The Chairman of the Federal Reserve, Jerome Powell, at the FOMC press conference recently stated that stablecoins hold the potential to be an efficient and useful part of the financial system. They only needed to be regulated properly. The market value of the four leading stablecoins on Nov 10 stood at $128 billion.
Powell went on to add that if the stablecoins would associate with any of the existing large tech networks, they could scale massively. This would create a payment network, but it would not be regulated and also would not have the necessary protections. Society expects the government and the Feds to put regulations in place for the safety of their investments.
Stablecoins are a class of cryptocurrencies. They are usually backed with a reserve asset. The purpose of the reserve asset is to maintain price stability. Other cryptocurrencies, for example, the BTC, experiences extreme volatility. Stablecoins can therefore be used as a store of value. They can also be used as a medium of exchange. Also, since they operate through the blockchain, intermediaries are eliminated – enabling faster transactions.
Some stablecoins are not backed by a reserve asset. For such stablecoins, an autonomously running algorithm monitors supply and demand and maintains a stable price.
The Design of Regulation
Lawmakers propose to bring stablecoins under banking rules. The issue is being studied by the SEC, the Fed and the Treasury department. It is felt that regulating stablecoins could be the first step towards regulating cryptocurrencies.
However, some lawmakers differed in their views. They believed that regulating stablecoins according to the old framework of banking would be self-defeating. It would obviate the benefit of stablecoins emerging as a competitor to traditional banking.