As with any set of policy recommendations or any white paper – there are the findings, and then there are the ripple effects and the implications.
The recently debuted report by the President’s Working Group on Financial Markets signals that stricter federal oversight, and guardrails, are needed to address this burgeoning sector of the crypto market.
That could possibly be to the detriment of private firms seeking to issue the digital assets – unless they are willing to embrace traditional banking rules, or (possibly) become banks themselves.
As to the policies outlined in the report, the Working Group is not shy in stating that Congress needs to act – or regulators should, with haste.
“In the absence of Congressional action, which is urgently needed to address the prudential risks inherent in payment stablecoins, the agencies recommend that the Financial Stability Oversight Council (Council) consider steps available to it to address the risks outlined in this report. Such steps may include designation of certain activities conducted within a stablecoin arrangement as, or as likely to become, systemically important payment, clearing and settlement activities.”
As to what’s new, in terms of broad policy strokes: The report recommends “ a regulatory framework” that will bolster support and use of stablecoins in transactions, both “in normal times and in periods of stress.”
Any new legislation, as recommended in the report, and the new framework would take some pages from banking regulation, including “access to appropriate components of the federal safety net.” Only entities that are insured depository institutions would be able to issue payment-related stablecoins.
“Insured depository institutions include both state and federally chartered banks and savings associations,” the report said.
Smoother Road for Traditional Financial Services Players
The implication seems to be that traditional financial services players should be the stablecoin issuers, already armed with the “backstop” of deposit insurance and the traditional levers of the banking system (the Fed, of course, is the proverbial lender of last resort, and strives to meet liquidity challenges when they arise during times of economic stress).
This does not seem to preclude players like Circle, which have openly stated that they intend to become full-reserve digital banks.
But by signaling that full faith, credit backing and governance from the traditional banking system needs to be in place, the working group is firing a shot across the bow at companies like Facebook and Diem. Key language in the report states that legislation should “require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities … in addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities.” The language signals limits on interactions with commercial entities, which in essence would limit partnerships between wallets, exchanges, issuers and so on.
By requiring that issuers become insured depository institutions, and by limiting the commercial interplay, the working group is essentially pointing toward a path that would give the nod to firms that have the capital “critical mass” and patience to go through the regulatory hoops of starting a bank, which can take several months. This might slow down stablecoin issuance and perhaps result in fewer issuers … but perhaps with greater uniformity and transparency.