WASHINGTON — U.S. financial regulators are endorsing the idea that stablecoin issuance should be limited to federally insured banks, calling on Congress to pass legislation that would dramatically alter the digital asset landscape.
In a report issued Monday, the President’s Working Group on Financial Markets, along with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, concluded that only insured depository institutions should be able to issue cryptocurrencies pegged to an actual currency.
Such a major policy development would push the leading stablecoin providers, all nonbanks including firms like Tether and Circle, out of the market unless they obtained banking charters. The report defines IDIs as state and federally chartered banks savings associations.
The agencies releasing the report said stablecoins issued by nonbanks could be prone to runs and therefore lead to financial contagion, and that operational challenges for nonbank stablecoin firms could disrupt the payments system. They also said the exploding use of stablecoins poses financial stability concerns.
"With respect to stablecoin issuers, legislation should provide for supervision on a consolidated basis; prudential standards; and, potentially, access to appropriate components of the federal safety net," the report said. "To accomplish these objectives, legislation should limit stablecoin issuance, and related activities of redemption and maintenance of reserve assets, to entities that are insured depository institutions. The legislation would prohibit other entities from issuing payment stablecoins."
The working group includes Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell, Securities and Exchange Commission Chair Gary Gensler and acting Commodity Futures Trading Commission Chair Rostin Behnam.
The group also recommended that lawmakers subject custodial wallet providers, such as Coinbase, Binance and Gemini, to “appropriate federal oversight.” That would include risk management, liquidity and capital requirements.
The recommendations would lead to a seismic shift in the stablecoin arena. But the emphasis on congressional action could mean that the impact of the PWG report is limited, since the prospects of such sweeping legislation in a bitterly divided Congress that already has a packed agenda appear slim.
Some were disappointed that the much-anticipated report did not delve deeper into what agencies can do on their own to regulate stablecoins.
“I think this is a very problematic report, in that the recommendations really just look at what Congress can do, and not the current authorities of the regulators,” said Todd Phillips, director of financial regulation and corporate governance at the Center for American Progress.
Here are the key recommendations in the report:
Bank-centered legislation
The primary recommendation from the president’s working group centers on Congress passing substantive legislation to limit stablecoin issuance to insured depository institutions, and to create regulatory standards for custodial wallet providers that hold stablecoins, as well as other forms of cryptocurrency.
The group also said legislation would ideally provide the banking regulators with examination and enforcement authority with respect to the stablecoin activities of depository institutions. Lawmakers should also consider putting restrictions on custodial wallet providers, such as limits around the use of a user’s transaction data, the report said.
Senior administration officials said that legislation is ultimately necessary to address prudential regulatory gaps, noting that the banking agencies on their own are unable to compel stablecoin issuers to become banks. Although issuers could apply for a banking charter with the OCC, such a process is voluntary.
Other methods to bring stablecoins into the regulatory fold — such as regulating them like money market mutual funds or similar securities — could potentially be done without legislation, but would fail to address all of the various concerns regulators have about stablecoins, officials said.
Passing the recommended legislation on stablecoins should be an urgent priority for Congress, officials added. Though the use of stablecoins is currently limited and the assets are used as more of an investment than a payment mechanism, the digital asset space is rapidly evolving, raising questions about how the tokens might be used in the future if they are widely adopted.
Although Congress is not currently considering any legislation to subject stablecoins to regulatory oversight, senior administration officials said that they have had preliminary conversations with some offices, and said that they are optimistic about the prospects of getting a bill to President Joe Biden’s desk.
FSOC designations?
Though administration officials feel that legislation is urgent, they added that various agencies can also take steps to address stablecoins in the meantime.
The report recommended that the Financial Stability Oversight Council — which Yellen chairs — consider designating certain activities conducted within stablecoin arrangements as systemically important payment, clearing and settlement activities.
Since the passage of Dodd-Frank, regulators have had the authority to designate certain institutions and activities as “systemically important,” a label that comes with increased scrutiny and supervision. The FSOC is comprised of the heads of the major financial regulatory organizations, several of which are also members of the president’s working group.
Designating certain stablecoin activities, such as the management of the reserve assets that back a stablecoin or the settlement of stablecoin transactions, “would permit the appropriate agency to establish risk-management standards for financial institutions” that engage in the designated activities, as well as an examination and enforcement framework, the report said.
Other agency actions
Although the report emphasized that legislation is the working group’s preferred way to address the risks posed by stablecoins, it also noted that there are some moves agencies can make absent congressional authorization.
Though the report declined to give any one agency in particular broad authority over stablecoins, it acknowledged that certain regulators have existing authorities that could help to address some of the primary concerns with the assets. However, the report did not elaborate on what the regulators might do specifically to target stablecoins.
Federal securities and commodities laws apply to stablecoins that act primarily as securities, commodities or derivatives, the report said. And to the extent that stablecoin activity in this area falls under the jurisdiction of the SEC and CFTC, those agencies “have broad enforcement, rulemaking and oversight authorities that may address” concerns around market integrity and investor protection.
The president’s working group said the Justice Department could also consider how certain preexisting statutes might apply to stablecoin arrangements. Additionally, the Consumer Financial Protection Bureau and existing consumer financial protection laws “also provide a number of safeguards in the payments sector,” the report said.
Certain stablecoin arrangements may also trigger anti-money-laundering and terrorist financing obligations under the Bank Secrecy Act, officials said.
The report said that the Treasury Department “will also continue to assess the illicit financing risks to the United States associated with stablecoins and other digital assets” through its upcoming national risk assessments on money laundering and terrorist financing.
