President’s Working Group: Stablecoin Risks Warrant Legislation

For stablecoins, per analysis by the President’s Working Group on Financial Markets in its long-awaited report: Promise, yes. A bit of risk, too … so legislation is needed to ensure that only banks are in the mix to issue the coins, which, as widely noted and reported, are backed by dollars or other liquid, stable assets held in reserve, such as dollars.

In the report, released Monday, (Nov. 1), titled simply, “Report on Stablecoins,” the working group, in tandem with the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency, said, “If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options. Moreover, the transition to broader use of stablecoins as a means of payment could occur rapidly due to network effects or relationships between stablecoins and existing user bases or platforms.”

Indeed, the rise of stablecoins has been swift. As noted in the paper, the market capitalization of stablecoins issued by the largest stablecoin issuers exceeded $127 billion as of last month, a 500 percent increase measured through the previous 12 months.

In a recent panel discussion on cryptocurrencies and comments on stablecoins in particular, Circle CEO Jeremy Allaire said scale can come quickly amid the innovation. Allaire said that with the blockchain networks in place, USDC stablecoins can transact at roughly 50,000 transactions per second, with 400-millisecond finality, and transactions cost a fraction of a cent.

“It’s on a linear growth path,” said Allaire. “Storing value, moving value and integrating that into different forms of financial contracts can become a commodity, a free service on the internet, like data and content.”

Read also: The Great Crypto Debate: It’s Different This Time, Or Maybe Not

But, as the paper Monday posited, risks abound.

“Speculative digital asset trading,” said the report, “which may involve the use of stablecoins to move easily between digital asset platforms or in decentralized finance (DeFi) arrangements, presents risks related to market integrity and investor protection.” There remains the specter of fraud and misconduct in digital asset trading — including a lack of trading or price transparency. Stablecoins also pose “illicit finance concerns and risks to financial integrity,” according to the report.

And in a nod to oversight as stablecoins are monitored and developed, the report stated in no uncertain terms that Treasury will continue leading efforts at the Financial Action Task Force (FATF) to encourage countries to implement international AML/CFT standards and pursue additional resources “to support supervision of domestic AML/CFT regulations.”

There is an apparent lack of uniformity in this nascent industry, we note, and stablecoin “redemption rights can also vary considerably, in terms of both who may present a stablecoin to an issuer for redemption and whether there are any limits on the quantity of coins that may be redeemed.” In some cases, redemptions can be postponed, for days at a time, or even indefinitely.

According to the report, failure of a stablecoin to perform according to expectations would harm users of that stablecoin and “could pose systemic risk. The mere prospect of a stablecoin not performing as expected could result in a ‘run’ on that stablecoin.”

Looking Toward Legislation   

The agencies recommended in the report that “Congress act promptly to ensure that payment stablecoins are subject to appropriate federal prudential oversight on a consistent and comprehensive basis.”

The paper also noted that “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.” Legislation should also require custodial wallet providers be subject to appropriate federal oversight, too, the paper found.