the walls are closing in on the $2.8tr crypto market

The US appears more concerned about the implications of cryptocurrencies for financial stability and consumer protection than in emulating China’s attempt to wipe out digital currencies.

The recent hacking of Coinbase, one of the largest digital assets exchanges, which resulted in the cryptocurrencies of more than 6000 customers stolen, can only add momentum to Gensler’s efforts to gain regulatory authority over the sector to protect consumers.

It seems a foregone conclusion that the major central banks and financial regulators will move to neutralise the threats to their own position and the stability of their systems by issuing their own digital currencies while forcing the digital challengers into the regulated financial system.

The primary concern of the Fed and US Treasury, however, appears to be the potential threat stablecoins, in particular, might pose to the stability of the financial system.

Cryptocurrencies like bitcoin are so volatile that they make poor mediums of exchange and therefore don’t represent much of a threat to central-bank issued currencies, whether physical or virtual.

Stablecoins – tokens backed by baskets of physical assets, or tied to reserves of US dollars – could be much more of a threat to central-bank issued currencies, even if they only represent about $US125 billion of the $US2 trillion crypto asset market today.

The US authorities would be particularly mindful that the Facebook-sponsored Diem (formerly Libra) consortium hasn’t abandoned its cryptocurrency plans.

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Its ambition of creating a global network for digital payments has evolved – the initial plan for Diem tokens to be backed by a basket of multi-currency assets has been replaced by a peg to the US dollar – but hasn’t been abandoned despite significant international regulatory opposition.

The US focus on stablecoins is driven by the theoretical stability of the value of the digital tokens, which would make them a far more viable alternative to central bank-issued currencies than Bitcoin.

The backing of the tokens with real financial assets, however, would also introduce vulnerabilities that bank regulators are very familiar with.

Banks and other regulated financial institutions are required to hold capital and minimum levels of high-quality liquid assets to protect against “runs” by their depositors and lenders.

It is apparent that the US regulators are contemplating imposing similar regulations on sponsors of stablecoins to protect investors and level the playing field for regulated institutions. Some stablecoin promoters have been seeking to offer bank-like financial products.

The response from authorities’ to the increased acceptance of cryptocurrencies as an investment class and the ambitions of some, most threateningly Facebook, to leverage their vast consumer bases and infrastructure to disrupt physical currencies and existing payments systems, is…