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President’s Working Group (PWG) Addresses Payment System Risks Associated with Stablecoins

President’s Working Group (PWG) Addresses Payment System Risks Associated with Stablecoins

Stablecoins are fast becoming an alternative to bitcoin payments, even as these hybrid cryptocurrencies already facilitate digital transactions of other cryptocurrencies. In order to regulate the payments risks associated with digital asset trading involving stablecoins, the President’s Working Group on Financial Markets (PWG) released a comprehensive report on stablecoins. The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) joined the PWG to highlight how stablecoins help the dollar economy. According to the report, stablecoins could be more widely used in the future as a means of payment by households and businesses.

At the time of this announcement, a spokesperson representing the PWG mentioned how stablecoins are designed and traded to support digital payment options. However, the lack of supervision and regulation of stablecoins also present a grave and immediate danger to the whole crypto-based payment ecosystem.

Secretary of the Treasury Janet L. Yellen said, “Current oversight is inconsistent and fragmented, with some stablecoins effectively falling outside the regulatory perimeter. Treasury and the agencies involved in this report look forward to working with Members of Congress from both parties on this issue.  While Congress considers action, regulators will continue to operate within their mandates to address the risks of these assets.”

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Stablecoins: A Quick Overview on Benefits and Payment System Risks

Stablecoin is a reserve-backed asset that can be linked to other cryptocurrencies, fiat money or commodities such as gold, precious gems and metals. Many federal institutions back the emerging economy involving stablecoin trading due to its stable denomination. Its consistent exchange rate ensures freedom from volatility, which has become a major attraction for other cryptocurrencies, such as Bitcoin. All you need is a stable, certified Ethereum (ETH) account. You can trade in Stablecoins if you already have a cryptocurrency, or deal in fiat money.

Based on the exchange commodity, stablecoins can be categorized as:

  • Crypto-backed
  • Fiat money-backed
  • Precious metals and minerals-backed, and
  • Algorithm-backed or non-collateralized stablecoins

Currently, cryptography secures every stablecoin, thus protecting owners from forgery or fraud.

Threats and Concerns Associated with Digital Transactions using Stablecoins

The PWG, in its latest report, has highlighted the risks involving crypto transactions using stablecoins. These issues relate to the mode of payment terms, disruptions in banking and wallet payments, and monopoly in the dollar economy once stablecoins become more mainstream.

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The report addresses key concerns as highlighted below:

  • The legislation should identify and list down all stablecoin issuers and hence, they must be insured depository institutions to guard against stablecoin runs;
  • The legislation should require custodial wallet providers to be subject to appropriate federal oversight.
  • Congress should provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards.
  • The legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Supervisors should have authority to implement standards to promote interoperability among stablecoins. In addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on use of users’ transaction data.

The PWG report has urged the Financial Stability Oversight Council to consider necessary steps required to address the payment system risks outlined in this report.

Linking Risks to FATF Regulation

As next steps, the PWG confirmed that the treasury will continue leading efforts at the Financial Action Task Force (FATF) to encourage countries to implement international AML/CFT standards. These would democratize stablecoins trading and support supervision of domestic AML/CFT regulations. In future, stablecoins governance would ensure crypto-trading activities fully comply with the federal body’s existing legal and financial infrastructures.

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Based on this report, we should be able to predict the course of development and regulation of stablecoins and other cryptocurrencies using cryptography and distributed ledger technologies.

Future of Bitcoin and Other Cryptocurrencies

Bitcoin could hit fresh all-time highs this week, which will bring upside to other cryptocurrencies, particularly those directly involved in fintech development.

This is the bullish prediction from Nigel Green, the CEO and founder of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organizations.

The ultra-bullish prediction comes as prices are on an upward trajectory and as Australia’s regulator, the ASIC, has become the latest watchdog to approve spot ETFs in the world’s two largest cryptocurrencies, Bitcoin and Ethereum.

Nigel Green comments: “It’s taken a week or so longer than the Bitcoin bulls would’ve liked, but overnight on Sunday the world’s largest crypto took off again.

“It reclaimed its previous high of $64,900 from April and is closing in on its all-time high spot price of $66,000 from 19 October.

“Bitcoin will maintain its strength and is likely to shoot further this week, possibly hitting fresh all-time highs, as this current ‘take off’ generates further interest and momentum, attracting even more retail investors.”

Nigel continues: “In addition, Australia’s securities watchdog has followed other global regulators, by giving the green light to the highly anticipated spot exchange-traded funds (ETFs) in a move that has provided a framework for other countries to follow suit.

“This move – especially when other regulators do the same, which they will – will mean that not only more retail investors will pile in but, crucially, more institutional investors such as family offices, hedge funds and real money asset managers will further increase their exposure into digital assets.

“They will bring with them unprecedented levels of capital and stability to the famously volatile crypto market. This will further drive prices skywards.”

The deVere boss goes on to add that the U.S. Securities and Exchange Commission (SEC) would be the “tipping point” in regard to ETFs.

“I believe that the Wall Street’s top regulator will eventually approve a spot Bitcoin ETF.

“A U.S.-based spot Bitcoin ETF would give the sector an unseen level of legitimacy and act as the ultimate tipping point for the market as it will allow corporates to buy and sell quickly and have direct exposure to the crypto itself, unlike with a futures-based ETF.”

As Bitcoin moves towards fresh all-time highs, other cryptos can also be expected to move to the upside, says Nigel Green.  His observation follows Solana and Ether both hitting record highs last week.

“Bitcoin’s gravitational pull on other digital assets will show itself again this week, pulling up other major cryptocurrencies as it maintains its own strength.

“We can expect those cryptos involved with fintech development, such as Ether, Solana and Cardano, to do particularly well.

“Bitcoin is just the start of the fintech revolution which is redefining and reshaping the way that all financial services are delivered.”

Nigel concludes: “This is going to be another good week for crypto investors as interest and demand, as well as regulatory recognition, take flight again.”

[To share your insights with us, please write to sghosh@martechseries.com]

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