Client Alert

President’s Working Group Releases Report on Stablecoins

05 Nov 2021

On November 1, 2021, the President’s Working Group on Financial Markets (PWG), along with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) (together, the “Agencies”), released a long-awaited Report on Stablecoins (“Report”).  As discussed further below, the Report recommends comprehensive federal legislation, to include a requirement that stablecoin issuers be insured depository institutions (IDIs), and enforcement based on existing regulatory authority.

As detailed in the Report, stablecoins are a form of virtual asset whose value is pegged to the value of one or more other assets, the so-called “reserve assets.” The reserve assets often take the form of fiat currency, but can also include commodities or even other cryptocurrencies. The Report summarizes risks presented by stablecoins and stablecoin-related activity, including:

  • Loss of confidence in stablecoin value;
  • Payment system risks; and
  • Systemic risk and concentration of economic power.

Although not the focus of the Report, the PWG and the Agencies also pointed out that stablecoins pose illicit finance concerns and risks to financial integrity, including concerns related to compliance with AML, CFT, and proliferation requirements. These risks have been a focus of other parts of the federal government, including FinCEN, OFAC, and the U.S. Department of the Treasury.

The Report highlights significant gaps in the prudential authority oversight of stablecoins used for payment purposes, with enforcement by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) limited to their respective jurisdictions. Within the jurisdictions of the SEC and the CFTC, the Report recommends that stablecoin activity be required to comply with federal securities law and the Commodity Exchange Act and related regulations. The Report makes several additional recommendations for legislation and regulation:

  • Comprehensive Federal Legislation. To limit risk and promote interoperability among different stablecoins, the Report recommends that Congress require stablecoin issuers to be IDIs. This would make stablecoin issuers subject to requirements regarding capital and liquidity standards, and to resolution under the Federal Deposit Insurance Act provisions that cover failed IDIs. In addition, to address the significant role of digital wallets, the Report recommends that Congress require federal oversight of custodial wallet providers and any entity that performs activities critical to the functioning of the stablecoin arrangement. Finally, the Report recommends legislation to require stablecoin issuers to limit affiliation with commercial entities to encourage competition and interoperability among different stablecoins.
  • Interim Regulatory Measures. While waiting for Congress to enact legislation, the PWG and the Agencies recommend collaboration across federal financial agencies to address stablecoin risks within their respective jurisdictions. In addition, the Report noted the existing authority of the Consumer Financial Protection Bureau to take enforcement action under laws including the Electronic Fund Transfer Act, the Gramm-Leach-Bliley Act, and the Consumer Financial Protection Act.
  • Financial Stability Oversight Council Measures. The Report recommends that the Financial Stability Oversight Council consider taking steps within its purview to address stablecoin risks, such as designating certain activities within a stablecoin arrangement as being, or likely to become, systematically important payment, clearing, and settlement activities.

The PWG and the Agencies recommend that Congress act promptly to ensure that stablecoins and stablecoin arrangements are subject to a federal prudential framework. While any significant change in the regulation of the stablecoin industry would require federal legislation, the Agencies emphasize their commitment to working within their respective jurisdictions, along with the SEC and the CFTC, to regulate stablecoins. The Report signals to the cryptocurrency market and industry participants that increasing scrutiny may be on the horizon.

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