Digital Dollar Becomes More “Urgent” After Crypto, Stablecoin Boom

The rise of cryptocurrencies is raising stakes for regulators eager to exert more influence over the sector, while protecting investors.

The rapid adoption of digital tokens has made the development of a central bank digital currency (CBDC) a more “urgent” proposition, a top official told Yahoo Finance recently, as debate rages over crypto regulation, especially in the United States.

“We absolutely support an urgent study of CBDC,” U.S. Treasury Undersecretary for Domestic Finance Nellie Liang said in a Yahoo Finance interview last week; however she then stopped short of outright endorsing such a study. “There are many ways in which it could be implemented, which have important implications for the financial system. We support the work in this across all dimensions,” she added.

Liang’s Tuesday remarks, which were made just before an appearance before the U.S. House Financial Services Committee on regulating stablecoins, mark a first for the Biden administration regarding a CBDC. Recently, a Presidential Working Group (PWG) recommended stablecoin issuers be treated like banks, but it sent the issue to Congress to decide.

A Fed coin will likely determine how stablecoins coexist with a CBDC, Liang suggested. Still, it’s possible a CBDC could supplant stablecoins; however, that depends on the kinds of features the Fed would choose for it, should it decide to pursue this.

“Our goal with the PWG report was that the private stablecoin, in fact, be stable and can function as a constant unit of value,” said Liang. “But there are questions in the future as to how it would coexist with the CBDC and whether that’s the best financial system in the future.”

But Liang notes it could be years before a theoretical digital dollar is even introduced, whereas stablecoins are active now. Their current use leaves regulators no choice but to regulate, or they will mushroom into a systemic risk to the economy, many believe.

And the U.S. Federal Reserve is currently reviewing the pros and cons of issuing a CBDC after releasing a report last month, with analysts speculating what impact it could have on stablecoins and financial markets.

The money market question: Whether to regulate crypto, stablecoin

The U.S. Treasury itself is looking at stablecoins as a form of payment. Liang explained stablecoins combine a bank-like product with a securities product, but noted that investors don’t invest in stablecoins for yield they’ll earn on assets, since stablecoins don’t pay interest like money market funds.

“The money market funds regulations of the SEC are designed for an investment asset, not designed to ensure that the payment system continues to function at all times under stress,” Liang told Yahoo Finance. “So that’s like a key distinction of what a stable coin is versus the money market.”

Liang insisted that Treasury is not taking a stand on whether stablecoins could be considered securities or commodities, but they have “features of serving as payment form, money, a security or a commodity… That’s why it’s not surprising that after reviewing the potential risks that could arise from stablecoins being used at payments, that there are gaps in the current regulatory structure.”

During Tuesday’s Congressional hearing, Democratic and Republican lawmakers questioned Liang on how to best regulate stablecoins, but found no consensus on the issue of treating them like bank instruments. Questions from both parties ran the gamut, from quality of reserves to disclosures and liquidity requirements.

“What it won’t do is put any pressure on the Senate to act as we see this as a partisan push. It is why we increasingly see the door closing for stable coin legislation this year,” Cowen analyst Jaret Seiberg said.

With reporting from Yahoo Finance