So-called stablecoins, touted as a bridge between cryptographic currency and old-fashioned money, have surged in popularity this year. There are now more than $100 billion in circulation. But are stablecoins actually stable? The answer is maybe — and the uncertainty says volumes about the need for regulation in the churning realm of cryptocurrency.
A stablecoin is a coin traded on the blockchain pegged to a traditional currency, such as the U.S. dollar or gold. The setup allows these tokens to retain a relatively steady worth rather than fluctuating as wildly as mercurial cryptocurrencies. Traders give their dollars to a stablecoin issuer, the issuer gives them stablecoins in exchange, and they use those stablecoins to invest in (or, better put, bet on) bitcoin and the like. Theoretically, a stablecoin’s value is ensured by a bundle of assets including cash, treasuries and commercial paper.
The trouble is, there is no guarantee that the issuers have on hand the assets they say they do.
Tether Holdings’ story is the prime example: The company once claimed to have $69 billion in real currency to support that amount of its coin in circulation. Yet no one who went looking for the money was able to find any evidence of it. After being sued by the state of New York, the company revealed it had been loaning money from its reserves to prop up an affiliated cryptocurrency exchange that was hundreds of millions of dollars in the hole.
Tether and stablecoins represent only one corner of a much more volatile world: Last week, a cryptocurrency inspired by the Netflix survival series “Squid Game” started at a penny a token traded, and in a 10-minute span, rocketed to $628.33, then $2,856.65, before plummeting to $0.0007 and disappearing from the Web. The backers, by the looks of things, took at least $3.38 million of investors’ funds with them.
The government, obviously, doesn’t want this phenomenon to grow more out of control. Authorities could, as a report by a presidential working group proposed this month, wait for Congress to legislate stringent special rules that basically force issuers to operate like banks — or the Treasury Department’s Financial Stability Oversight Council could designate stablecoins as “systemically important,” making them subject to supervision by the Federal Reserve. Alternatively, the various financial regulators could use the authorities they already have to deal with different versions of stablecoins according to their different functions: some as securities, for instance, and some as commodities.
The object must be to ensure that credulous investors don’t end up holding a bag of supposedly guaranteed but actually worthless non-dollars. The risk, and the challenge for the regulators, is that belatedly policing stablecoins now that so many are in circulation could prompt the type of run on their issuers that the government wants to guard against.
Cryptocurrency lobbyists have come to Washington to ask Congress for “guidance.” New laws, however, should not be permission to evade old ones that apply to banking and other traditional financial operations. Meanwhile, federal regulators already can guide the industry by letting it know they’re prepared to enforce the laws that currently exist.