Dollar-Backed Stablecoins to Become Part of Payment Universe
Asset-backed stablecoins are to become part of the payment universe amidst increasing interest of the United States regulator’s oversight despite some shortcomings noted.
Recently, US Federal Reserve Chairman Jerome Powell in testimony to the House Financial Services Committee discussed introducing regulation and increasing oversight of stablecoins, Moody’s said in a report.
Noting that stablecoins might become “a significant part of the payments universe,” Powell argued the clear need for a strong regulatory framework and said that the Federal Reserve plans to publish a white paper on digital currency in early September.
Fed’s white paper will seek to address digital assets broadly, including stablecoins, central bank digital currencies and other payment initiatives.
In the report, Moody’s said greater oversight of stablecoins would be credit positive for banks because it would help to increase safety and transparency around stablecoins and may limit some of the risks to financial stability and the potential competitive threats posed by the currently unregulated stablecoin industry.
“This oversight also could bring stability to, and acceptance of, digital currency payments systems, thereby encouraging technology advancements that would be credit positive for financial technology firms (fintech) and regulated stablecoins.
“Additionally, greater oversight would reduce systemic risk given that banks currently working with stablecoins carry systemic risk since most of fintech issuing stablecoins may not have a robust disaster recovery process in place”, the global rating agency added.
Stablecoins are digital assets or cryptocurrencies that are backed by another asset to limit price volatility, thereby increasing its utility as a means of payment and a store of value.
For example, a US stablecoin is linked to US dollar assets whereby the value of one US stablecoin is directly supported by one dollar of US assets.
The key feature of stablecoins is linkage to a stable store of value which could make it an efficient means of digital payment and everyday use.
However, currently, there is a negligible framework for regulating stablecoins, including the absence of rules regarding the disclosure or how reserves backing stablecoins can be invested.
Read Also: Digital Currency: Understanding Risks, Opportunities of Stablecoins
Therefore, there is no guarantee that stablecoins are indeed backed by the equivalent value in assets.
Currently, the US Office of the Comptroller of the Currency (OCC) has guidance for national banks and federal savings associations that allows them to hold stablecoin reserves if they can verify that the reserves are equal to outstanding stablecoin tokens to help withstand large client outflows.
Cryptocurrency firms issuing stablecoins are not required to follow OCC guidance, and no other enforceable regulation exists. The use of stablecoins is increasing, boosted by the potential benefits associated with the privacy, efficiency, speed and interoperability of digital assets.
However, the volume is currently small at around $100 billion outstanding globally. The Fed’s digital currency white paper will seek public comments in advance of any formal proposals on the subject.
Dollar-Backed Stablecoins to Become Part of Payment Universe
