Federal financial risk mitigators yesterday released their first comprehensive report on stablecoins. The punch line is that the President’s Working Group on Financial Markets recommends congressional action to fill “key gaps in prudential authority over stablecoins used for payment purposes.” The Group, created in 1987, includes the Treasury secretary, and the chairs of the Federal Reserve, Securities and Exchange Commission, and the Commodities Futures Trading Commission (CFTC). They recommend the Financial Stability Oversight Council (FSOC) consider whether “activities conducted within a stablecoin arrangement” are or could become systemically significant.
Given the industry’s dramatic growth, which relates to an increase of paid advocates, we doubt such legislation can be enacted during an election year. The question then becomes about the extent to which regulators’ might exercise patience before they turn to the FSOC to use its authorities to engage a financial stability rulemaking. The report likely initiates an anticipated policymaker tussle. The report identifies four key functions of stablecoin arrangements: (A) creation, (B) redemption, (C) transfers between parties, and (D) storage to support five activities that include governance, management of reserve assets, custodial services, settlement, and distribution. It is a complete payments system and one that operates with little regulation.
As we have previously written, regulators contend their primary focus is to prevent bank-like runs that expose taxpayers to liquidity backstop risks. To further reiterate, financial regulators’ are bound by statutes to regulate all “stores of value.” In the 21st century this likely will include stablecoin and other forms of digital money. We see this like a 20th century wild west battle over rules, wealth, innovation, and market share. It will be a multi-year epic, in our opinion.
Tim Massad last month penned a thoughtful essay contrasting the systemic risk responsibilities and payment system enhancement possibilities facing regulators. His headline message is that stablecoin could meaningfully improve financial inclusion opportunities for banked and unbanked Americans. Massad is one of many attempting to inform the rulemaking process based on his experience at Treasury during the Great Financial Crisis and later as chairman of the CFTC.
Stablecoin market cap has grown from less than $10 billion three years ago to about $125 billion three weeks ago, most of which came in the past year. A retiring senator, likely to be considered to lead a digital money association, last month warned Secretary Janet Yellen that the FSOC’s Dodd-Frank authorities could not be extended to this space. We do not think that is correct, but it’s likely that issue will be presented to the courts a few times before a guiding opinion comes.
