Washington policymakers have identified stablecoins as the initial target for stricter cryptocurrency regulation. Stablecoins — which are backed by a reserve asset — are booming due to investors using them to trade among other cryptocurrencies. The stablecoin sector grew by about 500 percent in the 12-month period ending October 31, according to a report issued by the Biden administration. While there are four basic types of stablecoin, the ones collateralized by fiat currency — and specifically the U.S. dollar — is by far the most popular. A bipartisan effort exists to create safeguards ensuring one stablecoin is expeditiously redeemable for one dollar.

At the same time, regulators are mindful of preempting risks to broader financial markets after the Treasury Department last year warned that a rush of stablecoin redemptions could negatively impact reserve assets and stress the overall financial system.

Last week, Senator Pat Toomey (R-Pennsylvania) of the Senate Banking Committee released a proposed regulatory framework for stablecoin he announced would “allow this crypto-innovation to continue flourishing while protecting consumers and minimizing potential risks.”

While there is agreement on a demand for government action, debate continues on how and when to move forward. The Wall Street Journal reports that “the Biden administration is asking lawmakers to pass legislation that would treat stablecoin issuers like banks, a step that Republicans and some Democrats oppose in favor of a lighter statutory touch. Other Democrats are skeptical of compromising with Republicans on the issue at all, instead pushing the Biden administration to take more aggressive steps itself.”

Meanwhile, The New York Times writes that the absence of federal regulation has prompted crypto executives and lobbyists “to work state by state to engineer a more friendly legal system” by “helping to draft bills to benefit the fast-growing industry, then pushing lawmakers to adopt these made-to-order laws” so they can quickly move to profit.

While federal regulation would supersede state law, the crypto industry apparently sees a window of opportunity in its timing. “How — and if — Congress resolves the debate over the roughly $185 billion stablecoin market is an early test of whether Washington will ultimately write new laws or wield existing frameworks to regulate the broader $2 trillion cryptocurrency industry,” writes WSJ.

“The reserve assets of the largest stablecoin, Tether, have been the subject of multiple investigations, with the Commodity Futures Trading Commission last year accusing it of misrepresenting that its dollar reserves were equivalent to its coins,” according to WSJ, which notes “Tether Ltd. agreed to pay a $41 million settlement but didn’t admit any wrongdoing in the case.”