President’s Working Group recommends Congress quickly enact legislation regulating stablecoins - 04 November 2021

In the absence of such action, the group recommends that the FSOC consider steps it could take to address the risks of stablecoins.

Congress should quickly enact legislation to ensure that payment stablecoins are subject to a prudential federal framework on a consistent and comprehensive basis, according to a report from the President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Stablecoins are a type of digital asset generally designed to maintain a stable value relative to the U.S. dollar. While stablecoins are currently used to facilitate trading of other digital assets, a fact sheet released in conjunction with the report noted that stablecoins could be more widely used in the future as a means of payment by households and businesses. However, the potential increase in the use of stablecoins also raises a “range of concerns, related to the potential for destabilizing runs, disruptions in the payment system, and concentration of economic power.”

“Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options. But the absence of appropriate oversight presents risks to users and the broader system,” said Treasury Secretary Janet L. Yellen. “Current oversight is inconsistent and fragmented, with some stablecoins effectively falling outside the regulatory perimeter.”

The PWG believes that legislation should complement existing authorities with respect to market integrity, investor protection, and illicit finance. Specifically, the report recommends:

• To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.
• To address concerns about payment system risk, in addition to the requirements for stablecoin issuers, legislation should require custodial wallet providers to be subject to appropriate federal oversight and should provide the federal supervisor of a stable coin issuer with 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.
• To address additional concerns about systemic risk and economic concentration of power, legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Supervisors should have authority to implement standards to promote interoperability among stablecoins. In addition, Congress should consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on the use of users’ transaction data.

Agency oversight. “While Congressional action is urgently needed to address the risks inherent in payment stablecoins, in the absence of such action,” the report recommends that the Financial Stability Oversight Council consider steps available to it to address the outlined risks. Such actions could include the designation of certain activities conducted within a stablecoin arrangement as, or is likely to become, systemically important payment, clearing, or settlement activities. In addition, the report notes that other federal agencies, such as the Securities and Exchange Commission or the Commodity Futures Trading Commission, may be able to implement rules to address some of the risks associated with stablecoins.

“The United States must do more to nurture a fast, safe, and competitive payments system,” said Rohit Chopra, director of the Consumer Financial Protection Bureau. “New technologies can help advance this goal, which would yield enormous benefits for consumers, workers, and small businesses.” He also indicated that while the CFPB was not included in preparing this report, the agency will “be taking several steps related to this market.”

According to Nellie Liang, Under Secretary for Domestic Finance, while the scope of the report is limited to stablecoins, “additional work on digital assets and other innovations related to cryptographic and distributed ledger technology is ongoing throughout the administration.” She noted that the administration and the regulatory agencies “will continue to collaborate closely on ways to foster responsible financial innovation, promote consistent regulatory approaches, and identify and address potential risks that arise from such innovation.”

Reaction. Lawmakers and industry groups were quick to release statements regarding the PWG report. Senate Banking Committee Chairman Sherrod Brown (D-Ohio) said that Congress “must work to ensure that any new financial technologies are subject to all the laws and regulations that protect investors, consumers, and markets.” Ranking Member of the House Financial Services Committee Patrick McHenry (R-NC) had the opposite take, stating “the Biden administration seems determined to stop innovation in its tracks—harming American consumers and our international competitiveness.”

Both Pat Toomey (R-Pa) and Cynthia Lummis (R-Wyo) noted that Congress should clarify which agencies have jurisdiction over stablecoins. “While Congress works on thoughtful legislation, I hope the administration will resist the urge to stretch existing laws in an effort to expand its regulatory authority,” said Toomey. Lummis agreed, stating, “As the report clearly states, though, Congress will, and should, have the final say.”

SEC Chair Gary Gensler called the report "thoughtful" and noted that stablecoins present a number of public policy challenges with respect to protecting investors because they can be securities, commodities, or derivatives. He observed further that stablecoins may be used for payments in the future, which will raise financial stability concerns. While Congress is evaluating the report, the SEC and CFTC "will deploy the full protections of the federal securities laws and the Commodity Exchange Act to these products and arrangements, where applicable," Gensler said.

Several industry groups, including the American Bankers Association, the Bank Policy Institute, and Public Citizen, released statements applauding the PWG report. According to Rob Nichols, president and CEO of the American Bankers Association, “Stablecoins have implications for consumers, the financial system and the broader economy, and careful consideration is required to determine how best to regulate this market. We look forward to continuing to engage with policymakers to ensure a robust discussion on this important issue.”

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