WASHINGTON — Despite the federal government's apparent interest in restricting stablecoin issuance, not all policymakers see eye to eye.
That was evident in a speech Wednesday by Federal Reserve Gov. Christopher Waller, who contradicted a recent report by the President’s Working Group on Financial Markets by warning against excessive regulation of stablecoin providers.
“While regulations are necessary, they also limit free entry into at least some of the markets in which banks operate,” Waller, a Trump administration appointee, said at a conference held by the Federal Reserve Bank of Cleveland and the Office of Financial Research. “As a result, regulatory oversight can insulate banks from some forms of direct competition.”
The President's Working Group, which includes Fed Chair Jerome Powell, released a paper earlier this month recommending
Waller emphasized that he wasn’t against banks' issuing or providing wallets for consumers to store stablecoins. But he suggested that there were better approaches than banning nonbanks from issuing them that would ensure safety and soundness and foster innovation.
“I understand the attraction of forcing a new product into an old, familiar structure,” said Waller, a former research director at the Federal Reserve Bank of St. Louis. “But that approach and mindset would eliminate a key benefit of a stablecoin arrangement — that it serves as a viable competitor to banking organizations in their role as payment providers.”
Limiting issuance to banks as recommended by the PWG would push the leading stablecoin providers, including firms like Tether and Circle, out of the market unless they obtained banking charters.
The report came out as the Fed is also exploring whether to issue its own digital dollar. The central bank is expected as early as this year to release a research paper discussing its potential plans as well as its views on the stablecoin sector.
Powell, who is awaiting an announcement from the White House on whether he will be renominated to another term running the central bank, has been careful to note that the Fed has
"It's very simple: These are economic activities that are very similar to deposits and money market funds, and they need to be regulated in comparable ways," Powell said at the time.
Waller said even though stablecoins and other new payments instruments could pose risks to the financial system, they also provide important benefits, such as speeding up transactions. The Fed itself is working on a real-time payments system that would be able to offer instant payments and settlement, but the service is not expected to be operational
“With the right network design, stablecoins might help deliver faster, more efficient retail payments as well, especially in the cross-border context, where transparency can still be low and costs can still be high,” Waller said. “Stablecoins could be a source of healthy competition for existing payments platforms and help the broader payments system reach a wider range of consumers.”
The Fed along with lawmakers should be encouraging private sector innovation in the payments space, Waller added, instead of imposing regulatory frameworks that were never intended to apply to payments services.
Private-sector innovation "can come from outside the banking sector, and we should not be surprised when it crops up in a commercial context, particularly in Silicon Valley,” he said. “When it does, we should give those innovations the chance to compete with other systems and providers — including banks — on a clear and level playing field.”
Waller’s concern about stifling innovation were echoed by some lawmakers at a Joint Economic Committee hearing to discuss the regulation of digital assets.
Sen. Mike Lee, R-Ut., said the federal government’s urge to over-regulate decentralized finance “must be resisted.”
“If we want the center of innovation to remain right here in the United States for the benefit of American workers and American families, Congress should focus on creating clarity around how existing rules apply to these new technologies,” Lee said in opening remarks to Wednesday's hearing.
But Democrats remain concerned about the risks of investor harm, fraud and a lack of market transparency in the crypto sector. Joint Economic Committee Chair Don Beyer, D-Calif., called on Congress to issue a “comprehensive legal framework around these assets.”
“Updating the U.S. regulatory framework for digital assets would be in line with how officials have responded to past financial innovations — although often after the fact — with stronger rules to protect consumers and market integrity,” Beyer said.
Instead of limiting stablecoin issuance to banks, Waller suggested that a regulatory and supervisory framework for stablecoins should narrowly address the specific risks that the digital assets might pose to the financial system. That could include requirements to ensure that stablecoin reserves are well maintained, he said.
If a company limited its business activities to issuing stablecoins, backed its liabilities with safe assets and was subject to supervisory oversight, he said, “that might provide enough assurance for these arrangements to work.”
Brendan Pedersen contributed to this article.
