Stablecoins should be regulated like banks and central bank digital currencies could tame these ‘wildcat’ crypto tokens, according to research from the Fed and Yale

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Cryptocurrencies that are pegged to a stable asset – known as "stablecoins" – should be regulated as strictly as commercial banks and those that are not should be wiped out to prevent instability in the global payments system, according to a report from researchers at the Federal Reserve and Yale University.

The report, titled "Taming the wildcat stablecoins", was released over the weekend ahead of a meeting of a Treasury Department working group on digital assets on Monday. In it, researchers suggested stablecoins should be issued by insured banks and backed by government bonds.

But anyone can issue a stablecoin and it is these privately produced tokens that have regulators worried.

Tether, for example, is the world's third-biggest cryptocurrency by market value. It's designed to be pegged to the US dollar and backed by assets such as dollars and Treasury bills. But regulators in New York recently banned it after an investigation found it had overstated its US dollar backing.

In May, the Federal Reserve's Lael Brainard raised concerns stablecoins could default and destabilize the financial system.

"Policymakers have a couple of ways to address this development, and they better get going," the report said.

The report's authors said the federal government could either "convert stablecoins into the equivalent of public money by (a) bringing stablecoins within the insured bank regulatory perimeter or (b) requiring stablecoins to be backed one-for-one with Treasuries or reserves at the central bank; or (2) introduce a central bank digital currency and tax private money out of existence."

The US is not the only government that feels the need to cool down the risks that stablecoins present central banks.

"Some commercial organizations' so-called stablecoins, especially global stablecoins, may bring risks and challenges to the international monetary system, and payments and settlement system etc," Fan Yifei, a deputy governor of the People's Bank of China, told CNBC earlier this month.

The Treasury Department called Monday's meeting to address some of these issues.

"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 said in a statement Friday. "In light of the rapid growth in digital assets, it is important for the agencies to collaborate on the regulation of this sector and the development of any recommendations for new authorities."

Cryptocurrency usage has grown across the world, and most major central banks are now considering issuing their own digital currencies.

The report suggested central bank digital currencies (CBDCs) could be issued either as a deposit account, or as a digital coin, with the latter being the preferred option, as it could operate alongside traditional banking tools like cards. The first option would mean central banks will have to open accounts and administer payments for users.

"The introduction of a central bank digital currency allows the government to maintain monetary sovereignty," the report said.

Read the original article on Business Insider

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