PWG Stablecoin report: a takeover of the executive branch?

Neither the author, Tim fries, nor this website, The Tokenist, provide financial advice. Please review our website policy before making any financial decisions.

A report from the Biden administration was released today that examines the risks associated with stablecoins and the financial system. The report’s recommendations line up exactly with Gary Gensler’s months-long efforts to secure the SEC’s role in the stablecoins market.

Report Says Stablecoins Need Federal Oversight

In the second half of 2021, the US government focused on stablecoins. This digital asset class represents a vital gateway to crypto adoption, as it solves issues of volatility and payments without borders. Stablecoins have the same utility as USD but are chain traded, making monetary institutions very uncomfortable.

In July, Treasury Secretary Yellen called for stablecoins to be quickly regulated. Likewise, Fed Chairman Jerome Powell has indicated that stablecoins are yet another reason to grow the digital dollar. Four months later, the President’s Financial Markets Task Force (PWG) released its report on stablecoins on Monday.

In cooperation with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), the 23-page stablecoin report covers:

  • How stable coins are guaranteed and redeemed.
  • How they are managed and stored.
  • Where they are used.

The report’s findings indicate that confidence in the stable currency can be compromised during times of stress. This may be due to falling prices for reserve assets used as collateral. Combined with the risk inherent in cybersecurity, the report postulates that these factors could cause a contagious ‘runaway’, thus posing a systemic risk to the economy at large.

As a remedy, the report suggests that issuers of Stablecoin should be treated like banks.

“Congress should require that providers of custodial portfolios be subject to appropriate federal oversight. Such oversight should include the power to restrict these service providers from lending stablecoins to customers, and to require compliance with appropriate risk management, liquidity and capital requirements. “

This is an important regulatory step, as these custodial wallet providers are nothing less than crypto exchanges and hybrid platforms, such as BlockFi or Gemini. Indeed, this would apply to all crypto services that challenge traditional banks.

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Reactions to the Stablecoin report: an executive takeover?

As members of the Senate Banking Committee, Senators Pat Toomey, Cynthia Lummis and Sherrod Brown were the first to respond to the report. Senator Toomey noted that the ball now rests with Congress to decide whether federal agencies have jurisdiction over stablecoins. Until that happens, the current administration should “resist the urge to expand existing laws in an effort to expand one’s regulatory authority. “

Congressman Tom Emmer, a member of the Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, came to the same conclusion.

In contrast, aligned with the Biden administration, Senator Brown said new technologies should be subject to the same set of rules as existing traditional financial institutions. Gary Gensler, chairman of the Securities and Exchange Commission (SEC), pointed to the report’s finding that stablecoins diverge in their classification. Depending on their use, they may be securities, commodities and / or derivatives.

Gensler also recognizes that it is now up to Congress to clarify matters further. While waiting for that to happen, he promised that:

“As Congress and the public assess this report, we at the SEC and our sister agency, the Commodity Futures Trading Commission, deploy all protections of federal securities laws and the Commodity Exchange Act to these products and arrangements, if applicable. “

The example of this deployment of full protections that we have already seen when the SEC pointed the finger and forced Coinbase cancels its loan program. However, this is not surprising given that Gary Gensler was appointed as chairman of the SEC by President Biden. Therefore, the recommendations of the PWG report could be interpreted as guidelines to extend the current scope of the SEC’s regulatory power.

Additionally, before the report was released, there were rumors that Gary Gensler was pushing for the SEC’s regulatory power to cover cryptocurrencies and stablecoins. Interestingly, at the end of the report there is a list of market players including Visa and Mastercard, both of which have no stablecoin operations made public.

We already know that Visa has developed its Universal Payment Channel (UPC) for cross-blockchain and CBDC transactions. Likewise, Mastercard has partnered with Bakkt to offer crypto payment rails to merchants. Will the two biggest payment processors jump into stablecoin gambling now that regulatory enforcement is approaching?

Congress sat on its hands

The crypto amendment to the Infrastructure Bill arguably highlighted Congress’ inaction to get ahead of this problem. Treasury Secretary Yellen was the driving force behind the Warner-Portman-Sinema Amendment, which aimed to ensure that miners and wallet developers receive the same legal restrictions as brokers.

On the bright side, the crypto lobby, in the form of the Congressional Blockchain Caucus, has redoubled its efforts to ensure that the crypto industry is not caught off guard again.

Chart dividing lobbying spending between Blockchain Association and Digital Chamber of Commerce’s own activities.
Source: Senate Lobbying Disclosures.

The executive is now in a position to force Congress to act. This was noted by former Congressman Harold Ford Jr, who views the current legislative gray area combined with over-regulatory reach as stifling. Likewise, Blockchain Capital’s Spencer Bogart predicts a brain drain for crypto firms if the regulations remain as they are today.

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About the Author

Tim Fries is the co-founder of The Tokenist. He has a BSc in Mechanical Engineering from the University of Michigan and an MBA from the Booth School of Business at the University of Chicago. Tim was a Senior Associate in the investment team of RW Baird’s US Private Equity division and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and protection solutions. control.

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