Jerome Powell: Stablecoin reserves must be public and transparent

The Federal Reserve has expressed its opinion on the regulation of stablecoins. Speaking on Tuesday in Paris at a conference on the opportunities and challenges of financial tokenization, Federal Reserve Chairman Jerome Powell joined European Central Bank President Christine Lagarde, Monetary Authority of Singapore Director Ravi Menon, and General Manager of the Bank for International Settlements Agustín Carstens, where they discussed the role of central banks in the rapidly growing crypto economy.

During a one-hour segment, the group discussed several topics, including DeFi, stablecoins, and central bank digital currencies. However, the central point of discussion focused on crypto regulation. When asked whether private sector stablecoins, such as Circle’s USDC or Tether’s USDT, should be regulated like current bank deposits and money market funds, Powell agreed that the instruments share some similarities. However, he added that stablecoins require strict regulation to ensure their adequate backing, citing the tendency of the broader public to  view stablecoins as equivalents to the dollar.

– “Stablecoin reserves must be transparent to the public and must consist of a type of credit asset that will always be there to fund withdrawals,” he explained.

Powell also shared further insights into central bank digital currencies, stating that a digital U.S. dollar should be intermediated, privacy-protected, identity-verified, and transferable. However, he added that the Fed does not plan to launch a digital dollar immediately, stating that any such currency would be subject to Congressional approval and would require years of research.

Comprehensive Legislation

Powell’s comments on stablecoins echo those of Treasury Secretary Janet Yellen when she spoke earlier this year about the issue of private regulation of stablecoins. Yellen called for the establishment of a regulatory framework ensuring that dollar-pegged tokens are sufficiently backed by quality collateral such as dollars and dollar equivalents, and that infrastructure is established to allow stablecoin holders to convert their assets back into dollars.

The push for stablecoin regulation comes after several incidents caused investors to lose faith in certain dollar-pegged assets. In May, the collapse of the algorithmic UST caused panic in the crypto market, wiping out over $40 billion in value within a matter of days. Soon after the implosion of UST, confidence in USDT also weakened, causing it to temporarily lose its dollar parity.

Fears over the quality of USDT’s collateral resulted in owners paying huge premiums to swap USDT for USDC, a stablecoin issued by Circle, which many market participants consider safer than USDT. Tether regained its parity thanks to the assurance that USDT can be exchanged at a 1:1 ratio for dollars, leading to successful redemptions worth billions of dollars.

However, for many members of the U.S. government, such assurances are of little value if appropriate legislation is not introduced. Powell’s comments reflect a growing desire to regulate private stablecoins. As such, it seems likely that comprehensive stablecoin legislation will be the first major piece of crypto legislation written in the U.S.