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Stablecoin Reserves Must Be “Publicly Transparent”: Jerome Powell

Stablecoin Reserves Must Be “Publicly Transparent”: Jerome Powell

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Key takeaways

  • Federal Reserve Chairman Jerome Powell has taken a stance on stablecoin regulation.
  • Speaking at the Opportunities and Challenges of the Tokenisation of Finance conference, Powell called for new regulation to ensure that dollar-pegged stablecoins can be individually redeemed for real dollars.
  • Powell’s comments echo those of US Treasury Secretary Janet Yellen following the collapse of TerraUSD in May.

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Jerome Powell, Christine Lagarde, Ravi Menon and Agustín Carstens shared their thoughts on a range of topics including DeFi regulation, stablecoins and central bank digital currencies.

Fed Chair talks about stablecoins

The Federal Reserve has taken a stance on stablecoin regulation.

Speaking at the Tokenisation of Finance conference in Paris on Tuesday, Fed Chair Jerome Powell was joined by European Central Bank President Christine Lagarde, Monetary Authority of Singapore CEO Ravi Menon and Bank of International Settlements President Agustín Carstens. Discuss the role of central banks in the rapidly growing crypto-economy.

During the hour-long session, the group discussed a variety of topics, including DeFi, stablecoins, and central bank digital currencies. However, the prevailing line of discussion focused on the regulation of crypto. When asked whether private sector stablecoins such as Circle’s USDC or Tether’s USDT should be regulated in the same way as current bank deposits and MMFs, Powell acknowledged that the instruments had some similarities. However, he added that stablecoins need strict regulation to ensure they have sufficient support, citing the general public’s tendency to think of stablecoins as dollar equivalents. “[Stablecoin] the funds must be transparent to the public and must consist of credit assets that are always available to fund withdrawals,” he explained.

Powell also shared more views on digital currencies from central banks, saying that the US digital dollar should be mediated, privacy protected, identity verified and transferable. However, he added that the Fed had no immediate plans to launch a digital dollar, saying any such currency would require congressional approval and require years of research.

Powell’s comments on stablecoins are reminiscent of Treasury Secretary Janet Yellen’s comments when she talked about private stablecoin regulation earlier this year. Yellen has called for a regulatory framework for stablecoins that ensures that dollar-pegged tokens are adequately backed by high-quality collateral such as dollars and dollar equivalents, and that the infrastructure is in place to allow stablecoin holders to convert their holdings back into dollars.

The push for stablecoin regulation comes after a series of events caused investors to lose faith in certain dollar-pegged assets. In May, the debacle of the unbacked TerraUSD stablecoin sent shockwaves through the crypto space, wiping out over $40 billion in value in a matter of days. Shortly after the collapse of TerraUSD, confidence in Tether’s USDT stablecoin also weakened, causing it to temporarily lose its peg to the dollar. Fear about the quality of the USDT collateral led to owners paying huge premiums to exchange USDT for USDC, a stablecoin issued by Circle that many market participants consider safer than USDT. Tether recovered its mortgage by guaranteeing that USDT can be exchanged one-by-one for dollars, leading to billions of dollars worth of successful redemptions.

Yet to many members of the US government, such guarantees are of little value unless appropriate legislation is enacted to preserve them. Powell’s comments indicate a growing desire to regulate private stablecoins. As such, it seems likely that a comprehensive stablecoin bill will be the first major crypto legislation in the United States.

Disclosure: At the time of writing this article, the author owned ETH, BTC and several other cryptocurrencies.

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