Comptroller Hsu Considers Alternative Paths to the Regulation of Stablecoins
Commentary by Steven Lofchie
OCC Comptroller Michael J. Hsu considered alternative paths to the regulation of stablecoins through "the lens of stability, interoperability and separability."
In an address before the Institute of International Economic Law at Georgetown University Law Center, Mr. Hsu posed policy questions related to the "architecture of stablecoin." He considered differing approaches to the regulation of stablecoins, including to treat them as an investment asset (akin to shares in a money market fund), or alternatively, to regulate issuers of stablecoins as banks. He challenged policymakers to anticipate various scenarios, e.g., if there were a run on stablecoins, or the potential impact on the United States if the U.S. dollar were to lose its stature as the "world's reserve currency" and be replaced by stablecoins.
Mr. Hsu suggested that prudent regulatory policy could pave the way for a "central bank-issued, blockchain-native coin" that would solidify the U.S. dollar as the global reserve coin of the Web 3.0 economy. Mr. Hsu posed several policy questions:
- Stability - Should stablecoin issuers adhere to a regime that uses (i) a rigid set of safety parameters much like those placed on banks; or (ii) a set of licensing alternatives that would each have "distinct risk-reward tradeoffs" more akin to money market funds?
- Interoperability - How does regulation ensure (i) interoperability across blockchains, i.e., allowing stablecoins to be used safely and effectively across various blockchain networks such as Ethereum or Solana; and (ii) interoperability across stablecoins, i.e., keeping stablecoins inclusive and preventing a single entity from fragmenting the "digital ecosystem[?]"
- Separability - Should stablecoin issuers (i) be structured as standalone entities to protect against blockchain specific liquidity risk; or (ii) are enhanced safeguards enough to protect entities from such risk?
Mr. Hsu concluded that "establishing an intentional architecture for stablecoins can help protect people and the dollar and reflect our values"; he argued that the above considerations were just "preliminary policy factors to consider in that architectural development," along with "other core values, such as privacy, security, and preventing illicit finance," among others.
Commentary
Further regulation of stablecoins (or at least the attempt at regulation) is coming. Assuming this to be the case, Mr. Hsu's bifurcation of potential modes of regulation as being either bank regulation or money market regulation is spot-on — those are the two ways that the United States regulates money and cash-equivalents. It is also possible that both methods of regulation could co-exist.
President Biden's recent Executive Order on Digital Assets was more notable for its length than for its substance. It was clear, however, that the Administration is seriously considering the issuance of a Central Bank Digital Currency ("CBDC"). If that is the case, the U.S. government might favor a system of bank regulation where all transfers can be traced to a U.S.-regulated depository. Under that scenario, the U.S. government could view privately issued stablecoins (the money market model) as unwelcome competitors to its CBDC. A bank-like system of regulation, that ultimately leads back into a CBDC, would also provide the government with greater transparency into individual expenditures (which would be justified as checks on money laundering and tax evasion) and the greater likelihood of maintaining the U.S. dollar as the global currency of choice.
A system based on money market fund regulation would allow for much greater diversity of choices and approaches, and for greater individual freedom. However, it also has downsides, as pointed out by Mr. Hsu, including a greater potential for fraud, a risk of runs and a lack of interoperability between "currencies."
There is also the possibility that attempts at regulation fail, or succeed only partially. In the Executive Order, President Biden used the phrase "whole-of-government" to describe the Administration's plans to increase the regulation of digital assets. To the extent that stablecoins are to stay clear of the full scope of U.S. regulation, developers and users will have a considerable challenge in holding their ground against the "whole-of-government."