Stablecoins “the oxygen of the crypto ecosystem”
OCC Chief believes bank regulations could give credibility to the ‘stable’ part of stablecoins and encourage innovation.
Speaking at an executive roundtable on “The Future of Crypto-Assets and Regulation” at the British American Business Transatlantic Finance Forum, Acting Comptroller Michael Hsu said that bank regulation would give “credibility to the ‘stable’ part of stablecoins.”
Likening stablecoins as the “oxygen of the crypto ecosystem” Hsu postulated a scenario in which holders of USDT, USDC, and other fiat-pegged assets no longer trust they’re fully redeemable for the cash that purportedly backs them.
Hsu explained that in 2008, investors initiated money market funds, stock brokerage firms, runs in banks, and pooled investments that nearly brought down the US financial system.
“The vulnerabilities that lead to a run generally do not appear suddenly out of nowhere,” Hsu warned. “They build up over time and are largely ignored, until a small group of participants sense the tail risk, get nervous, and quietly begin to edge away.”
Federal Reserve Chair Jerome Powell has also stated that stablecoins should be regulated like money market funds. Last July, Treasury Secretary Janet Yellen agreed that something needed to be done, and she assembled the President’s Working Group on Financial Markets to figure out the details.
According to Hsu, the risk for crypto is that inflows from stablecoins will slow or perhaps reverse, instilling FUD into crypto users’ minds. From a bullish perspective that seems impossible — the market capitalization of the top three stablecoins has risen from $30 billion a year ago to over $137 billion today, an increase of 356%, according to CoinGecko.
“Even if the tide were to go out, the reserves would be there, overseen and examined by bank supervisors, and potentially even backstopped by access to a central bank’s discount window to meet short term liquidity needs if warranted,” Hsu added.
Stablecoin redemptions would be a non-issue in such a scenario, he argued, while regulatory stability, which crypto projects have long desired, would encourage innovation.