The Presidents Working Group on Financial Markets, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) have released their joint Report on Stablecoins (report). Per the press release, the reports purpose was to:
identify regulatory gaps related to stablecoins with the potential to be used as a means of payment, and to present recommendations for addressing those gaps.
The report notes the rapid expansion of stablecoins in the past year, with the largest stablecoin issuers having a market capitalisation exceeding USD $127 billion, up 500 per cent from last year.
The report emphasised broad strategic risks which stablecoins and stablecoin arrangements could present, which read in the nature of a banking or payment systems, which may indicate how seriously the US government is treating the growth of stablecoins. The shopping list of risk included:
Run risk;
Payment risk;
Systemic risk;
Fraud and misappropriation;
Concentrated market power; and
Risks to bank-based credit.
The report discusses novel operational risks which could arise in relation to decentralised stablecoins such as network congestion, liquidity risks and the challenge of coordinating decentralised networks. In particular, the working group raised concerns about the risk of a 'run' on stablecoins reserve assets, which could result in volatility and disruptions to other stablecoins and funding markets.
Importantly, however, the report suggests that these risks, and others, arise from gaps in the current US regulatory framework, and not some from an inherent problem in stablecoins, a position at odds with the SEC Chairman's views. As such, the report makes several recommendations to remedy what are considered 'critical gaps' in regulation, which effectively suggest bank-like regulatory frameworks:
Limiting stablecoin issuance and related redemption and maintenance of reserve assets to 'insured depository institutions' which are subject to supervision and regulation, namely banks and bank holding companies;
Requiring custodial digital wallet providers in stablecoin arrangements to be regulated by an appropriate federal bank regulator based on the stablecoin issuer;
Prohibiting custodial wallet providers from lending stablecoins while enforcing liquidity, capital and risk management requirements; and
Prohibiting custodial digital wallet providers from affiliating with commercial entities or to restrict the use of consumers' transaction data.
This report, and the recently announced US crypto Executive Order, shows an intention by the Biden Administration to consider regulation of stablecoins and digital assets in general.
Should the proposed recommendations be implemented by Congress, stablecoins could either become one of the most popular traded assets in the US, or may be pushed offshore if the regulation deployed is not tailored to harness the benefits of stablecoins.