Testifying today before the House of Representatives, Fed Chairman Jerome Powell said that stablecoins should be subject to stricter regulation and be treated like bank deposits or money market funds.
A stablecoin is a type of cryptocurrency pegged to the price of a physical currency, usually the US dollar.
The idea is that the parity will keep the currency price “stable”, giving traders some of the flexibility and transparency of cryptocurrencies without the volatility.
What will happen to stablecoins?
Rep. Anthony Gonzalez asked Powell specifically about Tether – now the most valuable stablecoin. It has faced the greatest scrutiny over its support company’s business practices.
Although Tether once claimed that each of his currencies was backed by a real dollar, with a bank somewhere, it has been reported that much of his backing comes from commercial paper or debt.
“Commercial papers are short-term immediate obligations of companies and most of the time they are investment grade, most of the time they are very liquid, everything is good.”Powell
But during recent financial crises, he added, “the market just disappears. And that’s when people will want your money. It’s very simple: these are economic activities very similar to bank deposits and money market funds, and they need to be regulated in a comparable way.”
Powell attended the House Financial Services Committee to deliver his mid-year report on monetary policy. This, therefore, involved both a prepared statement and a series of responses to questions from lawmakers.
“We have a tradition in this country where public money is kept in what is supposed to be a very secure asset,” he said. That, before explaining that the regulatory framework for deposits and money market funds “doesn’t really exist stablecoins.”
Powell said: “If they’re going to be a significant part of the payments universe, which we don’t think crypto-actives will be. But stablecoins can be, so we need a proper regulatory framework, which frankly we don’t have. ”
A years-long legal battle between Tether and the New York State Attorney General’s Office recently ended in a deal. Tether and his support company, Bitfinex, were fined $18.5 million.
During today’s hearing, Powell also commented on the potential development of a CBDC, or central bank digital currency – something the Fed has long been wrong about.
Responding to a question from Rep. Stephen Lynch (D-MA), Powell suggested the development of a “digital dollar” system. This state-controlled one can avoid the need for private cryptocurrencies like Bitcoin.