people. An association that includes Facebook has previously announced plans to develop a stablecoin called Diem.
A spokesman for the Treasury Department declined to comment on the contents of the report. Bloomberg reported last week that after weeks of deliberations, the Treasury and other agencies are nearing a decision on whether to launch an examination of whether stablecoins threaten financial stability.
Regulators have quickly coalesced around the need to corral the crypto market, which is often seen as a new kind of shadow banking and the Wild West of finance. Treasury officials recently met with a variety of industry groups and executives.
“It is significant and very consequential that we are witnessing early steps to create a regulatory framework around digital assets,” said Tomicah Tillemann, a one-time aide to then-Senator Joe Biden who is now global head of policy at a crypto fund run by venture capital giant Andreessen Horowitz. “That’s a big deal.”
The upcoming report will be delivered to the President’s Working Group on Financial Markets, which includes Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell. Other members, including the Securities and Exchange Commissioner Chair Gary Gensler, have been outspoken about the need to erect safeguards in crypto. Acting Comptroller of the Currency Michael Hsu said this week that regulators must work as a unified force to ensure crypto transactions involving banks are “trustworthy.”
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