Stablecoins Enter the Mainstream

Eakinomics: Stablecoins Enter the Mainstream Stablecoins are cryptocurrencies where the price is pegged to a fiat money (e.g., the dollar), a traded asset, or perhaps to another cryptocurrency. On Monday, the President’s Working Group on Financial Markets (PWG) – a group of regulators and agency heads led by the Treasury – released a report on stablecoin regulation. AAF’s Thomas Wade has a full description, but my main takeaway is that the mainstream banking community has decided that it wants to participate in digital assets, and this report is the leading edge of doing so in familiar regulatory terms. Wade points out that “The report calls on Congress to require that stablecoin issuers be regulated as banks, including the requirement for federally backed insurance and a full suite of prudential capital requirements; to this, the federal financial regulatory agencies couple a request that their existing powers and authorities be expanded to allow for the better oversight of all actors in the stablecoin sector.” In particular, the report makes three recommendations: Legislation should require stablecoin issuers to be insured depository institutions; Legislation should require custodial wallet holders be subject to federal oversight; and Legislation should address systemic risk and economic concentration concerns by restricting the ability of stablecoin issuers to affiliate with commercial entities. It did not have to be this way. An alternative would have been to set up strong criteria for stablecoins (e.g.,100 percent reserves in safe assets) for any entity – traditional bank or otherwise – housing cryptocurrencies. It seems unlikely that legislation will pass in the near future. The report suggests an alternative route, noting: “In the absence of congressional action, the agencies recommend that the Council consider steps available to it to address the risks outlined in this report. Such steps may include the designation of certain activities conducted within stablecoin arrangements as, or as likely to become, systemically important payment, clearing, and settlement (PCS) activities. Designation would permit the appropriate agency to establish risk-management standards for financial institutions that engage in designated PCS activities, including requirements in relation to the assets backing the stablecoin, requirements related to the operation of the stablecoin arrangement, and other prudential standards. Financial institutions that engage in designated PCS activities also would be subject to an examination and enforcement framework. Any designation would follow a transparent process.” In other words, if the Financial Stability Oversight Council (FSOC) deems stablecoins to be systemically important, the regulators can go right ahead with this plan without waiting for legislation. Not so fast, however. An FSOC designation allows it to recommend stronger standards, but only Congress can give those regulators the authority to set cryptocurrency standards to begin with. Cryptocurrencies are clearly in the future of financial services. But before regulators reflexively subject them to policies from the past, Congress needs to design a modern regulatory framework for the future.