Regulators Racing Toward First Major Rules on Cryptocurrency

WASHINGTON — After largely standing aside for years as cryptocurrency grew from a digital curiosity into a volatile but widely embraced innovation, federal regulators are racing to address the potential risks for consumers and financial markets.

Their concerns have only grown as both new and established firms have rushed to find ways to profit from bringing the massive wealth held in cryptocurrency into the traditional financial system through quasi-banking services like interest-bearing accounts and lending.

Now the Treasury Department and other agencies are moving urgently on an initial target for tighter regulation: a fast-growing product called a stablecoin.

Issued by a variety of firms that are currently only lightly regulated through a patchwork of state rules, stablecoins serve as something of a bridge between cryptocurrency markets and the traditional economy.

The value of a stablecoin is ostensibly pegged one-to-one to the United States dollar, gold or some other stable asset. The idea is to make it easier for people holding cryptocurrency — which is notorious for its frequent price swings — to carry out transactions like purchasing goods and services, or to earn interest on their crypto holdings.

The use of stablecoins is surging rapidly, and regulators have grown increasingly concerned that they are not in fact stable, and could lead to a digital-era bank run. Just this year, dollar-tied stablecoins such as Tether token, USD Coin and Pax Dollar have jumped from $30 billion in circulation in January to about $125 billion as of mid-September.

“It is important for the agencies to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” Nellie Liang, an under secretary of the Treasury who is helping lead the effort, said in a statement.

The push by the Biden administration to exert some control over stablecoins is the leading edge of what is likely to be a far more expansive debate over the government’s role in regulating cryptocurrencies — a topic generating increased concern in Washington.

“I have seen one fool’s gold rush from up close in the lead-up to the 2008 financial crisis,” Michael Hsu, the acting comptroller of the currency said, in remarks on Tuesday. “It feels like we may be on the cusp of another with cryptocurrencies.”

Largely known as a vehicle for speculation, cryptocurrency is increasingly starting to transform banking and finance and is stirring discussions over whether governments should issue digital currencies of their own to augment or eventually replace their traditional currencies.

Stablecoins now underpin a growing share of cryptocurrency transactions globally, at a time when the total value of outstanding crypto tokens like Bitcoin is about $2 trillion — roughly the same value as that of all United States dollars in circulation.

The regulatory push has generated a wave of lobbying by cryptocurrency executives. They have lined up in recent weeks in a series of virtual…