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Are Stablecoins in the Crosshairs for Federal Regulation?

November 08, 2021 Stablecoin, Digital Assets, Private Companies

Stablecoins have been in the sights of various regulatory bodies repeatedly over the past year, including the SEC, CFTC, Federal Reserve and others. Last week President Biden’s Working Group on Financial Markets (PWG) released a report on stablecoins.

Stablecoins are a type of digital asset generally backed by a fiat currency and designed to maintain a stable value relative to such currency (primarily the U.S. dollar). Stablecoins are primarily used to facilitate trading of other digital assets across various exchanges and digital asset wallet providers. However, stablecoins have the potential to play an important role in the future of global finance and could become the foundation for global payment services as they are means of faster, more efficient and resilient payment systems.

The PWG report highlights gaps in the authority of regulators to reduce risks of payment stablecoins and payment stablecoin arrangements. The report’s legislative recommendations include:

  • Restrict stablecoin issuance to insured depository institutions to guard against a stablecoin run. Currently, as there are no stablecoins that comply with this recommendation, it would require a significant change to the regulatory structure of all stablecoins. There are, however, stablecoin issuer companies that currently comply with the money services business (MSB) and/or money transmitter license (MTL) requirements. Among other federal and state level requirements, this subjects the company to the Bank Secrecy Act (BSA) and involves strict anti-money laundering (AML) compliance requirements. The PWG’s recommendation to require stablecoin issuers to be insured depository institutions suggests the current regime is insufficient.
  • Require federal oversight for custodial wallet providers and stablecoin issuers to address concerns about payment system risk. Federal oversight would introduce additional restrictions that could threaten innovation and result in market consolidation and increase concentration risk.
  • Activity restrictions that limit affiliation with commercial entities and implementation of standards that require interoperability among stablecoins to address systemic risk and concentration of economic power. This recommendation conflicts with the current requirements placed on other payment service providers such as Venmo, Zelle and Paypal, which are not required to have functionality with one another.

Although stablecoins are still a relatively small portion of the global payment services ecosystem, most stablecoin issuers are taking their potential role in the global financial market seriously. These companies continue to take measures to provide transparency to their users, instill confidence in the marketplace, and follow the regulatory regime most suited to their current operations.

As stablecoins move beyond digital asset trading and decentralized finance (DeFi) to global prominence, regulatory bodies will continue to grapple with who will be responsible in addressing consumer protection concerns, financial crime prevention and global financial stability. The PWG report suggests that the Financial Stability Oversight Council (FSOC) step in to address the risks noted within the report, while other regulatory agencies like the SEC and CFTC continue to pursue enforcement and oversight of digital assets where they deem appropriate.

While stablecoins deal with intensified scrutiny and issuers await changes to existing laws, issuers would be wise to consider ways to address some of the concerns within the report sooner rather than later. Stablecoin issuers can enhance transparency about their reserves, establish standards for permissible reserve assets, and strengthen reserve segregation to be ready for any potential changes on the horizon.

>> Read the full report on stablecoins

Contact Will Coleman at will.coleman@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.

About the Author

Will Coleman

will.coleman@cohencpa.com
410.527.3951

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