The rise of cryptocurrencies, one of the biggest financial trends to emerge in years, has raised the stakes for regulators to exert more influence over the sector, while protecting investors.

The rapid adoption of digital tokens has made the development of a central bank digital currency (CBDC) a more "urgent" proposition, a top official told Yahoo Finance recently, especially as a multi-agency debate unfolds over crypto regulation.

“We absolutely support an urgent study of CBDC,” Treasury Under Secretary for Domestic Finance Nellie Liang said in a Yahoo Finance interview last week, but stopped short of outright endorsing one.

“There are many ways in which it could be implemented, which have important implications for the financial system. We support the work in this across all dimensions.”

Liang's remarks, made just before an appearance before the House Financial Services Committee Tuesday on regulating stablecoins, mark some of the first from the Biden administration on a CBDC. Recently, a Presidential Working Group (PWG) recommended stablecoin issuers be treated like banks, but threw the issue to Congress to decide.

The official believes a Fed coin will probably determine how stablecoins coexist with a CBDC, which she thinks can happen. Still, Liang said it’s possible a CBDC could supplant stablecoins, depending on the kinds of features the Fed would choose for it, should it decide to pursue one.

“Our goal with the PWG report was that the private stablecoin, in fact, be stable and can function as a constant unit of value,” said Liang. “But there are questions in the future as to how it would coexist with the CBDC and whether that's the best financial system in the future.”

But Liang says it could be years before a theoretical digital dollar is even introduced. whereas stablecoins are active now. Their current use leaves regulators no choice but to regulate, lest they mushroom into a systemic risk to the economy.

The Federal Reserve is currently reviewing the pros and cons of issuing a CBDC after releasing a report last month. Analysts are postulating what impact it could have on stablecoins and financial markets.

According to Chainalysis, a digital dollar could be in a strong position versus non-CBDC stablecoins, arguing that a CBDC would be characterized by “essentially zero credit and liquidity risk and would be the most desirable form of holding cash, especially during periods of market turbulence where a financial institution’s creditworthiness might be called into question.”

The money market question

The Treasury is looking at stablecoins as a form of payment. Liang explained stablecoins combine a bank-like product with a securities product, but noted that investors don’t invest in stablecoins for yield they’ll earn on assets, since stablecoins don’t pay interest like money market funds.