Regulators in many parts of the world aren’t thrilled about the ascendancy of cryptocurrency. It makes sense that monetary regulators around the world might take issue with a decentralized form of currency that promises to make central banks obsolete.
In China, for instance, cryptocurrency is outright illegal, and the country’s government is going out of its way to enforce its ban on crypto mining rigs and illegal exchanges of digital coins. Meanwhile, the US has been openly discussing coming regulations, with many crypto enthusiasts wary of a forthcoming capital gains tax that will be levied on crypto soon.
Chief among the government’s issues with crypto are “stable coins,” crypto standards that are, as their name implies, based on stronger currency than something like Ether or Bitcoin. The Treasury Department could be cracking down on these assets, soon, however, as they could present a destabilizing threat to the economy at large.
What Are Stable Coins?
Stable coins are crypto-assets like any cryptocurrency. As they currently exist, they’re essentially private stocks you can hold in a given asset. Take Tether, for instance, a stable coin that generates its value by holding large amounts of corporate debt. Tether, as a currency, is “backed” by how much debt its parent company holds.
However, should a malicious investor turn a mean-spirited eye toward Tether, it wouldn’t be difficult to tank the coin’s value. A squeeze on the coin could be as simple as aggressively short-selling the companies Tether holds debt from. On a large scale, this could cause a serious ripple effect out through the economy, which has regulators’ attention.
The US Treasury Department is aware of the issue and has convened an official inquiry. The Treasury, along with some other federal organizations, has tasked the Financial Stability Oversight Council to conduct the review and give their recommendation on the situation. Chief among these groups is a Presidential Working Group on Financial Markets.
The Working Group will be specifically concerned with Tether, as it is one of the most popular stable coins, and potentially the one that is most vulnerable to manipulation by hostile investors. The group is expected to make their recommendation on the coin sometime in December, but there could be indications long before that of how the group is feeling with regards to the standard.
Should the group recommend strict rules be imposed on stable coins, there’s a good chance that many popular cryptocurrency standards could be required to fundamentally alter their business models. Depending on the nature of the regulations, they could even run entire business models into the ground, requiring those coins to discontinue operations.
The timing of the investigation might seem strange to some market analysts. However, experts agree that there is a two-pronged strategy at play here. For one thing, the potential that these stable coins could cause a financial meltdown is reason enough for regulators to be concerned. After all, cryptocurrency has been a massive destabilizing force for the past several years.
On the other side of things, there’s a possibility that the Federal Reserve might want to issue its own stable coin in the near future. Such a government-backed crypto-asset would likely not be competition for private coins, but instead would be an outright superior option. After all, why invest in the private-sector option that incurs more risk and is worth less when you could just invest in a US-Coin, or whatever name the Fed goes with?
In that light, the move to codify how, exactly, stable coins need to operate to be considered safe and regulated makes sense. If the Fed plans to institute its own coin, then it’s going to need some basic ground rules for everyone to work with.
This news couldn’t come at a worse time for Bitcoin, either. The world’s most popular cryptocurrency is taking a beating even as regulators consider sweeping changes to crypto as a whole. Last Tuesday, a sudden crash in Bitcoin saw the standard lose a full 15% of its value in just 24 hours. This steep fall made many who bought in at the peak of $63,000 wince as the coin fell to $45,000.
Some establishment investors have shared harsh words regarding Bitcoin. Legendary Berkshire Hathaway investor Charlie Munger didn’t mince words when discussing crypto recently: “I don’t welcome a currency that’s so useful to kidnappers and extortionists,” Munger told reporters during the company’s investor meeting. “The whole damn development is disgusting and contrary to the interests of civilization.”
Other major investors have warned that Bitcoin is a dangerous investment, largely because it has no value of its own. Bitcoin’s value is entirely dictated by the sentiment of other Bitcoin investors. For the time being, crypto’s detractors seem to be right: it’s been a bad week for the standard.