Month: October 2021

Opaque cryptocurrency makes regulators nervous

The SEC, Fed and the US Treasury Department are working on rules for stablecoins. These cryptocurrencies are backed by traditional money and because more than $100 million has now been built up in reserves, regulators want banking regulations in place for parties issuing these currencies.

Stablecoins are backed by fiat money, so a unit is always exchangeable for the same amount of traditional money. One Tether – one of the best-known stablecoins – is therefore about one dollar. But it is unclear how much liquid is in reserve. Cryptocurrency traders also use their reserves for operational costs, but as a rule do not share their impact on liquid reserves. The fear is therefore that these stablecoins are actually not that stable at all.
<h2>Supervisors skeptical</h2>
For example, Tether tries to allay concerns by showing that about half of its reserves are invested in short-term loans, which should be an equivalent of cash. But it is not clear which loans this concerns and where the companies are located. An additional reason why regulators are skeptical is because Tether previously used its reserves to financially prop up cryptocurrency exchange Bitfinex, which is operated by the same company. As a result, Tether now reports quarterly on its reserves. <a href=””>FTX exchange review</a> is well known in crypto.

<h2>Effect on economy</h2>
The US Treasury Department is now consulting with the Fed and SEC about stablecoins and their effect on the economy. Minister Janet Yellen of the ministry wonders aloud whether rules are not necessary for this type of crypto. Because they are backed by reserves of traditional money, the impact on the financial system if this currency goes wrong can be significant. For example, the US Congress is working on a law that requires stablecoin issuers to comply with banking regulations and be approved by the Fed. <a href=””>Enjin coin ENJ</a> is well known in crypto.
<h2>Own stablecoins</h2>
The concept of a stablecoin is also a mechanism that central banks are investigating for a possible own digital currency. The ECB, among others, has started a project for a digital currency, and an obvious choice is a digital currency that is backed by the euro and is exchanged via a private Distributed Ledger Technology, such as a permissioned blockchain.