NEW YORK, Nov 2 (Reuters Breakingviews) - Working out rules of the road for cryptocurrency is a bewildering task, made more so by the complexity of U.S. politics and regulation. A U.S. report on how to oversee stablecoin – which sits at the sober end of the crypto spectrum – offers some solutions, and shows up more problems.

Stablecoins like Tether, a digital currency pegged to the dollar, are mainly used to facilitate trading in other digital assets like bitcoin. The President’s Working Group, a team led by the Treasury, worries that they could be more widely used for other kinds of payment in future read more , and should be regulated somewhat like banks.

That looks reasonable on both counts. Holdings of stablecoins have increased sixfold in the past year to some $127 billion in value, according to the group’s report. If users came to treat the coins like bank deposits, they could bring bank-like risks. Chief among them is the idea that customers might rush to turn their stablecoins back into regular dollars and find the dollars aren’t there. Banks therefore have federal deposit insurance, and the quid pro quo is that they must obey certain rules on capital and liquidity. Applying similar rules to stablecoins would crimp issuers at first, then help them by legitimizing their business.

Beyond that, things get complicated. As well as stablecoins, there are assets like bitcoin that have no central governance. Then there are myriad intermediaries like $70 billion Coinbase Global (COIN.O), which describes itself as “a trusted and easy-to-use platform for accessing the broader cryptoeconomy.” Some offerings resemble banks, others broker-dealers, exchanges or financial advisers. The U.S. Congress has shown itself barely able to grasp how companies like Facebook, now known as Meta Platforms (FB.O), operate , so it’s unlikely politicians can legislate effectively on the digital economy.

Just as abstruse is the U.S. regulatory landscape. Securities and Exchange Commission head Gary Gensler wants to oversee some crypto activities but is only one of four watchdogs usually involved in the President’s Working Group. Meanwhile, the Financial Stability Oversight Council, which has unilateral powers where it detects systemic risk read more , has members from nine named agencies. That doesn’t count state-level regulators: Wyoming, for example, already issues bank charters for firms that specialize in digital currencies.

Policing crypto is a puzzle. If regulators and politicians want to solve it, the jigsaw-like rulemaking process could use some attention too.

- A U.S. Treasury-led regulatory group on Nov. 1 called for Congress to regulate issuers of so-called stablecoins like banks and urged financial agencies to assess whether the role of these fast-growing digital assets in the country's payments system posed a systemic risk.

- Stablecoins, which include Tether, USD Coin and Binance USD, are generally designed to maintain a stable value relative to the U.S. dollar. They have ballooned 500% to reach a market cap of $127 billion over the past 12 months, according to the report from the President’s Working Group.

- The PWG has been researching stablecoins, in consultation with the financial industry, academics and advocacy groups, for the past few months after Treasury Secretary Janet Yellen said policymakers must move quickly to build a regulatory regime for the asset class.

- The group traditionally includes the Treasury, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are also involved in the stablecoin work.

Source: Reuters

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