By Nathalie Voit


Federal officials are crafting rules to regulate cryptocurrencies and other major forms of digital finance. The news comes as concern over the increased use of stablecoins, a new form of digital currency, has regulators worried about the potential for a “digital era bank run.”


Stablecoin, a fast-growing cryptocurrency, falls somewhere in the middle between a traditional cryptocurrency and a non-crypto asset. According to the New York Times, stablecoin’s value is pegged one-to-one to a stable asset like gold or the U.S. dollar. The purpose of the new asset is to strengthen consumer trust for people holding cryptocurrencies, which are subject to severe price swings.


Demand for the new currency has recently surged, and regulators are worried that contrary to its name, the new product is, in fact, not stable. A primary focus of concern is whether stablecoin companies hold enough liquid reserves to “back up the value of the currency they issue.” Another major area of concern for Treasury Department officials is whether stablecoin firms have the technical know-how to handle large surges in transactions, the New York Times reported.


Stablecoins now underpin a growing share of global cryptocurrency transactions. At a time when crypto-assets like Bitcoin account for nearly $2 trillion of the total cryptocurrency market, almost as high as the total value of all U.S. dollars in circulation, officials are working overtime to ensure there is “an appropriate U.S. regulatory framework in place.”


The renewed move to regulate cryptocurrency has prompted lobbying from industry executives seeking to shape new policies. According to the New York Times, company representatives from blockchain-focused financial services providers Circle and Paxos have met with banking and financial regulators in recent weeks to “shape the new rules while largely acknowledging that some form of federal oversight is now inevitable.”


In a sign executives at Circle understood the need for federal intervention in the digital finance market, the online crypto platform drew out plans to voluntarily shift its reserves to more liquid assets last month.


“Regulators really start to care more when risks get greater for society,” said Jeremy D. Allaire, the chief executive of Circle. “You naturally see regulators want to come up with ways to address those risks.”


Unlike Circle, digital e-broker Paxos is opposed to regulation that would designate stablecoins as “systematically important,” a move that could prompt widespread industry regulation and potentially cut off growth.


“If we think back on the 20th century, first you had key innovations like aviation or automobiles,” said Tomicah Tillemann, a former Senate aide to President Biden and the current Global Head of Policy for a branch of Andreessen Horowitz, a leading venture capital firm that invests substantially in crypto. “And then you have investments in regulatory frameworks that helped to bring the benefits of those technologies to larger numbers of people.”