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A U.S. interagency report recommends bank-like oversight of stablecoin activities, urging Congress to take “prompt” actions.
On November 1, the President’s Working Group on Financial Markets (PWG), comprising the main federal financial regulators, published a report on stablecoins. The report identified risks associated with stablecoins and made a number of recommendations to Congress to ensure that “payment stablecoins” are subject to appropriate federal prudential oversight on a “consistent and comprehensive” basis.
Among the recommendations, the report urges Congress to issue legislation that requires stablecoin issuers to be insured depository institutions and to bring custodial wallet providers under appropriate federal oversight.
The executive branch agencies are now calling on Congress to act and provide a legal framework for stablecoins that essentially treats issuers of stablecoins like banks, said Ari Redbord, head of legal and government affairs of TRM Labs.
These recommendations are pushing cryptocurrency into full-service banks, Gene Grant, CEO of VRBex/Levelfield, added. He explained that the recommendations are completely consistent with the expectations of the Texas-based digital assets firm, and this is "a continuation of the movement to bring digital assets into the mainstream financial system, and to provide investor protections and improve market integrity.”
Impact of the proposed regulatory approach
Stablecoins are an integral part of crypto trading and lending platforms, as most transactions between crypto-assets use stablecoins.
With their market value of nearly $130bn, stablecoins represent about 5 percent of all crypto-assets, showing a 20-fold increase throughout the last 20 months, according to SEC chair Gary Gensler. In addition, in October, more than 75 percent of trading on all crypto trading platforms occurred between a stablecoin and some other token.
Although stablecoins are currently used mainly to facilitate trading, lending, or borrowing of other digital assets, they have the potential to become widely used by households and businesses as a means of payment.
“Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options. But the absence of appropriate oversight presents risks to users and the broader system,” said Secretary of the Treasury Janet L. Yellen.
Given this potential, it is unsurprising that the core recommendation from the report is that stablecoins only be issued by insured depository institutions, or fully chartered banks, Grant stressed. Insured depository institutions are subject to the oversight of the Federal Deposit Insurance Corporation (FDIC) and are covered by deposit insurance. In the U.S., such entities are generally full-service chartered banks, and the term does not encompass trust companies, Grant explained.
Looking at the current stablecoin issuers, Grant believes these rules will likely materially negatively impact Circle, the issuer of USDC, which does not have a banking charter. It could possibly materially impact Paxos and Gemini too as both companies hold trust charters and therefore are not insured depository institutions.
Wyoming state-chartered Avanti may also be affected, considering that the Wyoming Special Purpose banking charter does not require FDIC insurance. Grant added that Tether could be also affected, “naturally,” as the offshore company is already “in the crosshairs” after the New York attorney general revealed its virtual currency was not always fully backed 1-to-1 by U.S. dollars in reserve.
The recommendations also include a proposal to bring custodial wallet providers under appropriate federal oversight. This would have the impact of moving all of the so-called “exchange” providers to become subject to a federal regulator, Grant explained.
This is likely a suggestion that the Office of the Comptroller of the Currency (OCC), the federal banking regulator, will be explicitly given the responsibility for regulating these entities, he added. This would be consistent with the movement towards the banking system.
To address concerns about systemic risk and concentration of economic power, the report proposes imposing requirements on stablecoin issuers and custodial wallet providers, such as limits on affiliation with commercial entities or on the use of users’ transaction data.
It also recommends Congress give supervisors the authority to implement standards that promote interoperability among stablecoins and notes that “legislation should provide regulators flexibility to respond to future developments.”
The report also highlights a number of risk areas, including money laundering, and notes that stablecoin transactions could be “money transmission services,” and therefore subject to the Bank Secrecy Act (BSA) and regulated by the Treasury's Financial Crimes Enforcement Network (FinCEN), Redbord said.
This is consistent with last week's Financial Action Task Force guidance that states that if a stablecoin project has a "central developer or governance body" or an entity that drives the launch of the asset, then that entity could be a virtual asset service provider — essentially a money service business under U.S. law — and responsible for BSA-style compliance.
Multi-agency cooperation
The report is a result of the collaboration between federal financial regulators. The PWG comprises the Secretary of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC), but the FDIC and the OCC also contributed to the report.
Although many of the federal financial regulators have jurisdiction to regulate certain aspects of stablecoin activities, the report does not propose the expansion of their regulatory perimeter; instead, it urges Congress to take action.
“What we believe is underestimated is the ability for coordinated regulated action under the existing laws without action by Congress,” Grant stressed.
“We do not expect the regulatory authorities to sit idle while waiting for Congress, and participants should have every expectation that such recommendations will be implemented one way or another,” he added.
Trade bodies welcome recommendations
The Electronic Transactions Association (ETA) and the American Bankers Association welcomed the report. “The key to adoption of cryptoassets, including stablecoins, is a positive regulatory framework. By calling for appropriate and proportionate oversight, the report starts the important process to achieve certainty and predictability for stablecoins,” said Jodie Kelley, CEO of the ETA.
“Clarity as to the health of these assets could bring much-needed trust in crypto, but also to the true value that may be actually underpinning it. Many have deep concerns that there is a hollow asset bubble built as one of the pillars of crypto, and may have been manipulated to inflate the overall ecosystem. Getting to the bottom of this will bring true stability and allow for long-term adoption,” said Jim Preissler, managing partner, Tritaurian Capital, a blockchain-focused investment bank.
