Move towards stablecoin regulation picks up pace in U.S.

Regulators and policy makers across the world continue to focus on stablecoins, which are cryptoassets pegged to the value of the U.S. dollar or other reserve assets. We have previously reported on international efforts to establish a global regulatory framework for stablecoins. Last month, the U.S. President’s Working Group on Financial Markets (the Working Group) published a Report on Stablecoins, [PDF] which recommends that Congress urgently enact legislation that would subject stablecoins to a prudential framework and limit stablecoin issuance to insured depository institutions.

On November 23, 2021, Sen. Sherrod Brown, Chair of the U.S. Senate Committee on Banking sent letters to stablecoin issuers and exchanges requesting information on the risks to consumers, investors, and markets. The letters referred to the Working Group’s report.

The letters note that the market capitalization for the largest stablecoin issuers has exceeded USD$127 billion as of October 2021, a 500% increase over the prior year, and express “significant concerns with the non-standardized terms applicable to redemption of particular stablecoins, how those terms differ from traditional assets, and how those terms may not be consistent across digital asset trading platforms.”

The letters request answers to six questions about the stablecoins’ “operational features” by December 3, 2021, which signals that more legislative action may be imminent.

Sen. Brown’s letters show that the Report is attracting attention from American legislators. Furthermore, as a joint publication of the most important American capital markets regulators, the Report is likely to be influential in Canada and internationally. The Working Group consists of the Secretary of the Treasury and the Chairpersons of the Federal Reserve, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which co-authored the Report alongside the Federal Deposit Insurance Corporation, and Office of Comptroller of the Currency.

The Report acknowledges that stablecoins currently play an important role in facilitating the trade of crypto assets and could come to be an important means of payment more generally. According to the Report, this potential means that stablecoins could present prudential concerns, including potential disruptions to the “payment chain.” To address these prudential concerns, the Report makes several proposals:

• To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions.
• To address concerns about payment system risk, legislation should require custodial wallet providers to be subject to federal oversight.
• To address concerns about systemic risk and concentration of economic power, legislation should require stablecoin issuers to comply with “activities restrictions” that limit affiliation with “commercial entities”. The Report does not specify what form these restrictions would take.

The Report also notes that stablecoins can pose investor protection and market integrity risks. Although the Report does not take the position that stablecoins are securities, it does indicate the authors belief that the SEC and the CFTC have “broad enforcement, rulemaking, and oversight authorities” to address these risks.

Whether, how and when the Report’s proposals are adopted in the United States will be the subject of careful observation by Canadian regulators and market players.