Congress Should Act “Promptly” to Regulate Stablecoins, Presidential Working Group Urges
A key US presidential working group has recommended legislation that would restrict the issuance of stablecoins in the US to insured banks. Stablecoins, which are virtual assets that are intended to reflect a value relative to a national currency or other assets, have seen rapid adoption in recent years and are used as the basis for trading in decentralized finance, or DeFi, and cryptocurrency trading.
A report released by the President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), draws particular attention to the risk that stablecoin regimes can be subjected to a sudden loss of confidence and hence dramatic drops in value, be vulnerable to payment system outages and disruptions, and can concentrate the economic power of one or more stablecoin players.
The Report on Stablecoins, released on 1 November, recommends that Congress “promptly” extends prudential regulatory authority over stablecoins used for payments purposes by enacting legislation that would bring stablecoins under the scope of the Bank Holding Company Act of 1956 (BHC Act).
It recommends specifically that:
* stablecoin issuers should be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level;
* custodial wallet providers should be subject to appropriate federal oversight and that the federal supervisor of a stablecoin issuer should have the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards;
* and legislation should require stablecoin issuers to comply with restrictions that limit affiliation with commercial entities and that supervisors should have authority to implement standards to promote interoperability among stablecoins.
The concerns mainly relate to the “potential for stablecoin runs, payment system risks, and the possibility that some stablecoins may rapidly scale”. The risk is exaggerated by the fact that regulatory responsibilities are widely distributed and currently fall within the jurisdiction of different regulatory agencies, or outside of the regulatory perimeter altogether, the report says.
In the absence of Congressional action, the report recommends that the Financial Stability Oversight Council, which was established in 2010 to identify risks and threats to US financial stability, to designate certain activities conducted within a stablecoin arrangement as, or as likely to become, systemically important payment, clearing, and settlement activities. It is currently able to do this under s 5463 of the Dodd–Frank Wall Street Reform and Consumer Protection Act.