President’s Working Group Urges Congress to Enact Urgent Legislation for Stablecoin Regulation
The President’s Working Group on Financial Markets (PWG), along with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), has released its much-anticipated
Report on Stablecoins
. In 2021, stablecoins experienced staggering growth of over 500%, reaching a market cap of $127 billion, up from just $3.7 billion at the end of 2020.
The Report advises that Congress should swiftly pass legislation related to stablecoins to effectively regulate them and address potential risks. The Agencies recognize that stablecoins could enable quicker, more efficient, and inclusive payment methods. However, the report highlights the prudential risks associated with the use of stablecoins as payment methods, which could harm both users and the overall financial system.
Key highlights from the Report include;
(1) An overview of stablecoins
(2) A detailed assessment of the potential risks related to stablecoins (such as possible ‘runs’, payment chain disruptions, and rapid adoption)
(3) Recommendations for Congress regarding legislative measures, or, if absent, potential regulatory initiatives
Notably, the Report urges Congress to pass “urgent” legislation limiting “stablecoin issuance.” Should Congress enact the proposed legislation, stablecoin issuers and participants may need to secure banking licenses or charters and comply with relevant banking regulatory standards.
The Agencies express that there are significant regulatory gaps concerning stablecoins, primarily questioning whether stablecoins qualify as securities. The report observes that the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) may have regulatory authority over stablecoins if deemed securities, commodities, or derivatives, yet it offers no definitive guidance on when that status would apply.
Nonetheless, they advocate for Congress to implement the following legislative measures to mitigate prudential risks:
- Mandate that stablecoin issuers be insured depository institutions; FDIC-insured companies have access to Federal Reserve services, including emergency liquidity.
- Require custodial wallet providers to operate under appropriate federal supervision, ensuring that they adhere to risk management standards.
- Impose restrictions on activities for stablecoin issuers to limit affiliations with commercial entities and promote stablecoin interoperability.
In the European Union (EU), regulators have also turned their attention to this category of crypto assets, as evidenced by their extensive coverage in the soon-to-be-adopted Markets in Crypto-Assets (MiCA) framework, indicating the EU’s intention to play a significant role in addressing potential risks linked to stablecoin issuance.
While stablecoins pose minimal financial stability risks currently in the euro area, their increasing size, usage, and interconnectedness necessitate the prompt implementation of regulations and a potentially expanded role for banks.
One of the fundamental requirements outlined in MiCA for all stablecoin issuers is to maintain “at all times” capital reserves of either €350,000 (around $400,000) or 2% of their total reserve assets, depending on which amount is greater.
Currently, there is a scarcity of transparency regarding the reserve assets of stablecoins. Nevertheless, issuers like Denmark’s eMoney.com, which supports the Euro, Swiss Franc, Swedish Krona, Norwegian Krone, and Danish Krone, prioritize transparency with quarterly reserve audits conducted by Ernst & Young.
Stablecoin Issuers aiming for bank-like regulations, such as Circle’s USDC, have expressed support for the regulatory recommendations, viewing them as significant advancements for the industry’s development.
The Joint Economic Committee of the United States Congress convenes Wednesday afternoon to deliberate on the regulation of Global Stablecoins and other cryptocurrencies, a move urged by various sectors within the country and the crypto industry.
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