So-called stablecoins are a fast-growing corner of the crypto market that sold itself on being immune from volatility, but the largest dollar-pegged stablecoin of all has been dogged by investigations, and the government is concerned about risks to investors and even the financial system.
Stablecoins are a form of cryptocurrency with a fixed price, typically $1, that are backed by real-money reserves such the U.S. dollar or the price of gold. They attempt to offer price stability and are attractive because they offer the best of both worlds—the instant processing, security and privacy of crypto payments and the volatility-free stable valuations of fiat currencies.
However, government officials say investors may not understand that money held in a stablecoin isn’t protected by the Federal Deposit Insurance Corp. and in some cases, investors could lose money on a stablecoin, Bloomberg reported.
The total market capitalization of stablecoins, including those offered by crypto firms Tether and Centre, reached $100 billion at the end of May, and that got the attention of lawmakers and government officials.
There is concern that consumers won’t be protected if one of the stablecoin firms doesn’t have the backing it claims to have as massive volumes of U.S. dollar-equivalent coins are exchanged without touching the U.S. banking system, potentially blinding regulators to illicit finance.
Doubts about Tether — the largest stablecoin with a market cap of $62.6 billion — have persisted for years over a lack of full audits of the reserves backing the tokens, Coindesk reported. U.S. Dollar Coin, or USDC, has a market value of $23.8 billion and was created by the Centre Consortium, a partnership between crypto exchange Coinbase and crypto payments firm Circle Internet Financial.
In 2018, researchers reported that tether minting might have helped inflate the bitcoin market during the 2017 bull run, raising questions of what could happen to bitcoin prices if revelations emerge on tether, Coindesk reported. Tether has been the focus of multiple ongoing investigations by the U.S. Department of Justice and the New York Attorney General’s office.
Tether originally said its coins were completely backed by cash. In February, the New York attorney general said the company for years didn’t have the cash it said it did and banned Tether from trading with New York residents. Now Tether says its coin is backed not just by cash, but by assets including commercial paper, corporate bonds and precious metals. The Centre Consortium says each U.S. Dollar Coin is backed by a dollar held in a bank account.
In an effort to weed out possible systemic risks of stablecoins, government officials may be planning a framework for them backed by the regulated banking system, according to Kevin Lehtiniitty, chief strategy officer of Prime Trust, a Nevada-based trust company that has worked extensively with stablecoins, Bloomberg reported. For now, Lehtiniitty said, most cryptocurrency traders are probably just ignoring those risks.
It’s not clear what regulators can do to slow the growth of stablecoins. The Securities and Exchange Commission could regulate them the way it does money-market funds, which were under duress during the 2008 financial crisis and are not FDIC-insured.
The U.S. and other countries are considering launching their own digital currencies known as CBDC (central bank digital currencies) that would be in direct competition with stablecoins.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?