(Bloomberg) -- The cryptocurrency sector may be inching closer to mainstream finance after fresh guidance from a U.S. banking regulator on using certain types of less volatile digital coins for payments.
Federally chartered banks can use so-called stablecoins for payment activities and participate in the underlying blockchain that verifies and records transactions, according to a statement from the Office of the Comptroller of the Currency on Monday. Analysts said the move may encourage banks to develop stablecoins for faster payments.
Stablecoins are designed to avoid wild swings by being pegged to another asset, such as the U.S. dollar or gold. In contrast, Bitcoin is famously volatile, surging to a record above $35,000 on Wednesday just two days after registering its biggest one-day decline since March.
“Banks will likely see a commercial opportunity to launch their own stablecoins” and that could spur issuance, which climbed to $31 billion last year from $5 billion, said Seamus Donoghue, vice president for sales and business development at digital infrastructure provider Metaco.
The Office of the Comptroller of the Currency statement follows a Dec. 23 warning from the Treasury Department and other agencies that stablecoin issuers need to tighten protections against money laundering. A week earlier, Treasury proposed new requirements that would force banks and other intermediaries to maintain records and submit reports to verify customer identities for certain cryptocurrency transactions.
Banks potentially entering the blockchain space won't be a competitive threat to the valuations of existing cryptocurrencies, David Grider, a strategist at Fundstrat Global Advisors, wrote in a note Tuesday.
Grider sees the development as long-term positive for the crypto industry, though with winners and losers. For instance, large firms like JPMorgan Chase & Co. and Bank of America Corp. could benefit from the more widespread adoption of bank-issued stablecoins, he said.
Tether is the dominant stablecoin used by cryptocurrency exchanges worldwide, with about a 75% market share. Other popular tokens include USD Coin, which is run by a consortium that includes Coinbase Inc. and Circle Internet Financial Ltd., and Paxos Standard, which has been approved by the New York State Department of Financial Services. Gemini dollar is offered by the exchange run by the Winklevoss brothers.
The OCC said blockchain-based stablecoins “may enhance the efficiency, effectiveness, and stability of payments activities.”
The Bloomberg Galaxy Crypto index is up about 30% this week, and some commentators have attributed the rally in part to the regulatory update.
Read More: Bitcoin Tops $35,000 for Fresh Record as Wild Swings Resume
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