Stablecoins Face Industry-Defining Regulatory Guidance

U.S. regulators considering oversight of stablecoins will have to balance the need for greater security against the risk of stifling innovation in a fast-growing corner of the cryptocurrency market.

Recommendations for new cryptocurrency rules will be published within weeks, Federal Deposit Insurance Corp. Chairman Jelena McWilliams said on Oct. 25, including measures for stablecoins. The market for stablecoins, which are pegged to government-issued currencies, has ballooned to about $130 billion, according to data from Coin Metrics and The Block.

NCUA recently published a request for information (RFI) in the Federal Register on decentralized finance (DeFi), digital assets , distributed ledger technology (DLT), and other things that might be necessary to incorporate DeFi and digital assets into delivering products and services to credit union members.

The surging growth of stablecoins has prompted calls for issuers to be regulated like banks, particularly after Tether Ltd. agreed in October to a $41 million settlement over prior misrepresentation of its reserves. Tether did not immediately respond to a request for comment; in a previous statement, the company noted the disclosure issues had been resolved since 2019 and that the company had always maintained adequate reserves.

Tighter controls could bolster the market by easing concerns about issuers' ability to redeem coins, or alternatively, choke off growth by adding burdensome regulation in a sector that advocates see as revolutionizing payments and financial services more broadly.

"Regulators are still learning a lot about this rapidly evolving and fast-moving space," said John Popeo, partner at bank consultancy The Gallatin Group. They will have to take a "thoughtful and creative approach in regulating this area, rather than trying to fit stablecoins and other crypto assets into existing pockets under current laws or regulators," he said.

As regulators express concern about systemic risk, stablecoin proponents argue that too heavy a regulatory hand could stifle innovation. Stablecoins have the potential to provide lower-cost, real-time payments for consumers, lower payment costs for businesses and connect unbanked or underbanked consumers to the financial system, wrote the chief economist for Diem Association, formerly known as Facebook Inc.'s Libra project, in a recent Harvard Business Review article.

Learn more