The long-awaited report and policy recommendations on stabilitycoins was released by the United States President’s Working Group on Financial Markets on Nov. 1. The main focus of the document is on the prudential risks that payment stablecoins, or those designed to maintain a stable price against a reference fiat money — can pose to financial stability and users.
The PWG’s main message is that although stablecoin is only used to facilitate digital asset transactions, it could be adopted by more retailers if certain conditions are met. Congress should enact a comprehensive federal prudential framework soon.
Here’s a list of all the consequential points the report raises, and some it doesn’t.
All the men and women who are presidents
The PWG is made up of the heads of Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve System. The secretary of Treasury Department leads the group. The interagency report was also prepared by the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency.
Due to the large number of federal financial regulators in the country, it was exciting for the government to finally come together and produce a reliable representation about where they stand on stablecoin regulation.
Anonymous reports, which appeared shortly before the publication of the document, claimed that the group had developed a plan to give the SEC substantial authority over stable tokens. This added to the suspense surrounding the interagency reports, since such a regulatory designation would require an attendant categorization.
Some actors in the crypto industry were uneasy about the possibility of the SEC leading stablecoin regulation. C. Neil Gray, partner in law firm Duane Morris, spoke to Cointelegraph before the publication of the report.
“Industry participants will likely view the SEC’s push in this area as yet another example of SEC excess in the cryptocurrency space. They fear that the SEC may regulate stablecoins through enforcement instead of by rule as some believe it is doing in other areas.”
However, for compliant crypto players, any level of certainty is better that none. Sujit Raman is a partner in Sidley’s privacy and cybersecurity practice and a former associate attorney general at U.S. Department of Justice. He noted that it was still important to know the limits of each regulator’s responsibilities. Raman pointed out:
“In the absence new legislation, stablecoins are still subject to the concurrent and potentially overlapping jurisdiction of several federal and state regulatory regimes. It is therefore important that all federal agencies reach an agreement on who will regulate stablecoins.
There were signs in the lead up to publication that the SEC wasn’t the only U.S. regulator looking to increase its presence on digital asset scene.
Marc Powers, a former SEC attorney, and columnist for Cointelegraph Magazine, believes that the SEC has been more active in enforcing and guiding digital assets over the past four years. However, the CFTC asserts jurisdiction over Bitcoin (BTC), which the CFTC considers a commodity.
Rostin Behnam (acting chairman of the CFTC) claimed last week that up to 60% of digital assets could be classified as commodities. This amounts to suggesting that the agency should become the U.S.’s leading cryptocurrency regulator.
Contrary to expectations, the interagency reports did not give precedence over any of the regulatory agencies. The authors concluded that stablecoins or parts of stablecoin agreements could be securities, commodities and/or derivatives. Accordingly, they invoked the jurisdiction of the SEC/CFTC.
The language used by the PWG in the initial stages of investigating the stablecoin world is very similar. One example is the December 2020 statement by the working group that stated that a stablecoin could be a security, commodity or derivative subject to U.S. federal securities, commodities and/or derivatives laws, depending on its design.
Moreover, the interagency report did not mention the SEC as “taking the lead” in overseeing the stablecoin sector.
Waiting for Congress
The report’s central message is to urge Congress to pass legislation on stablecoin as soon as possible. However, the framers of this document provide additional information about how regulators should address stablecoin-induced risk before Congress takes any action.
The report asks the SEC, CFTC and CFPB to continue to apply their existing authority to protect against the outlined prudential risk. It also calls for other relevant authorities, including the Department of Justice and the Consumer Financial Protection Bureau (CFPB), and the Financial Crimes Enforcement Network(FinCEN), to examine how existing laws could affect stablecoin activity in areas such as consumer protection, money transmission and payments.
The report leaves it up to Financial Stability Oversight Council, a group U.S. regulators, to declare some stablecoin activities, such as settlement, clearing, and payment, as “systemically significant,” which would allow for additional oversight. In a recent letter to Janet Yellen, Senator Pat Toomey, a crypto-friendly senator, warned against this scenario.
It seems possible to designate stablecoins systemically important, particularly in light of the responses of regulators to the report. Rohit Chopra, Director of CFPB, has promised to work with other members on the Financial Stability Oversight Council in order to decide whether to start proceedings to designate certain non-bank stablecoin-related entities or activities to be systemically significant.
Are you ready for a long wait
Given that Congress is unlikely to act quickly on the issue of stablecoin, the intergroup report addressing the distribution of regulatory responsibilities before (or absent) legislative action is particularly relevant. Gray spoke to Cointelegraph
“No significant action by Congress in this area can be expected in the near term. This leaves the SEC and other agencies to take over the space in the interim.”
Powers further supported the point by stating that Congress is unlikely to adopt a comprehensive framework for all digital assets.
It remains to be seen, however, how much regulatory activity will the report spark given its non-binding nature.
Related: Are Crypto-Lending Firms Hot: Are New Regulations Coming?
Cointelegraph spoke with Jackson Mueller, the director of policy at Securrency and government relations, shortly before publication of the PWG report. He said that he expected the PWG report to look like a series Treasury reports that were published several years ago in response to President Donald Trump’s executive order on core principles to regulate the U.S. financial sector.
Mueller claimed that many of the recommendations were too vague to encourage Congress or regulators to continue working on a specific matter.
Although some of the PWG’s recommendations may seem generic, there is at least one important implication: the potential acceleration by the FSOC to designate some aspects of stablecoin activities as systemically significant — which could have a very tangible impact on the sector.