Stablecoins are a compelling payment option but they need to be regulated, Biden admin says

The Biden administration has asked Congress to quickly pass new legislation that would require stablecoins to be issued by insured banks that are overseen by federal banking regulators, in a report issued by the President’s Working Group on Financial Markets on Monday.

“If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options,” said the report released late Monday by the President’s Working Group on Financial Markets, joined by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

Although they are used today mostly to facilitate trading in digital coins and crypto exchanges, “stablecoins could become widely used by households and businesses as a means of payment,” it said.

The total market capitalization of the most popular stablecoins has increased by more than 500% over the past year to $127 billion, according to the Treasury Department, and the vast majority of the investment is in a handful of dollar-denominated tokens.

The document outlines a variety of risks that stablecoins pose to crypto investors and the economy more broadly, including risks related to a so-called “run” on a stablecoin’s backing assets. Many popular stablecoins are backed by real assets, and maintain their value by promising to always exchange one token for one U.S. dollar If investors lose confidence in the assets backing a stablecoin, it could trigger “a self-reinforcing cycle of redemptions and fire sales of reserve assets,” the report says.

“Runs could spread contagiously from one stablecoin to another, or to other types of financial institutions that are believed to have a similar risk profile,” the document continues. “Risks to the broader financial system could rapidly increase as well, especially in the absence of prudential standards.”

Crypto boosters largely welcomed the report as a call for measured and comprehensive regulation of stablecoins. “We are fully supportive of the call for Congress to act and establish federal banking supervision for stablecoin issuance,” said Jeremy Allaire, CEO of Circle, the issuer of USD coin in a statement. “The rapid scaling and strategic importance of this to dollar competitiveness in the age of crypto and blockchains is critical.”