WASHINGTON – When Federal Reserve Chairman Jerome Powell said last week that he was not looking to ban cryptocurrencies, a wave of relief washed over his investors. The price of bitcoin, the largest of the digital currencies, has jumped more than 10% to its highest level in nearly two weeks.

But behind the scenes, fear is mounting: After allowing the industry to go from an obscure project to a $ 2 trillion juggernaut in just over a decade, regulators in Washington are now preparing to unleash a torrent. rules to bring crypto to heel.

In recent days, regulators have warned the industry. Powell, in the same guise, has indicated that he wants to impose federal standards on stablecoins, a type of digital asset that has exploded in recent months and generally maintains a more stable price by pegging to a national currency. His comments came as details began to leak about a key report from the Biden administration that is expected to recommend regulators develop bank-like rules for stablecoins.

As recently as last week, Securities and Exchange Commission Chairman Gary Gensler compared stablecoins to “casino poker chips” during a live Washington Post event, adding that he doesn’t think cryptocurrencies have much “long-term viability.” Acting Comptroller of the Currency Michael Hsu said the crypto craze resembled a “fool’s gold rush” similar to the one that foreshadowed the 2008 financial crisis.

The looming regulatory calculation is shaking some industry insiders that federal rules will crush the industry before it finds its place. Others are cooperating with policymakers in Washington, believing that the potential of technology to streamline banking and payment options for consumers is too great to be stifled – and that maybe it’s time to impose a bit. order in the chaos of digital currency.

“In many ways, these innovations are opening up whole new markets and new capabilities of what you can do with a dollar if it existed on the Internet,” said Dante Disparte, chief strategy officer for Circle, one of the major stablecoin issuers, in an interview. . “It’s starting to get ‘too big to fail’ but ‘too big to ignore’. “

The next report from the Biden administration will begin to shake up the crypto regulatory scheme by focusing on stablecoins.

Stable coins pegged to the dollar saw their circulation increase from $ 29 billion at the start of the year to $ 126 billion today. So far, they’re mainly used by investors to settle transactions between different crypto assets, although their issuers say they have the potential to transform payment processing for average consumers.

Major regulators fear that stablecoins could spark some sort of bank run if the reserves supporting them are not large or liquid enough to meet a sudden demand for redemptions.

The president’s task force on financial markets – a group that includes Gensler, Powell, and Treasury Secretary Janet L. Yellen – has almost completed its recommendations for regulating assets.

Its report – the final versions of which have been distributed to relevant agencies – should suggest imposing rules derived from banking regulations on issuers of stable coins, according to a senior administration official. This could involve requiring companies to obtain a new type of charter, which would force Congress to create one.

The group will also offer the possibility of a review of stablecoins by the Financial Stability Supervisory Board, a super-committee of regulators created in the aftermath of the 2008 financial crisis. risk to the stability of the financial system, the Fed would be responsible for developing rules to contain the threat. Details of the report were first reported by The Wall Street Journal.

A third option, the senior administration official said, would use a provision in a 1933 banking law to regulate stablecoins as deposits, although the Justice Department is expected to endorse this approach. Regulators involved in the process all declined to comment.

The public will likely not see the report until after the Fed releases a separate document exploring whether the U.S. government should issue its own digital currency. Powell, who said last week that the newspaper would arrive “soon,” said such a currency could eliminate the need for private crypto products.

“You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies, if you had a US digital currency,” the central bank chairman said during a testimony to Congress this summer, qualifying that of “one of the strongest arguments in its favor”.

Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, said stablecoin’s recommendations and the Fed’s report on its own digital currency “are deeply linked” because the two assets “could easily compete.” On the flip side, a digital dollar could be used for basic government functions like taxes and stimulus, while a well-regulated private stablecoin could be used in retail. But all of this spills over onto each other and the end goal, which is tricky, is to build a healthcare digital currency ecosystem. “

In addition to the challenge of regulators, they seek to build a system of rules for the industry essentially from scratch. “There is no regulatory framework in place to define who does what, or what activity counts as what,” said Andrew Park, senior policy analyst for Americans for Financial Reform.

“It would be better if the FSOC started a review of this, and that’s where I hope the (chairman’s task force) report lands,” said Timothy Massad, former chairman of the Commodity Futures Trading Commission. “They have the right to get information and would look into what a disruption of this activity might do in terms of ripple effects. We just don’t have a lot of information at the moment.

The industry has found itself on the defensive on other fronts. Despite a vigorous lobbying campaign over the summer, he failed to pass a provision in the infrastructure bill currently before Congress that would impose tax reporting obligations on crypto brokers.

And this month, the Treasury Department announced sanctions against Suex, a crypto exchange that allows people to buy and sell digital assets with credit cards, as part of a campaign to disrupt channels that hackers use to collect profits from ransomware attacks. National security officials have suggested more exchanges may be next. This year alone, federal regulators have imposed more than $ 729 million in penalties on companies in the crypto industry for violating existing market regulations and other infractions, according to Elliptic, a crypto research firm.

Some large crypto firms have also clashed with state regulators. Hong Kong-based Tether, which issues the world’s most widely used stablecoin, settled this year with the New York attorney general following a two-year fraud investigation by that office at the company. Letitia James, the attorney general, said her office discovered the company misled investors about stablecoin’s reserves.

“Tether’s claims that its virtual currency was fully backed by US dollars at all times were a lie,” she said in a February statement announcing the settlement. Tether did not admit any wrongdoing but agreed to stop doing business with New York customers and start producing quarterly reports on its reservations.

Meanwhile, BlockFi, a company that offers traditional banking services like loans and paid accounts but trades in cryptocurrency, was targeted this summer by regulators in five states who accused it of selling. unregistered titles. In a blog post, BlockFi CEO Zac Prince wrote that the company is complying with the law and sees stocks “as an opportunity for BlockFi to help define the regulatory environment for our ecosystem.”

In response to the threat in Washington, some industry players are trying to get ahead of the crackdown. Circle, which issues USD Coin, the second-largest dollar-indexed stablecoin, says it is adopting potential federal regulation. The company is in the process of seeking a banking charter and has announced that from this month it will hold all of its stablecoin reserves among the most liquid assets.

Coinbase, the largest crypto exchange in the United States, is also striving to position itself as a friend of regulators. Company executives said they were looking to work with the SEC to ensure that Lend, a proposed product that would allow investors to earn interest on their stablecoin holdings, would be accepted by the agency. When the SEC threatened to sue if Coinbase went ahead with the launch, it put the project on hold.

The company is preparing to roll out its own proposal for regulating the sector. And like many other crypto players, he’s embarked on a wave of hiring lobbyists in Washington. Last month, he added Andrew Olmem, deputy director of the Trump administration’s National Economic Council to his list of mercenaries; a team from Rich Feuer Anderson, including two former Senate assistants and a former member of the Treasury; and Milan Dalal of Tiger Hill, former collaborator of the Senate Banking Committee

Kristin Smith, executive director of the Blockchain Association, said her group was cautiously optimistic about the stablecoin report. “There is certainly a risk that they will misunderstand how stablecoins work,” she said. “We’re nervous about this, but we’ve had some positive conversations as well, and I’d like to be optimistic, it’s a vector of progress.”