WASHINGTON — Federal Deposit Insurance Corp. acting Chairman Martin Gruenberg said that stablecoins require prudential regulation and could upend the banking system if they become more widely used in payments.
Stablecoins that are meant to be used for payments could "fundamentally alter the landscape of banking," Gruenberg said during remarks at an event on digital assets held by the Brookings Institution Thursday.
"Economies of scale associated with payment stablecoins could lead to further consolidation in the banking system or disintermediation of traditional banks," he said. "And the network effects associated with payment stablecoins could alter the manner in which credit is extended within the banking system — for example by facilitating greater use of FinTech and non-bank lending — and possibly leading to forms of credit disintermediation that could harm the viability of many U.S. banks and potentially create a foundation for a new type of shadow banking."
Gruenberg noted, however, that crypto and stablecoins haven't yet "proven to be a meaningful or reliable source of payments in the real economy," although he said that the distributed ledger technology that digital assets are built on could have an impact on the payments system. He said that he sees stablecoins designed for payments as "conceptually distinct and separate" from stablecoins more broadly, specifically as they're currently used as investments.
But stablecoins used as payments could pose a variety of risks, he said, to everything from financial stability to community banks.
"Payment stablecoins by their very design could exhibit many of the features, and potential vulnerabilities, associated with money market mutual funds," Gruenberg said. "As we have seen previously, in stressed market conditions, large investors could quickly exit their holdings, leading to the fire-sale pricing of underlying securities and panic selling by other investors. This could result in contagion across other payment stablecoins and similar pooled asset holdings, resulting in a systemic event."
He said that, to make stablecoins safer, they should be offered through bank subsidiaries, they should be backed by short-term Treasurys and they should be on "permissioned ledger systems" with robust compliance mechanisms.
While federal banking regulators have a good deal of power in how they craft prudential oversight rules, Gruenberg said that there are still "clear limits" to their authority.
"We must consider the extent to which legislation would be necessary to provide a cohesive framework to prudentially regulate a payment stablecoin system from 'end-to-end' and to ensure that consumers are appropriately protected in the process," he said.
Similar to other Biden bank regulators, Gruenberg hit a cautious note about crypto assets in general, and how they interplay with the banking sector. Still, he said that interest among banks in offering crypto-related services has accelerated.
The FDIC, along with the Federal Reserve and the Office of the Comptroller of the Currency, has asked banks to let their regulators know if they want to engage in any crypto-related activities. The agencies have long promised more clarity for banks on crypto custody arrangements, for example, but have so far taken a tepid approach.
"As the FDIC and the other Federal banking agencies develop a better collective understanding of the risks associated with these activities, we expect to provide broader industry guidance on an interagency basis," Gruenberg said.
