Federal Agencies Urge Congressional Action on Stablecoins
Commentary by Steven Lofchie
The President's Working Group on Financial Markets, the FDIC and the OCC urged Congress to take prompt action to establish a federal prudential regulatory framework for stablecoins.
In their report, the agencies found that financial and economic stability risks could arise from (i) fluctuation in a stablecoin's value, (ii) payment chain disruptions and (iii) rapid scaling of stablecoin arrangements. In addition, the agencies stated that stablecoin use presents risks to investor protection and market and financial integrity, and creates AML concerns.
The agencies recommended that legislation include provisions to address the following issues:
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Risks to stablecoin users and protection against stablecoin runs. The agencies recommended that stablecoin issuers be required to be insured depository institutions.
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Payment system risk. The agencies recommended that (i) there should be mandatory federal oversight of custodial wallet providers, and (ii) federal supervisors should be able to impose risk-management requirements on entities with operations that are key to stablecoin arrangements.
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Economic power concentration and other systemic risks. The agencies recommended that (i) stablecoin issuers and custodial wallet providers be subject to activities restrictions to establish limits on commercial entity affiliation, and (ii) federal supervisors should be able to impose criteria that encourage stablecoin interoperability.
Until Congress takes action to address the aforementioned concerns, the agencies recommended that the Financial Stability Oversight Council identify activities in a stablecoin arrangement that have the potential to become "systemically important payment, clearing, and settlement activities."
In a related speech, Treasury Undersecretary for Domestic Finance Nellie Liang emphasized that the agencies' report addresses only stablecoins and that the Biden administration is undertaking efforts to address other types of cryptocurrency and distributed ledger technology. In separate statements, SEC Chair Gary Gensler and CFPB Director Rohit Chopra supported the recommendations and pledged that their agencies will take action to address the risks identified in the report.
Commentary
The tone of the report is surprisingly supportive of stablecoins, recognizing them as a product that can compete perhaps very successfully against credit cards. It is disappointing that the report did not make a clearer distinction between what might be considered "true" stable coins; i.e., coins backed by dollars (or another fiat currency) ultimately held at a bank and other coins that may be backed by other financial assets the value of which is not inherently stable, and which more closely resemble investment companies.
It is not clear why the regulators believe that commercial entities should not issue stablecoins, so long as the actual currency is held at a bank. Since true stablecoins are not leveraged, they do not present the same competitive issues as bank deposits that are loaned out and might be misused by a commercial company that owned a bank to obtaining financing at a favorable rate.