Powell flags threat to financial stability from cryptocurrencies and stablecoins

Cryptocurrencies and ‘stablecoins’, in particular, pose risks to the U.S. financial system and require new laws to regulate them. This was stated by Jerome Powell, chair of the Fed, according to the Associated Press.

“Stablecoins, CBDC and digital finance more broadly will require changes to existing laws and regulations or the development of entirely new rules. […] For some products there are potential financial stability issues. We do not know how they will behave during market stress,” — said he.

In the view of the head of monetary authorities, the rules should follow the principle ‘same activity, same regulation’. This means that operations outside traditional banking should be regulated the same as when carried out by financial institutions.

Powell said that cryptocurrencies have been used for money laundering and other illicit activities. Governments should prevent this so that digital assets can achieve broad adoption, he added.

Powell noted that U.S. citizens buying cryptocurrencies “may not realise the scale of potential losses”. Such investments also lack government protection, as with traditional financial instruments and services.

Regarding stablecoins, the official noted the risk that collateral does not match the issuance size. Powell said that the Fed has begun work on a digital version of the dollar, but a decision on its issuance has not yet been made.

Earlier this year, the Fed presented a report on the CBDC study findings. The regulator noted that the advent of a dedicated digital form could help the U.S. dollar maintain its status as the world’s reserve currency.

On March 9, President Joe Biden signed an executive order coordinating federal agencies in regulating cryptocurrencies. The document required regulators to consider the opportunities, benefits and risks of issuing a central bank digital currency.

Earlier, the U.S. Treasury released a report on the risks associated with stablecoins. The department saw stablecoins as a threat to investors and market integrity, and called for strict legislative constraints.

Prior to this, Jerome Powell expressed doubts about the necessity of stablecoins and cryptocurrencies following the appearance of the digital version of the dollar.

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