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Stablecoins will need to be regulated if they keep growing to the point where their holdings of short-run dollar assets grows large enough to spread disruptions when their backers get jittery, St. Louis Fed senior vice president David Andolfatto told MNI.
"History shows very recently that they might get in trouble if they experience a wave of redemptions and they can't honor the dollar peg, they might feel compelled to dump a whole pile of commercial paper on the market," said Andolfatto, one of the first central bankers to express interest in Bitcoin and blockchain technology when it emerged. "These are the types of issues I think regulators are going to have to worry about."
Stablecoins are cryptocurrencies pegged to an asset like the U.S. dollar, and have a market of around USD100 billion -- just a fraction of the USD2.6 trillion cryptocurrency market. Bitcoin, which hit a record high above USD66,000 this week before retreating, has advantages that give it the potential to become a flight to safety asset like gold, said Andolfatto, who has done joint research in this area with Fed Governor Christopher Waller.
"Bitcoin itself -- you could argue that there is some fundamental value there to a group of people who value an asset that is removed from any government agency," he said.
Andolfatto said of critics who see digital currency as a venue for criminal financing that many such activities already take place through traditional markets. Most regulators have started to come to the view that emerging financial tech will have to be regulated like traditional competitors serving financial markets.
"I don't need Bitcoin to do a lot of illicit, illegal activity -- the circulation of USD100 bills is going through the roof," he said.
"If ever a ransom payment on the Bitcoin blockchain wanted to be cashed out at some exchange, you could follow these tainted coins and prevent Coinbase or some other established intermediary from cashing them out," he said. "I would much prefer those types of efforts to banning it."
The crypto movement has major potential benefits for the decentralization of corporate and government power, he said. "You get a bigger say in how we run the community the more you demonstrate you have a stake in the prosperity of the community."