Federal Reserve Chairman Jerome Powell told Congress this week that he would like to see a corner of digital currencies more tightly regulated.
“If [stablecoins] are going to be a significant part of the payments universe — which we don't think crypto assets will be, but stablecoins might be — then we need an appropriate regulatory framework, which frankly we don't have,” Powell told the House Financial Services Committee on Wednesday.
To get around the stigma of cryptocurrencies being volatile, stablecoins tie their values to one or more other assets, such as sovereign currencies. One selling point for stablecoins: facilitating cross-border payments.
Stablecoins have been growing in popularity, taking some steam out of prime money market funds. The concern: that left unregulated, stablecoins may be riskier than advertised.
“I think we have a tradition in this country where [if] the public’s money is held in what is supposed to be a very safe asset, we have a pretty strong regulatory framework,” Powell said Wednesday, citing bank deposits or money markets as examples.
On a second day of testimony Thursday, Powell clarified that he was specifically talking about stablecoins and not other cryptocurrencies that are more speculative in nature.
“It’s not that [cryptocurrencies] didn’t aspire to be a payment mechanism, it’s that they failed to become one, except for people who desire anonymity of course, for whatever reason,” the Fed chief told the Senate Banking Committee.
Powell’s thinking on stablecoins could be relevant to the central bank’s dialogue on digital currencies as it ponders launching its own U.S. digital dollar.
The Fed chairman said Wednesday that somewhere close to early September, the Fed will publish a report kicking off public discussion on stablecoins, cryptocurrencies, and the prospects of a central bank digital currencies.
Debate within the Fed over the crypto space and the Fed’s role in that space has already heated up.
Boston Fed President Eric Rosengren told Yahoo Finance on June 25 that he similarly would like to see stablecoins more tightly regulated, pointing to the risk that stablecoins could collapse during market stress and “destabilize short-term credit markets.”
But Fed Vice Chairman Randal Quarles has openly questioned the need for a Fed-issued digital currency, arguing that private-issued stablecoins may better facilitate cross-border transactions.
“We do not need to fear stablecoins,” Quarles said on June 28. “The Federal Reserve has traditionally supported responsible private-sector innovation.”
For his part, Powell said Thursday he is “legitimately undecided on whether the benefits [of a central bank-issued digital currency] outweigh the costs or vice versa.”
Powell also emphasized that if the Fed wanted to ultimately issue a U.S. digital dollar, it would want a sign-off from Congress on its legal ability to do so — which could involve new legislation.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.