The Inter-Agency Report on Stablecoins recently issued by the President’s Working Group on Financial Markets is an important milestone that not only presents the Biden administration’s initial policy recommendations for regulating the growing stablecoin market, but also clearly reflects the importance of the stablecoin market in the future of global payments.
Unfortunately, the working group simply got it wrong.
While well-intentioned, the proposal to limit stablecoin issuance to bank holding companies and their insured depository institution subsidiaries ignores the existence of state money transmitter laws, which already govern nonbank stablecoin issuers, and already address the risks noted in the report.
As a result, the report would have you think that stablecoin issuers and wallets are completely unregulated with no protections for consumers or users. It paints a picture of dire consequences unless Congress pushes through “urgent” legislation requiring that only banks be permitted to issue stablecoins. In my view, this is both wrong and misleading.
For example, the President’s Working Group is very concerned by the risk of “runs” on stablecoins. Its solution is to put stablecoin reserves in insured depository institutions. However, over the decades, billions of U.S. dollar-denominated payment instruments (such as prepaid cards, money orders and travelers checks) have been issued by nonbanks that hold customer funds as licensed money transmitters, yet there has not been any “run” on those products. Why? Because under state money transmitter licensing laws, issuers of payment products are required to hold “permissible investments” on a dollar-for-dollar basis to cover 100% of the funds held on behalf of their customers.
It is worth noting that this 100% reserve requirement is far more restrictive than the reserve historically required of insured depository institutions with respect to their customers’ demand deposits, such as checking accounts. But even the Federal Reserve decided in March 2020 that this was no longer necessary, and instead relies on a rule under which depository institutions may require seven days’ advance notice of withdrawals.
Part of the original rationale for the reserve requirement is related to the fact that banks could, and should, use the deposited funds to make loans. But licensed money transmitters can’t do that. And one would be hard pressed to come up with an example of a run on a licensed money transmitter. State-licensed money transmitters are not only highly regulated, but they are also subject to extensive background checks, net worth and capitalization requirements, and regular audits and examinations
So, one has to ask: Did anyone on the President’s Working Group actually look at how stablecoin issuers (and payments generally) are currently regulated? Didn’t they notice that perhaps the largest stablecoin issuer, Circle Financial, lists more than 40 state licenses on its website? Did they not realize that stablecoin and cryptocurrency issuers and sellers, which are licensed as money transmitters under state laws, are required to hold enough reserves to cover not just the funds held for customers in one state, but for all U.S. customer funds?
For example, in Florida the applicable money transmitter licensing law states that a licensee shall “at all times” hold permissible investments with a value of the total face amount of outstanding payment instruments issued or sold in the United States. Similarly, New York law states that licensees must maintain permissible investments in the total amount of all unpaid payment instruments sold “anywhere in the United States.” These are standard requirements typically required under most state money transmitter licensing laws.
In addition to state licensing laws, stablecoin and cryptocurrency issuers and sellers need to adhere to U.S. and global regulatory standards. They are already subject to Fincen’s anti-money-laundering guidance and, of course, they are also expected to comply with the Federal Trade Commission’s Unfair, Deceptive, and Abusive Acts and Practices (UDAAP) requirements.
These are long-standing, well-tested laws and regulations that have been effective to date. It is unfortunate that the working group’s report failed to address the impact of such laws. The report’s recommendation that only bank holding companies’ FDIC-insured banks and depository institutions should be allowed to issue stablecoins not only ignores existing regulatory protections, but puts the U.S. way out of sync with the rest of the world. If such a law were actually enacted, it would damage the United States’ competitiveness and ability to innovate.
Just to be clear, there is no doubt that banks are the backbone of our financial system and are well respected and highly regulated institutions. I am not suggesting that banks should not or could not issue stablecoins if they wished to and their regulators permitted it. However, to prohibit all other state-regulated and state-licensed nonbanks from issuing stablecoins is unfair, anticompetitive and entirely unnecessary.
Before Congress takes any further steps, I would urge members of the working group to talk to the
