Banking regulation can increase trust in stablecoins, said Michael Hsu, the acting head of the Office of the Comptroller of the Currency (OCC) within the U.S. Treasury.
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The official drew attention to a hypothetical scenario of a “bank run” among stablecoin holders.
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“Vulnerabilities […] accumulate over time and are largely ignored until a small group of participants begins to get nervous and, without attracting attention, withdraws,” he explained.
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A trigger could be a slowdown in inflows or outflows of funds from this market segment, which could instill fear and uncertainty in investors.
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“[In such situations with banking regulation] reserves would be under control and checked by supervisory authorities. There could also be access for issuers to the “discount window” discount window Fed to meet short-term liquidity needs, if warranted,” — said Hsu.
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Bank-level regulation would be a “no-lose option” for holders of “the oxygen of the crypto ecosystem” — converting to fiat would not pose problems, and removing regulatory uncertainty would spur innovation.
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In Hsu’s view, this would benefit the financial system as a whole, given the growing interconnection between digital assets and traditional institutions.
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Hsu lamented that regulators currently cannot know for sure “how a crypto startup works overall, how much risk it takes and whether its activities are safe and sound.”
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The agency head warned that the technology underpinning cryptocurrencies and governance issues around certain tokens pose challenges that require careful analysis and consideration. He urged startups to collaborate to minimize the risk of eroding trust in digital assets.
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In May, the interagency sprint with the participation of the Fed, FDIC and OCC, began, and will continue in 2022. The result of these efforts will be defining areas of responsibility for each regulator and building a mechanism for cooperation.
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The OCC promised in 2022 to present additional recommendations regarding the integration of cryptocurrencies into banks’ product lines.
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Earlier, the President’s Working Group on Financial Markets published a report that outlined the risks associated with stablecoins and recommended treating asset issuers like banks.
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In January 2022, the FDIC-insured USDF Consortium announced plans to create a network of banks to promote the stablecoin USDF issued by its members.
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