A top Treasury official on Tuesday is expected to make the case to Congress that there are gaps in the framework for stablecoins, should they become widely used by households and businesses.
As lawmakers and the White House weigh oversight of the booming cryptocurrency sector, regulators and policymakers need to monitor stablecoins closely, according to Nellie Liang, Undersecretary for Domestic Finance. Liang is testifying before the House Financial Services Committee as the sole witness on the President’s Working Group (PWG) on Financial Markets’ report containing recommendations on regulating stablecoins.
“We believe the current framework for stablecoins is not consistent or clear,” Liang told Yahoo Finance in an interview. “The PWG supports responsible financial innovation that can create efficiencies and increase growth; but it is also equally important to protect investors and consumers and to mitigate risk to financial stability and payment system integrity.”
Stablecoins are a type of digital asset designed to maintain a stable value relative to the U.S. dollar. They’re mostly used to get in and out of cryptocurrency trades quickly. Yet because they are designed to maintain a stable value, they could potentially be used more widely as a means of payment by households, businesses, and financial firms.
Last November, the PWG tasked Congress with coming up with new regulations to police stablecoins, while also recommending that only banks be allowed to issue stablecoins. Since the release of that report, Liang says Treasury officials have been speaking with lawmakers on Capitol Hill about how best to regulate stablecoins.
'Very supportive'
Lutsk, Ukraine - May 1,2021: Dark altcoin on market. New cryptocurrency on top of coins against black surface. Black crypto token. Noname coin. Independent stablecoin. Alternative type of digital asset ·Yevhenii Podshyvalov via Getty Images
Questions linger surrounding the credit and liquidity risks of the digital asset, and why there are gaps in oversight. In addition, there are concerns about whether the PWG proposal is the best way to fill gaps in oversight, and if it’s the most efficient way to reduce risk while still allowing for financial innovation.
Liang says Treasury is “very supportive” of the general direction of stablecoin legislation being circulated by Democratic Rep. Josh Gottheimer, but that they want to look at the details of the bill. She added that there may be some areas of difference that would need to be fleshed out and discussed.
Gottheimer is proposing legislation that would limit stablecoin issuance to FDIC-insured banks, and to nonbanks that follow specific rules—including only investing reserves in Treasury securities, or keeping them on deposit at FDIC-backed institutions. They would also be subject to leverage, auditing, redemption and liability management rules that Treasury would issue.
“I think there are important similarities, [but] there are specifics about what kind of assets need to back the stablecoin that could differ depending on the degree of supervision,” Liang said. “So there are some discussion points there that would need to be had, but in general, the proposals are very aligned… it is something that we are very supportive of the general direction.”
In its current form, Liang said the bill is “very consistent” with the Biden administration’s proposal for stablecoin issuers to be insured depository institutions. That allows for a clear supervisory framework and gives regulators visibility into the entire stablecoin arrangement, including the wallet provider, custodian, and other providers critical to how stablecoins could function as payments.
The PWG report recommends that stablecoins may only be issued by an insured depository institution. The thinking on using these rules is that a bank deposit product – like a stablecoin — offers the promise of redemption of money upon demand.
For its part, the stablecoin industry has had difficulty obtaining FDIC insurance, and says it hasn’t been made available yet to stablecoin issuers, just as others have had difficulty obtaining federal bank charters.
Brian Brooks, former Comptroller of the Currency under President Donald Trump and now CEO of Bitcoin mining firm Bitfury Group, questioned the regulatory system last fall at a hearing before the House Financial Services Committee.
“Is it consistent to take the position that only banks should be allowed to issue stablecoins, but then fail to grant bank charters to the largest issuers of stablecoins?” Brooks asked at the time.
Caitlin Long, founder and CEO of Avanti Financial Group, which specializes in digital assets said that she hopes the PWG “didn't intend to create a perfect catch-22 that gives the stablecoin market to incumbent banks, which already have FDIC insurance, while blocking the innovators.
She added: “If FDIC insurance is not available to the upstart companies, that may be the practical reality, though — whether intended or not."
But Liang clarified that the PWG recommends that stablecoin issuers be insured depository institutions, not that they need deposit insurance. Requiring deposit insurance is an issue for further discussion, and would depend on the types of assets required to back stablecoins, and how an issuer could manage liquidity and redemption, the regulator said.
“If they were backed by high quality assets, it may not be necessary for them to have insurance,” Liang told Yahoo Finance. “But they would be part of an institution that could have access to deposit insurance for some of their other liabilities.”
She added: “The framework is designed to provide clarity and consistency and to support financial innovation. It is not designed to preserve the status quo or inform or reinforce existing institutions.”
