Yellen Says Stablecoins to Be Regulated ‘Quickly’, What That Could Look Like

At a meeting of the President’s Working Group on Financial Markets, Treasury Secretary Janet Yellen asserted that stablecoins should be “quickly” regulated. Considering how stablecoins are poised to become key components of the global economy, it’s fair to see regulations as a necessary part of stablecoin infrastructure moving forward.

However, a key question is how policymakers can—or will—regulate stablecoins. In other words, what could stablecoin regulations look like?

Yellen Asks For Quick Regulation on Stablecoins

Lately, stablecoins have been subject to hostility from officials all around the world. Among the more noticeable moves, a couple of weeks ago, China’s central bank warned that stablecoins pose serious risks to global financial systems.

Now, Treasury Secretary Janet Yellen has urged lawmakers to quickly establish a regulatory framework for stablecoins. The comments, which came at Monday’s meeting of the President’s Working Group on Financial Markets, were mentioned among a group of top-tier lawmakers including the heads of the SEC, CFTC, and FDIC.

Following the meeting, the Treasury Department said in a statement:

“In the meeting, participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security. The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place.”

The statement then further adds that the group “expects to issue recommendations in the coming months,” meaning that we can expect a proposed regulatory framework aimed at stablecoins in the near future.

Jeremy Allaire, CEO of Circle, issuer of the second-largest stablecoin by market cap which just recently set to go public, quickly pointed out the necessity of a regulatory framework. He argued that stablecoins need regulation in order to gain more mainstream adoption. Allaire stated:

“It’s extraordinary and positive that US financial policy leadership are taking this on right now. It’s a sign of how far we’ve come and how fast this is all happening.”

The question of how a regulatory framework could function still remains, however. 

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Two Proposed Choices For Lawmakers

Two high-profile financial experts, U.S. Federal Reserve attorney Jeffery Zhang and Yale professor of finance Gary B. Gorton have laid out two possible choices as a working regulatory framework for stablecoins. In a lengthy paper titled “Taming Wildcat Stablecoins”, the pair proceed to compare stablecoins to the “world of wildcat banking.”

The two prominent researchers argue that stablecoins can’t be considered as an efficient payment method because they are “not always accepted at par and are subject to runs.” They further match stablecoins to the Free Banking Era — a period in the 19th century when banks were authorized to issue their own banknotes against their deposits of gold and silver. 

After asserting these potential problems associated with stablecoins, the two claim that policymakers have two options to consider:

1. Transform Private Money into Public Money: To apply this option, policymakers shall mandate stablecoin issuers to either (a) issue their private money through Federal Deposit Insurance Corporation (FDIC) insured banks, or (b) require that all stablecoins be collateralized by Treasuries at the Federal Reserve.
2. Introduce a central bank digital currency (CBDC) and oust private stablecoins out of existence. 

While the first option seems more tolerable, officials around the globe further incline toward the second choice. Recently, Federal Reserve Chair Jerome Powell declared that the US could undercut the need for cryptocurrencies and stablecoins by issuing a CBDC. He stated:

“In particular, you wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency – I think that’s one of the stronger arguments in its favor.”

However, it is greatly unlikely for CBDCs to substitute stablecoins. For one, looking at China’s e-CNY whitepaper, it becomes obvious how CBDCs have the dangerous potential to trace transactions. Privacy concerns have always been linked to CBDCs, but they’re now anticipated to only get worse. 

In addition, stablecoins are now a substantial part of the global economy. As covered by The Tokenist, stablecoin transactions volume totaled a staggering $1.7 trillion in the second quarter of 2021. In comparison, this figure was up 1,090% year-over-year and 59% compared to Q1 of 2021.

It is widely believed that stablecoins are the backbone of the digital asset ecosystem. Do you think this can be a reason for why policymakers are particularly targeting stablecoins? Let us know in the comments below.