Federal Reserve Chairman Jerome Powell said Wednesday that U.S. is at a ‘critical point’ for regulation of digital currencies, advocating for the application of new rules on some digital payment tools that are similar to those applied to bank deposits and money-market mutual funds.

He made special mention of stablecoins like Tether
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and USD coin
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which are pegged to the U.S. dollar and are used to facilitate trading between various cryptocurrencies, including bitcoin
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and ether
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+2.66%
.

“We have a tradition in this country where the public’s money is held in what is supposed to be a very safe asset,” Powell said during a virtual hearing before the House Financial Services Committee. “That doesn’t exist for stablecoins, and if they’re going to be a significant part of the payments universe…then we need an appropriate framework, which frankly we don’t have.”

Cryptocurrencies like bitcoin have not become widely used as a means of payment, in part because their values are so volatile relative to the U.S. dollar or other government-backed currencies. Because stablecoins are pegged to the dollar, many crypto enthusiasts see them as an essential tool for promoting the use of digital currencies for everyday purchases.

Critics of stablecoins say they pose significant risks to financial stability, especially after it was revealed that some of these dollar-pegged tokens are not backed by actual U.S. dollars, but a combination of riskier assets. In February, the New York State Attorney General Letitia James banned the use of Tether and an associated crypto exchange, Bitfinex, in the state for making false statements about the currency’s backing.

Tim Swanson, founder of the tech advisory Frim Post Oak labs, wrote in January that stablecoins were “parasitic” because they operated just like “non-bank financial intermediaries that provide services similar to traditional commercial banks, but outside normal banking regulation.”

This kind of behavior puts not only stablecoin holders at risk but could potentially threaten financial stability in general, if a run on a stablecoin causes the asset and other cryptocurrency prices to collapse, he argued. Such a collapse could also disrupt the market for bitcoin and other popular cryptocurrencies, according to crypto services company FlowBank.

Powell said the Federal Reserve plans to issue a report in late summer or early fall that will lay out the risks and benefits associated with cryptocurrencies, stablecoins as well as a potential Fed-backed digital dollar. Advocates of a so-called central bank digital currency have argued that a CBDC could function similarly to a stablecoin, but with reduced risk.

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