On November 1, 2021, President Biden’s Working Group on Financial Markets (“PWG”) issued a report on “stablecoins” (the “SC Report”). The PWG is composed of the Secretary of the Treasury, the Chair of the Federal Reserve, the Chair of the Securities and Exchange Commission, and the Chair of the Commodity Futures Trading Commission. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Commission also participated and joined in the SC Report.
Stablecoins are digital assets, such as cryptocurrency tokens, that are pegged to the value of other assets. For example, U.S. Dollar Coin is a cryptocurrency that is redeemable on a 1-for-1 basis with the U.S. dollar. Although there are few practical limits to the types of assets that can be used to back a stablecoin, the SC Report focuses on the most common type, those backed by government-issued currency. The SC Report notes that “Stablecoins are generally created, or ‘minted,’ in exchange for fiat currency that an issuer receives from a user or third-party.”
The SC Report states that interest in stablecoins is growing rapidly: “(t)he market capitalization of stablecoins issued by the largest stablecoin issuers exceeded $127 billion as of October 2021. This amount reflects a nearly 500 percent increase over the preceding twelve months.” Regulators have expressed concern that this growth has occurred outside the purview of financial regulators with authority over more traditional financial instruments like securities or bank deposits. The SC Report also notes that stablecoins may evolve to become used “by retail users to pay for goods and services, by corporations in the context of supply chain payments, and in the context of international remittances.” This has generated suspicions in some quarters that national governments may be concerned that stablecoins will become a competitor to, and potential substitute for, government-issued currencies.
The SC Report identifies three main risks that financial regulators believe could be posed by stablecoins:
- Systemic Risk: the failure or distress of a stablecoin issuer or a related service (such as a wallet provider) that could adversely affect financial stability and the real economy.
- Excessive Concentration of Power: combinations of coin issuers or related services and commercial firms that could impair competition and lead to market concentration.
- Anti-competitive Effects: the widespread use of a stablecoin could make it difficult to switch to other types of payment products or services.
To address these perceived risks, financial regulators suggest that the U.S. Congress enact new laws to forbid any but insured depository institutions to issue stablecoins. Until Congress acts on these recommendations, the SC Report encourages financial regulators to increase efforts to use existing powers to regulate this market and, if Congress does not take the recommended actions, the report suggests the Financial Stability Oversight Council examine other ways to impose restrictions. Additionally, the SC Report notes that these proposals are exclusive of any other laws or regulations that financial regulators (such as the Securities and Exchange Commission or the Commodity Futures Trading Commission) believe are necessary.
The SC Report represents the first active proposal for regulation that would fundamentally change the stablecoin market as it currently exists. For those interested in this topic, the time to communicate their views on such a change to regulators and elected representatives is now. Jordan Ramis attorneys stand ready to help all interested parties navigate the evolving regulatory landscape for stablecoin and cryptocurrency generally.
Gregory Zerzan is an attorney with Jordan Ramis PC. Zerzan has served in a wide range of roles in the U.S. government, including as Acting Assistant Secretary of the U.S. Treasury, Counsel to the House Committees on Agriculture, Financial Services, and Energy and Commerce, and as Principal Deputy Solicitor of the U.S. Department of the Interior.