To regulate the crypto market, the Biden Administration wants the Congress to swiftly issue rules and regulations for stable crypto coins. It was suggested that token issuers should be converted to chartered banks or depository institutions. The broader crypto coin industry is warned of tougher enforcement and supervision, including the ‘DeFi’ and other lending platforms being tracked.
Stablecoins are crypto coins or digital assets that are designed to maintain a value of $1. It is believed that stablecoins are backed by some reserves that consist hard currencies or money market instruments like commercial paper or treasury bills. People can easily use them to trade crypto coins or other digital assets like non-fungible tokens (NFTs).
However, various authorities and regulations view stablecoins as a financial instrument that can lead to potential destabilization in the economy. The major concern relating to crypto coins is that the issuers or founders of these coins do not backup their issued tokens with enough reserves of hard currency or other financial instruments. It is precisely for this reason that people are not confident about cryptos. A financial panic might cause investors to rush to redeem all crypto coins at once. Such a situation will be very unpleasant for financial regulators as they would have to deal with emergency liquidity. It is highly risky to leave the crypto market unregulated.
A major portion of the stablecoins is deposited in the ‘smart contracts’ used for DeFi transactions and lending on the Ethereum Blockchain. As per many reports, stablecoins represent around 5% of the total crypto assets, but more than three-fourth of trading in the crypto market occurs between a digital token and a stablecoin. The administration has also proposed a requirement that digital wallets need to take custody of crypto assets to be financially supervised. Prudential standards can be developed by the Congress for such purposes.
The Biden administration believes that it would be better if clear policies and secure administration are implemented in the industry. This can lead to more confidence amongst the investors and wider adoption and involvement of people in stablecoins. The token issuer shall be regulated just like a traditional bank and they would also come under the purview of the federal security net. This shall include the FDIC insurance for repaying the customer in case of default and the mechanism of orderly resolution in case of failure on the part of the issuer. The Biden administration might soon take some action in this regard.