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Comptroller Hsu: Regulation, Reserves Can Put the 'Stable' in Stablecoins

Acting Comptroller Michael J. Hsu laid out his plan to ensure the viability of the oft-maligned stablecoin sector, and it predictably includes rigorous oversight and regulation.

michael hsu bioHsu’s remarks regarding stablecoins, which are a type of cryptocurrency designed to peg their value to traditional, fiat currencies, were made during the BritishAmerican Business Transatlantic Finance Forum Executive Roundtable held earlier this month. “Within crypto, stablecoins have received the most attention from regulators worldwide. This is for good reason. Stablecoins bridge the fiat and crypto worlds and serve as the blockchain-native medium of exchange on crypto trading platforms,” Hsu said.

The panel forum entitled “The Future of Crypto-Assets and Regulation” featured both U.S. and U.K. regulators along with participation from the private sector, according to the organization. “Stablecoins are the oxygen of the crypto ecosystem and serve as a key link to the fiat currency world,” Hsu said. “Stablecoins also present unique risks. Currently, crypto users trust that the largest stablecoins are stable and equivalent to fiat: that is, the holders of USD-backed stablecoins believe they can redeem their stablecoins for US dollars on demand, at par, with no questions asked.”

Hsu compared that trust to that which depositors have with the banks holding their money. However, he warned that any fracture in that trust could come with catastrophic consequences. Panicky stablecoin holders who rush to redeem their digital assets for fiat could spark a cascade of activity that would be “indiscriminate in their destruction.”

“Runs are like hurricanes or tornadoes,” said the acting comptroller. “They do not distinguish between those who deserve to bear losses and those who are innocent.”

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One of the most notable cascades, or runs, in recent memory was the economically devastating financial crisis of 2008, Hsu pointed out. “It isn’t just about the assets or the numbers. It is as much about how others act when there is uncertainty and the fear of being the sucker,” he said.

To combat the psychological risks associated with stablecoins and their investments, Hsu called for tighter regulation and reserve funding. If stablecoin issuers were subjected to banking regulation and issuers were forced to keep adequate reserves, he said, it would add a layer of protection that investors could fall back on as they make their financial decisions.

“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,” he said during the address. “There would be no need for any holders to redeem or even to worry about redeeming a bank-regulated stablecoin. Bank regulation would give credibility to the ‘stable’ part of stablecoins.”

The roundtable panel addressing the challenges of crypto regulation included:

  • Esme Hodson, chief compliance officer at SC Ventures, Standard Chartered
  • Helene Oger-Zaher, payments, retail banking and crypto policy at the Financial Conduct Authority
  • Matthew Osborne, payments and policy lead at the Bank of England
  • Nicole Sandler, head of digital policy at Barclays
  • Cheyenne Hopkins, managing director of Strategic Communications at FTI Consulting, who moderated the event.

“While the pace of innovation in crypto is exciting and the growth of the industry presents a host of opportunities for banks, the risks, the pace of change, and the lack of standards and controls in the crypto space suggest that a cautious and careful approach is warranted,” Hsu concluded.

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