During a recent event in Paris, the U.S. Federal Reserve chairman, Jerome Powell, discussed central banks’ role in the increasingly tokenized financial system.
Jerome Powell Discusses Stablecoins
Commenting on stablecoin regulations, the Fed chair, in the company of other prominent personalities, talked about the role of central banks.
Speaking in the company of Christine Lagarde, president of the European Central Bank (ECB), Ravi Menon, the managing director of the Monetary Authority of Singapore, and others, Powell discusses the need for more participation from central banks.
The group has several topics of conversation, but the central theme is that of stablecoin regulations. Powell infers that private sector stablecoins should also be regulated in line with bank deposit guidelines. However, the Fed Chair calls for stricter regulations for stablecoins to ensure adequate backing.
Powell cited the widely held belief by the public that stablecoins are USD equivalents. As a result, he calls for transparency in the token’s reserve. In addition, the Fed Chair wants the integration of credit assets for stablecoins that would fund withdrawals.
Furthermore, Powell noted that the central bank digital currency (CBDC) pegged to the USD should have privacy protection and an identity verification process. More importantly, it should be transferable to make it seamless for retail use.
Moreover, Treasury Secretary Janet Yellen has previously echoed Powell’s sentiment on stablecoins. She also called for regulation of stablecoins to ensure that dollar-pegged tokens have sufficient collateral, which is dollar equivalent. In addition, they also called for the proper infrastructure to enable stablecoin holders to convert their tokens into fiat.
How Stablecoin Regulations Calls Deepen
Following the collapse of the Terra UST stablecoin, the crypto industry was in a panic. The issue has caused many to lose faith in most dollar-pegged coins. Furthermore, more than $40 billion were wiped out during the Terra incident. As a result, regulators worldwide increased their scrutiny of the industry.
The crash also affected the leading stablecoin in the market, Tether USDT, as holders’ confidence began to wane, leading to the temporary loss of its dollar peg.
Moreover, the fears continue, with holders switching to USDC after paying a high premium to exchange their USDT. Circle’s USDC is seen as the safer token of all stablecoins. However, Tether regained its peg after convincing users that they could exchange it for dollars. This led to billions of dollars’ worth of transactions involving USDT, thus redeeming the once-over coin.
Still, most decision-makers in the United States government are not convinced that the stablecoin environment is well protected to withstand future setbacks. According to them, the guarantees given by stablecoin issuers are worth nothing until proper legislation is implemented.
Meanwhile, the U.S. may likely be the first to implement the industry’s relevant regulations.