The U.S. Treasury Department proposes to supervise stablecoin issuers as banking institutions. It may be a good idea to provide stablecoin issuers with the same privileges as regulated banks.

US Department of the Treasury report: urgently need to regulate stablecoins

The rise of stablecoins in the crypto ecosystem clearly reminds people that cryptocurrency and blockchain technology have surpassed their humble beginnings and gradually position themselves as challengers to the existing hegemony of physical finance.

along with The market value of stablecoins is expanding at an unprecedented rate, Governments and financial regulators around the world have begun to focus on better overseeing this rising asset class. By design, stablecoins are backed by “stable” assets, enabling them to maintain a constant value relative to the underlying assets. Due to this feature, stablecoins are increasingly used to facilitate lending and trading other digital assets.

The stablecoin market is currently worth more than 135 billion U.S. dollars. As it begins to receive mainstream attention from businesses and individuals as an acceptable payment method, it is likely to experience explosive growth. Due to its inherent qualities such as low cost, scalability and near-instant settlement, stablecoins may eventually replace bank transfers. Therefore, governments and financial regulators around the world are working hard to regulate this growing asset class.

The idea of ??supervising stablecoin companies like a bank

At this point, almost every country is experimenting or implementing regulatory guidelines on cryptocurrencies. But the US government was one of the first countries to have a strong interest in stablecoins.

From Federal Reserve Chairman Jerome Powell urging the need to regulate stablecoins—especially those that are 1:1 linked to the U.S. dollar—to Securities and Exchange Commission (SEC) Chairman Gary Gensler emphasized the benefits of regulation for service providers and consumers. Stable coins have become a core attraction for policy makers.

Another risk that shocks regulators is the clarity of the assets supporting stablecoins.Although these coins may appear to be pegged to the U.S. dollar, a large portion of the most popular stablecoins, such as USDT, USDC and BUSD are actually backed by commercial paper and U.S. Treasury bonds, which act as “cash-like” securities.

this Latest report from the U.S. Treasury Department Expresses the urgent need to regulate stablecoins because they pose risks to the integrity of the financial market, including compliance with anti-money laundering (AML) and counter-terrorism financing (CFT) laws. The report further pointed out that since stablecoins play the same role as the legal tender regulated by banks in the traditional economy, stablecoin companies should be regulated like banks.

Need a level playing field

Although the Ministry of Finance report emphasizes the financial risks of stablecoins, it ignores some fundamentals. On the one hand, it suggested treating stablecoins as legal tender and supervising them accordingly, but did not consider the company’s views behind these stablecoins.

It is undeniable that the regulation of stablecoins may change the rules of the game for defi and tradfi. Nevertheless, to this end, the government and regulatory agencies must also ensure that stablecoins receive the same privileges as legal tenders, and that these companies also receive similar treatment to regulated banks.

Simply put, if the US Treasury Department wants to supervise stablecoins like banks, it should also allow stablecoin companies to maintain a partial reserve model. Currently, the ratio of stablecoins to USD and cash equivalents is close to 1:1. In contrast, depository banks in the United States usually only need to hold a certain percentage (usually about 10%) of cash deposits.

Due to the partial reserve system of the banking industry, all regulated banks in the United States use only a small part of their deposit liabilities as reserves, and can lend the remaining part to borrowers as needed. This allows them to reinvest funds in high-yield assets instead of holding all deposits in cash or cash equivalents.

Stablecoin platforms must hold all deposits in cash or cash equivalents (such as treasury bonds or commercial paper). The funds collected in these platforms are idle and not used for any other purpose. Take, for example, Paxos recently disclosed assets that support stablecoins such as PAX and BUSD, Which states that 96% of reserves are cash and cash equivalents, while 4% has been invested in U.S. Treasury bills.

Long and stable road

In the long run, it is difficult to say how stablecoin issuers will develop, but considering the potential benefits that can be derived from this technological revolution, it is hasty and short-sighted to supervise them as banks without equal privileges. Nonetheless, a comprehensive audit and compliance framework is needed to provide the transparency and assurance needed to attract more adoption.

It is hoped that the latest report from the Ministry of Finance will play a key role in laying the foundation for congressional leaders to formulate new regulatory guidelines in the coming months to allow stablecoins to expand their scope of influence.

Do you think stablecoins should be regulated like banks? Let us know in the comments section below.

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