On November 1, the President’s Working Group on Financial Markets, or PWG, released its much-anticipated report on the risks that stablecoins pose to the financial system.
“Stablecoins and stablecoin arrangements raise significant concerns from an investor protection and market integrity perspective,” the report reads.
Specifically, those concerns involve threats of runs on stablecoin reserves and the opacity surrounding reserve holdings. It’s become a critical discussion within crypto circles, especially as the stablecoin supply has increased by 500% in the past year, with Tether (USDT) in particular seeing the highest trading volumes of any token.
The PWG’s guidance clearly calls for Congress to put out new laws that would limit who can issue stablecoins.
“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,” the PWG wrote. “The legislation would prohibit other entities from issuing payment stablecoins.”
In a press briefing on the report, Treasury officials commented that the central issue was identifying a gap in prudential authority, describing stablecoins as “a complex multifaceted product with a complex multifaceted set of risks” in a comment to The Block.
Those new risks require legislation, officials say. But legislation on crypto has historically been slow to make it to actual law.
In the meantime, the PWG advises regulators to use existing authority to cover any perceived gaps. The PWG formally includes a number of those regulators: the Treasury, the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. Monday's report also involved input from banking regulators the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
The report clearly emphasized that the SEC and CFTC should participate in regulating the markets for at least some stablecoins. The guidance provided also suggested that the Financial Stability Oversight Council — a Dodd-Frank-created market risk watchdog — should also get involved.
This summer, Treasury Secretary Janet Yellen began sounding the alarm on stablecoins, noting “the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place.”
The past year has seen multiple pieces of legislation emerge looking to restrict which players can get involved in stablecoin issuance. These have involved some variation of FDIC or Treasury registration.
Despite earlier criticism of the report’s backroom development, the PWG also advertised the involvement of a range of market participants in the discussions that led to today’s report. Included in the roster were a number of stablecoin issuers, namely Tether, Circle, Paxos and Gemini, as well as the Diem Association, which has yet to launch its namesake token.
Regarding response from these industry players, Treasury officials told The Block that “in general, among stablecoin issuers, there’s a recognition that as stablecoins are widely adopted they are going to be widely regulated.”
They continued: “There’s also a desire for regulatory clarity.”
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