The Washington PostDemocracy Dies in Darkness

Biden administration calls on Congress to take the lead regulating stablecoins

The Treasury-led effort to oversee the booming crypto industry asks lawmakers to forge bank-like rules for cryptocurrency linked to real-world assets

The U.S. Treasury building. (Samuel Corum/Bloomberg News)
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A high-level task force of financial regulators recommended Monday that firms that issue stablecoins — a type of cryptocurrency linked to real-world assets — be more tightly regulated but called on Congress to write the necessary laws, suggesting they lacked the power themselves.

The report — written by a Treasury-led group that includes Secretary Janet L. Yellen, Federal Reserve Chair Jerome H. Powell and Securities and Exchange Commission Chair Gary Gensler — was widely anticipated as the administration’s first attempt at establishing a framework for the $2 trillion cryptocurrency industry.

The report advocates requiring each firm that issues stablecoins to register with a federal or state banking regulator — which it did not specify — and maintain an adequate cushion of capital and enough liquidity to meet any short-term obligations. It also suggests investors in stablecoins should get at least some of their holdings covered by deposit insurance.

At the same time, the report suggested that existing regulators don’t have the authority to impose such requirements on the industry under current laws.

“If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options,” the report says. But it notes that stablecoins also present “a variety of risks” and that there are “key gaps” in regulators’ ability to address them. “The rapid growth of stablecoins increases the urgency of this work. Failure to act risks growth of payment stablecoins without adequate protection for users, the financial system, and the broader economy.”

Stablecoins are a subset of the cryptocurrency industry. Unlike bitcoin and other popular digital currencies, which are purely speculative assets, stablecoins’ value is pegged to that of hard currencies like the dollar or metals like gold.

Currently, stablecoins mainly serve to make it easier for crypto investors to conduct trades. In the future, boosters of stablecoins say, a much broader swath of consumers could use them for everyday retail purposes.

Critics argue firms issuing stablecoins — whose circulation has skyrocketed from $29 billion at the start of the year to more than $133 billion today — too often make it impossible for regulators and consumers alike to see what assets are backing up the tokens and how easily those who buy them could trade the tokens back in for their face value.

These critics worry that without stronger oversight, a misstep could prompt a sort of bank run that poses a risk to the broader financial system. They slammed the report for punting the matter to Congress, where they said crypto lobbyists will overrun the process.

“I have deep concerns about this report,” said Todd Phillips, who focuses on financial regulation at the left-leaning Center for American Progress. “I don’t think this Congress is interested in addressing stablecoins alone. So if Congress were to intervene, I expect they’d work to weaken the regulatory apparatus for all cryptocurrencies currently in existence.”

The SEC and the Commodity Futures Trading Commission already are flexing some regulatory power over stablecoins. Gensler, who has described the tokens as “poker chips at the casino” of the crypto-trading frenzy, argues stablecoins display properties of securities and should be overseen by his agency. The SEC recently threatened to sue Coinbase if it launched a program that allowed stablecoin investors to earn interest on their holdings by lending them out; the company shelved the plan.

And the CFTC last month announced a $41 million settlement with Tether, the largest stablecoin issuer in the world, over charges it lied for years about holding a dollar in reserve for each of its tokens.

Rostin Behnam, nominated to chair the CFTC, said at a confirmation hearing last week that almost 60 percent of the crypto market consists of commodities, meaning the CFTC should work with the SEC to regulate it.

The Treasury-led group in its report acknowledged a role for those agencies, specifically focused on the use of stablecoins for trading and lending. In the absence of congressional action, regulators “are committed to taking action to address risks falling within each agency’s jurisdiction, including efforts to ensure that stablecoins and related activity comply with existing legal obligations, as well as continued coordination and collaboration on issues of common interest,” the report says.

And the group recommends that the Financial Stability Oversight Council, a committee of regulators formed after the 2008 financial crisis, examine any risks stablecoins could pose to the stability of the broader financial system. If any activities associated with stablecoins are even on the way toward becoming such a threat, the council could move to impose new restrictions.

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