Federal Regulators' Report Recommends Urgent Legislation to Regulate Stablecoins

• Citation: Vol. 5 No. 2
• Publication year: 2022

Jessica S. Carey, Michael E. Gertzman, Roberto J. Gonzalez, and Carly Lagrotteria ^*

The authors of this article discuss the President's Working Group on Financial Markets "Report on Stablecoins," which recommends that Congress pass "urgent" legislation that would regulate stablecoins pegged to fiat currency through a federal prudential framework, which would include limiting stablecoin issuance, redemption and maintenance to insured depository institutions.

The President's Working Group on Financial Markets (comprised of the Department of the Treasury, Federal Reserve, the Securities and Exchange Commission ("SEC"), the Commodity Futures Trading Commission ("CFTC"), the Federal Deposit Insurance Corporation ("FDIC"), and the Office of the Comptroller of the Currency ("OCC") (collectively, the "Agencies") has issued a "Report on Stablecoins" (the "Report"). ¹ The Report recommends that Congress pass "urgent" legislation that would regulate stablecoins pegged to fiat currency ² through a federal prudential framework, which would include limiting stablecoin issuance, redemption, and maintenance to insured depository institutions. ³ As such, all entities involved in the issuance, redemption, and maintenance of stablecoins pegged to fiat currency—including any holding companies and custodial wallet providers—could be required to obtain banking charters and, therefore, to meet risk-management standards, liquidity, and capital requirements and to generally be separated from commercial enterprises. ⁴ Absent Congressional action, the Report recommends that the interagency Financial Stability Oversight Council ("FSOC") consider "steps available to it to address the risks" identified in the Report, including designating certain stablecoin-related activities as "systemically important payment, clearing, and settlement activities" and thus requiring entities involved in those activities to be subject to increased oversight. ⁵

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The Report comes as the use of stablecoins continues to grow. According to the Report, the market capitalization of stablecoins issued by the largest issuers exceeded $127 billion as of October 2021, which reflects a 500 percent increase since last year. ⁶

The key takeaways of the Report are as follows:

• The Report highlights three primary alleged risks associated with stablecoin and stablecoin-related activities: (1) risks to stablecoin users, including from stablecoin runs, ⁷ inconsistent redemption rights, issues with preservation of reserve assets and risks related to the collection, storing and safeguarding of user data; ⁸ (2) concerns about payment system risks, including risks related to credit, liquidity, operation, and settlement, which can "create financial shock or operate as a channel through which financial shock can spread"; ⁹ and (3) concerns about systematic risks and concentration of economic power, including risks associated with the rapidly increasing use of stablecoins, the potential for "an excessive concentration of economic power" if a stablecoin issuer or wallet provider links with a commercial enterprise or bank, and concerns that any such concentration would result in practices associated with the "mixing of banking and commerce" such as the use of transaction data for marketing. ¹⁰ Further, the Report expresses concern about the heightened challenge of supervisory oversight of stablecoins due to the number of different parties who can be involved in the various functions of a single "stablecoin arrangement" ¹¹ —which the Report identifies as the creation and redemption of the stablecoin, the transfer of the stablecoin between parties, and the storage of the stablecoin. ¹²
• The Report recommends "urgent" Congressional action, which would align the regulation of entities involved in stablecoin arrangements to banking regulations. After outlining the various alleged risks associated with stablecoin and stablecoin-related activities, the Report calls for Congressional action that could address these risks on a comprehensive and consistent basis and then provides a proposed structure for any potential

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