US officials have been displaying an extremely negative approach towards cryptocurrencies, and Biden has openly expressed this. Many governments see cryptocurrencies as a way to easily collect taxes from the public. Biden’s perspective is no different. However, those who overlook the innovation here are at risk of falling behind in the future.
Crypto Comment from a Fed Expert
A new policy document written by former Federal Reserve analyst Brendan Malone on behalf of technology investment firm Paradigm addresses an important category in crypto. Stablecoins are crucial solutions for investors to buy and sell cryptocurrencies, and it is expected that this field will be regulated by the Fed in the future. The recent report also focused on stablecoins. Brendan, who examined the risks of stablecoins, wrote interesting things.
According to him, stablecoins are much better than bank deposits in terms of risk. The document investigating the risks posed by stablecoins states that proposed laws in the United States could include crypto payment instruments in existing banking and securities frameworks. Malone argues that the risks posed by stablecoins are lower than bank deposits and different from money market funds.
Stablecoins Are Safer
We have seen what happens when banks do not properly adjust their risks, even as recently as a few months ago with the bankruptcies in March. Banks that cannot properly diversify their customer base and adjust their risks went bankrupt one after another in connection with their liquidity problems. According to Malone, when banks accept short-term deposits and use these funds to offer long-term loans that are not repaid for years, they are exposed to a risk called maturity transformation. Maturity transformation poses a constant risk for banks and requires continuous risk management.
A recent example of risks related to maturity transformation is the collapse of Silicon Valley Bank in March. It was reported that the US bank allocated customer deposits to long-term assets and was forced to close by regulators following a bank operation. According to Malone, stablecoins do not inherently pose similar risks as they are typically backed by short-term Treasury bonds and separated from the issuer’s assets.
“Federal regulations implemented under new legislation may require special protective measures. If this happens, there will be no duration mismatch between short-term liabilities (a stablecoin holder can convert to cash on demand) and long-term or risky assets, unlike bank deposits.”
According to the article, if stablecoins are regulated through existing frameworks without considering their unique features, it will lead to bank-like strict supervision of stablecoin issuers. Such oversight could limit competition and increase the market dominance of a few major players.
