Risks of Crypto Stablecoins Attract Attention of Yellen, Fed and SEC

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Stablecoins, digital currencies pegged to national currencies like the U.S. dollar, are increasingly seen as a potential risk not just to crypto markets, but to the capital markets as well.

Treasury Secretary

Janet Yellen

is scheduled Monday to hold a meeting of the President’s Working Group on Financial Markets to discuss stablecoins, the Treasury Department said Friday. The group includes the heads of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

“Bringing together regulators will enable us to assess the potential benefits of stablecoins while mitigating risks they could pose to users, markets, or the financial system,” Ms. Yellen said in a statement.

Stablecoins are a key source of liquidity for cryptocurrency exchanges, their largest users, which need to process trades 24 hours a day. In the derivatives and decentralized finance markets, stablecoins are used by traders and speculators as collateral, and many contracts pay out in stablecoins.

Stablecoins have exploded over the past year as cryptocurrency trading has taken off. The value of the three largest stablecoins—tether, USD Coin and Binance USD—is about $100 billion, up from about $11 billion a year ago.

Jeremy Allaire,

chief executive of the USD Coin issuer, Circle Internet Financial Inc., said the meeting of the president’s working group is a good thing for stablecoins and that he supports developing clear standards. “I think it’s good news,” he said.

Tether Ltd., the issuer of the tether stablecoin, said it looked forward to working with officials to support transparency and compliance. Binance Holdings Ltd., issuer of Binance USD, said it sees the meeting as a positive move. Having regulators involved will bring more legitimacy and clarity to stablecoins, Binance Chief Compliance Officer Samuel Lim said.

Stablecoins and the companies that issue them have been criticized as not being trustworthy.

“There are many reasons to think that stablecoins—at least, many of the stablecoins—are not actually particularly stable,” Boston Federal Reserve President

Eric Rosengren

said in a June speech.

While the startups issuing these stablecoins including Circle and Tether are responsible for assets that make them sizable players in the traditional capital markets, there are no clear rules about how the assets should be regulated to ensure stability.

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In December, the president’s working group released a statement on the regulatory issues concerning stablecoins. Among other things, it suggested that best practices would include a 1:1 reserve ratio and said issuers should hold “high-quality, U.S.-dollar denominated assets” and hold them at U.S.-regulated entities.

Stablecoins operate on the assumption that their reserves are liquid and easily redeemable. Ostensibly, a stablecoin should at all times be redeemable for national currencies, and the amount held in reserve should equal the amount in circulation: currently $64 billion for Tether, $26 billion for USD Coin and $11 billion for Binance USD.

Stablecoin reserves, however, don’t just sit in bank accounts collecting interest. Circle and Tether manage the reserves to provide some level of income.

Neither Circle nor Tether provides a detailed breakdown of where their reserves are invested and the risks users of the tokens are taking. This lack of information has alarmed central bankers and lawmakers in the U.S. and overseas. Binance has said its stablecoin’s reserves are backed 1-1 by U.S. dollars held in custody by the New York-based crypto services company Paxos.

Both Circle and Tether have separately defended the level of information they share with the markets.

Stuart Hoegner,

general counsel at Tether, said the company has a highly liquid portfolio that has been stress-tested. He said the company has a risk-averse approach to managing its reserves and operates in a way to ensure that its dollar peg is maintained.

“Our transparency allows people to decide whether they are happy holding that token or not,” he said.


‘Bringing together regulators will enable us to assess the potential benefits of stablecoins while mitigating risks they could pose to users, markets, or the financial system.’


— Treasury Secretary Janet Yellen

What the companies have disclosed is that they have invested the reserves in corporate debt, commercial paper and other markets that are generally considered liquid, and in cash equivalents.

Tether, according to a report it released earlier this year, held about half of its reserves in commercial paper—short-term loans used by companies to cover expenses. The credit ratings of the commercial paper and whether it came from the U.S. or overseas couldn’t be determined.

In 2019, New York Attorney General Letitia James revealed as part of an investigation that executives of Tether, who also own and operate the exchange Bitfinex, took at least $700 million out of the tether reserve to shore up the balance sheet of Bitfinex.

The case was settled in February. As part of that settlement, Tether agreed to release quarterly reports on the composition of its reserves.

Regulators don’t have to look far for examples of what can go wrong in the world of finance. Money-market funds came under pressure last year during the pandemic-driven selloff and required support from the Fed. Dozens of money-market funds needed to be propped up during the 2008-09 financial crisis to prevent them from “breaking the buck,” or falling under their standard of a $1-a-share net asset value.

Building trust was one of the biggest reasons that Circle decided it would go public, according Mr. Allaire.

“It is about being a public company and being an open and transparent company,” he said in an interview earlier this month.

Write to Paul Vigna at paul.vigna@wsj.com

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