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President's Working Group on Financial Markets Issues Report Supporting Federal Regulation of Stablecoins and Urging Congressional Action
Practical Law Legal Update w-033-2216 (Approx. 6 pages)
President's Working Group on Financial Markets Issues Report Supporting Federal Regulation of Stablecoins and Urging Congressional Action
by Practical Law Finance
| Published on 02 Nov 2021 • USA (National/Federal) |
The President’s Working Group on Financial Markets (PWG), joined by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), released a report supporting regulation of stablecoin arrangements by US federal regulators such as the SEC, the CFTC, and the CFPB, while also urging congressional action on stablecoins.
On November 1, 2021, the President’s Working Group on Financial Markets (PWG), joined by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), released a report on stablecoins, recommending that:
- Regulatory agencies, such as Securities and Exchange Commission (SEC), Consumer Financial Protection Bureau (CFPB), and the Commodity Futures Trading Commission (CFTC), should exercise authority over stablecoin arrangements to the extent that stablecoin trading, lending, and borrowing activities implicate investor protection and market integrity concerns.
- Congress should act to bring stablecoin arrangement under federal oversight on a comprehensive basis. Chief among the report's recommendations is for Congress to "urgently" pass a law that would regulate stablecoin issuers in the same way as insured depository institutions are regulated, subjecting them to strict supervision by banking regulators while also providing some form of government backstop in the event of crises.
- The Financial Stability Oversight Council (FSOC) could act to designate certain activities of these stablecoin arrangements as important payment, clearing, and settlement (PCS) activities, which would permit appropriate agencies to establish standards for financial institutions that engage in activities related to stablecoin arrangements.
The instruments that back stablecoins vary, and may include fiat currency, US treasuries, gold or other similar assets, and in certain cases other cryptocurrencies or digital assets. This has created varied levels of risk, with some stablecoin arrangements tied to insured depository accounts or US Treasury bills, and some to commercial paper and other digital assets.
According to the report, the significance of stablecoins is demonstrated by their growth over the past year. The report notes that the market capitalization of stablecoins issued by the largest stablecoin issuers exceeded $127 billion as of October 2021. This is a 550 percent increase over a 12-month period. Currently, much of this wealth is held in a few stablecoins that are backed by the US dollar, including Tether and USD Coin. Stablecoins are used to facilitate trading of other digital assets and are instrumental in crypto finance (see Practice Point, Crypto Finance), including decentralized finance (DeFi) (see Practice Note, Decentralized Finance (DeFi) Overview).
The report indicated that there will likely be continued and increased use of stablecoins as a payment device for households and businesses. This use could lead to destabilizing runs, disruptions in payment systems, and concentration of economic power. The report notes the following issues associated with stablecoins:
- Confidence in underlying asset. Confidence in a stablecoin is tied to the assets that underpin it. However, as noted, there is no common backing instrument for stablecoin, which could leave them susceptible to runs if users lose confidence in the underlying asset.
- Payment system risks. Like risks associated with traditional financial instruments, stablecoins also have risks associated with their issuance. The report notes that different parties may be involved in the key functions of a stablecoin arrangement, so a framework focused solely on the stablecoin issuer may leave certain payment system risks inadequately or inconsistently addressed. Key functions may be performed by one of more parties and may be "highly distributed and complex." The key functions are:
- Creation and redemption of the stablecoin;
- Transfer of the stablecoin between parties; and
- Storage of the stablecoin by users.
- Systemic risk. The past growth of stablecoin and its anticipated continued rapid growth raises risks associated with scale, such as:
- the risk of a stablecoin failure creating instability for the US or global financial system;
- concentration of wealth in stablecoins leading to a concentration of economic power; and
- wide adoption of stablecoin creating an anticompetitive effect. An example provided in the report is of "undue frictions or costs" that may impact stablecoin holders if they choose to switch to other payment products or services. The report notes this anti-competitive effect would be greatest in the absence of interoperability standards for stablecoins and stablecoin arrangements.
- Regulatory gaps. There are currently no fixed set of regulatory standards that apply to stablecoin arrangements. The involvement of a specific regulator depends on the nature of the entities involved in each stablecoin arrangement.
For more information on cryptocurrency and VC regulation, see Cryptocurrency and Virtual Currency Regulatory Tracker.
On November 1, 2021, in response to the report, CFPB Director Rohit Chopra issued a statement setting out the steps the CFPB plans to take to regulate the stablecoin market. In addition to actively monitoring and preparing for broader consumer adoption of cryptocurrencies, the CFPB plans to work with FSOC to determine whether certain nonbank stablecoin-related activities or entities are systemically important.