Crypto investors are growing worried about a potential regulatory crackdown on the industry in the U.S., as SEC Chair Gensler called the crypto industry “a Wild West” and called for more regulation.
Securities and Exchange Commission Chairman Gary Gensler made his case against the U.S. Senate for regulating cryptocurrencies, stablecoins especially, as securities.
In a Tuesday’s Senate hearing, Senator Pat Toomey (R-PA) asked the SEC Chair on whether cryptocurrencies can be considered securities under Supreme Court’s rulings.
“There are a small number that aren’t, but I think very many of these are investment contracts,” Chairman Gensler said.
When asked specifically about stablecoins, Gensler said “they may as well be securities.”
Regulars maintain that stablecoins are being used as cash substitutes, similarly to bank deposits and money market mutual funds.
However, unlike the former, stablecoins are still very lightly regulated. As such, regulators believe that stablecoins could pose a risk to the financial system, if left unregulated.
Gensler also criticized decentralized finance (DeFi) tokens, calling them “decentralized in name only.”
He also claimed that their user agreements often mask additional fees and charges, and called them a “highly speculative asset class.”
SEC chair also took shots at Coinbase, stating that they have dozens of “tokens that are securities” but are not registered with the SEC.
Despite his criticism, Gensler claimed that he was “not negative or minimalist” about the industry.
What Are Stablecoins
Stablecoins are a vital part of the cryptocurrency system. They facilitate crypto exchanges and provide a convenient way for crypto holders to cash out their gains.
However, unlike cryptocurrencies, they don’t experience wild swings in their valuations. As their name suggests, stablecoins are designed to be stable.
Stablecoins are digital tokens backed by another asset, usually a currency such as the U.S. dollar. They are managed by a stablecoin exchange that maintains the peg between the stablecoin and the currency.
The value of a stablecoin is supposed to be maintained by reserves, similarly to how banknotes were backed by gold during the gold standard.
Stablecoins With Fractional Reserves
Exchanges in charge of USDCoin and Tether used to claim that their stablecoins were 100% backed by dollars in the reserve.
However, both companies have since gone back on their commitment to 100% reserves.
In May 2021, Bitfinex’s company Tether Limited claimed to hold “over 75%” of reserves for Tether in cash and cash equivalents.
In August 2021, Centre, a consortium funded by Circle and crypto exchange Coinbase, announced that USD coin would no longer be backed by cash and U.S. treasuries alone.
This has led many to draw parallels between stablecoin exchanges and fractional reserve banking, questioning the stability of stablecoins.