The US Treasury says there is 'urgency' in regulating stablecoins to mitigate risks in the $176 billion market

• The huge growth in the stablecoins market underscores the "urgency" for more oversight, a Treasury official said Tuesday.
• Nellie Liang, under secretary of the Treasury for domestic finance, testified before the House Committee on Financial Services.
• Stablecoins represent technological innovation but also pose policy concerns, she said.

The boom in the value of the stablecoin market highlights the crucial need for more regulation over issuers, said Nellie Liang, under secretary of the Treasury for domestic finance, in testimony before US lawmakers Tuesday.

"Stablecoins are growing and developing rapidly and are not subject to a statutory or regulatory framework that mitigates the risks they present in a consistent and comprehensive manner," Liang said in prepared remarks for the House Committee on Financial Services for its virtual hearing about stablecoins and digital assets.

Stablecoins are cryptocurrencies that are usually pegged to fiat currency, such as the US dollar, and backed by collateral.

In November, the President's Working Group on Financial Markets released a report asking Congress to create regulations for stablecoins.

"Currently, regulators have authorities that can be used to address illicit finance and investor protection concerns in the context of stablecoins. However, as described in the PWG Report, regulatory gaps exist regarding certain prudential risks," said Liang on Tuesday.

She added that the Treasury supports "responsible innovation" aimed at meeting the needs of users and the financial system, but stablecoins also raise policy concerns such as those related to illicit finance and systemic risk.

Stablecoins with their potential to be used for making payments and the design mechanisms they rely on to maintain a stable value present risks traditionally associated with bank deposits and other forms of private money, she said. Runs on stablecoins are among prudential risks, and there are payment-system risks related to the mechanisms used to store or transfer the digital assets.

Run risk envisions a scenario in which investors who lose confidence in a stablecoin set off a wave of stablecoin redemptions, leading to distressed sales of the stablecoin's reserve assets.

"The regulatory frameworks that apply to stablecoin issuers and service providers are inconsistent, creating opportunities for regulatory arbitrage and uncertainty among stablecoin users," Liang said in the remarks.

"The exponential growth of stablecoins – from a market capitalization of roughly $5 billion at the start of 2020 to approximately $175 billion today – increases the urgency of ensuring that an appropriate regulatory framework is in place."

The Commodity Futures Trading Commission under the Commodity Exchange Act holds the authority to police fraud and manipulation in commodities spot markets, which include digital assets. Derivatives products on commodities and leveraged retail transactions also are subject to CFTC's jurisdiction.

"These are important tools for ensuring the integrity of these markets and protecting investors, but they are not intended to address prudential risks," Liang said.

The PWG report recommended limiting issuance of stablecoins to insured depository institutions, among other proposals.

The stablecoin market was valued at more than $176 billion on Tuesday, according to CoinMarketCap. The largest stablecoin, Tether, was valued around $78 billion on Tuesday, trading around $1.