‘Bad things will happen’ if stablecoins are not regulated soon

A senior Republican has sounded the alarm over the fast-growing stablecoin industry, warning “bad things will happen” to investors’ money unless it is regulated soon.

Pat Toomey, the top Republican on the Senate banking committee, said he thought Congress should write new rules for the $180bn market in stablecoins, which are some of the most popular cryptocurrencies in the world.

But he pushed back against some of the stricter measures being promoted by Democrats, who believe stablecoins are now worth so much money that their operators should be regulated like banks.

Toomey told the Financial Times in an interview: “Could a lot of individual consumers get badly burnt? Absolutely. Would that be a bad thing? Yes, it would be bad for those consumers. It would also probably be a big setback for the industry.

“For both of those reasons, I would like to get a sensible framework in place before some bad thing happens. And let’s face it, eventually, some bad things will happen — after all, this is still a relatively new technology.”

Stablecoins differ from other cryptocurrencies such as bitcoin or ethereum in that they are backed by real currency, offering investors the chance to own digital assets with the promise of extra price stability.

Financial regulators have become concerned about how fast the cryptocurrency is growing, how many are in circulation and how little clarity there is over the assets that back them.

Tether, the most popular coin, has grown from a market capitalisation of around $4bn at the beginning of 2020 to $83bn now, according to CoinMarketCap. Regulators have previously fined the company tens of millions for making false claims about its reserves. It currently says it has enough reserves to match 100 per cent of the coins it has issued.

The Biden administration wants to limit the market so that only nationally regulated financial institutions are able to issue stablecoins, a rule that would exclude both tether and USD Coin, the two biggest issuers.

Toomey’s draft bill, however, would also allow other organisations to offer the coins if they publicly disclose their reserves every month and submit to an audit every three months.

“The idea that the only permissible issuers should be insured depository institutions is way too constraining,” said Toomey. “There is no logical reason in the world why you have to be an insured depository institution to do this.”

The move to regulate stablecoins is part of a broader push by both Democrats and Republicans to put rules in place for the entire cryptocurrency industry. But Republicans are resisting some of the tougher proposals from senior Democrats such as Gary Gensler, chair of the Securities and Exchange Commission, who has argued that many cryptocurrencies should be regulated in the same way as securities.

Toomey hit out at Gensler, saying: “He is attempting to use the enormous power he has and enforcement actions to basically compel an industry to do what he wants. This is absolutely no way to handle a new technology.”

He was also critical of Democrats for attempting to use the Federal Reserve to accelerate the transition to green energy.

Toomey was one of a number of senators who helped block the nomination of Sarah Bloom Raskin to the Fed’s board of governors, after taking issue with her call for regulators to factor in climate change when considering economic risks.

“There’s a movement here in the United States to use the threat of climate change as the opportunity to begin the process of having the Fed allocate capital away from carbon intensive industries, so as to accelerate the transition to a low-carbon economy,” he said. “This makes my head want to explode.”

He called it a “public conspiracy” by Democrats to curb climate change using tools that were not designed for the task.

Toomey, one of seven Republican senators to vote to convict the former president Donald Trump in his second impeachment trial, is retiring at November’s midterm elections. The move has prompted a bitter contest for his seat, with the two frontrunners being television personality Mehmet Oz and hedge fund chief David McCormick.

Oz is one of more than 100 candidates to have been endorsed by Trump, including JD Vance, the author and venture capitalist who won his hotly contested race to be Ohio senator this week.

Despite that victory, however, Toomey insisted the former president’s influence on the party is waning.

“He has been very frequently trying to make sure he picks the horse that’s going to win, so that he can then later take credit for the win that was going to happen anyway and brag about the tremendous win/loss record,” Toomey said.

“First of all, he’s not going to win everywhere — I think there’s a number of high-profile cases where he’s not likely to prevail. And secondly, people aren’t stupid. You know, they are going to see what’s going on here.

“I think his influence is going to continue to decline — which I think it already has.”