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US federal financial regulators have reiterated last year’s message to Congress: pass comprehensive stablecoin legislation or they will use their existing authorities to fill the increasingly risky regulatory gap.
In a report sent to Congress, the Financial Stability Oversight Council (FSOC), composed of the main federal financial regulators, told lawmakers to legislate a comprehensive federal prudential framework for stablecoin issuers.
Such legislation would be necessary to fix a regulatory gap relating to regulatory arbitrage, whereby businesses would choose to operate under more favourable laws in one jurisdiction to circumvent less favourable regulations elsewhere.
Should Congress fail to do so, the council “remains prepared to consider steps available to it to address such risks related to stablecoins”, the report says.
One such proposal for a comprehensive stablecoin framework has been included in the overarching digital asset bill introduced by Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) in June.
Meanwhile, it has been widely reported that another bipartisan bill is in the making by House Financial Services chairwoman Maxine Waters (D-CA) and ranking member Patrick McHenry (R-NC).
It was expected to be filed before the August recess but the draft was “unfortunately not there yet”, Waters said at the time.
The agencies first made a plea to Congress last November to legislate the rapidly growing stablecoin market. As members of the President’s Working Group, the agencies recommended that the FSOC consider using its existing authorities to enhance the regulation of stablecoins in absence of congressional action.
Many of our agencies have already taken steps to address issues under their respective authority to prevent deposit insurance misrepresentation and to lay the groundwork to address concerns related to fraud, hacks and scams.
The FSOC could designate activities conducted within stablecoin arrangements as systemically important payment, clearing, and settlement activities.
Such a designation would give federal regulators greater visibility into the stablecoin ecosystem and allow for the application of heightened safeguards, where appropriate.
As one of the ten recommendations of the report, the regulators are now reaffirming their willingness to consider actions under existing law.
The report additionally recommends that regulators continue to coordinate with each other in the supervision of crypto-asset entities and that federal and state bank regulators use their existing authorities to review services provided to banks by crypto firms.
It also notes that federal regulators have limited direct oversight over spot markets for crypto-assets that are not securities and calls for legislation that gives rulemaking authority to federal financial regulators in that regard.
The council also recommends that the agencies study the impact of vertical integration by crypto-asset firms.
The report was issued in accordance with President Joe Biden’s executive order on digital assets. Among other things, the order directed the FSOC to produce a report outlining the specific financial stability risks and regulatory gaps posed by various types of digital assets and provide recommendations to address such risks.
FSOC members include the leaders of the Treasury, the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), the Commodity Futures Trading Commission (CFTC), the Federal Housing Finance Agency (FHFA) and the National Credit Union Administration (NCUA).
