The Biden administration wants Congress to promulgate general rules for stablecoins, arguing that token issuers should become chartered banks or “insured depositories.”
The administration is also warning the crypto industry as a whole against stricter oversight and enforcement, including a crackdown on “DeFi” trading and lending platforms.
The recommendations came in a much-anticipated report released Monday by the president’s task force on financial markets, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
Stablecoins are digital assets, or cryptocurrencies, designed to maintain a value of $ 1. They are supposed to be backed by reserves made up of hard currency, treasury bills or cash proxies like commercial paper. The biggest stablecoins include
(symbol: USDT) and
People use them to trade cryptos or other digital assets, such as non-fungible tokens (NFTS). And the existing amount has taken off, multiplied by 20 to reach $ 130 billion in the last 20 months.
Regulators, however, view stablecoins as a potentially destabilizing financial instrument. The concern is that coin issuers do not back up their tokens with sufficient reserves of hard currency or super-safe securities like treasury bills.
Confidence in stablecoins could evaporate in a financial panic, triggering a scramble for assets if people try to buy them all at once for cash. This, in turn, could have ripple effects in other markets, which could quickly seize up, forcing federal regulators to step in with emergency liquidity measures.
“The mere prospect of a stablecoin not performing as expected could result in a ‘race’ on that stablecoin,” the report said. It could spread from room to room. “The risks to the wider financial system could increase rapidly,” the report said.
Rather than allowing the market to remain largely unregulated, Congress should require coin issuers to turn into holding companies of chartered banks under federal and state supervision, according to the report. Congress is also expected to develop “prudential standards” for issuers, including asset reserve and liquidity requirements. Entities that are not licensed should not be allowed to issue the coins, he said.
The administration also wants digital wallets that support crypto assets to be overseen by the federal government, in part to reduce their potential use in money laundering or other illicit activities. And the administration wants large coin issuers to be designated as “systemically important” institutions, subjecting them to the oversight of the Financial Stability Supervisory Board, which has the power to limit financial risks in the market.
Another regulatory target for the Biden administration appears to be decentralized finance, or DeFi, exchanges and lending platforms. Traders often use stablecoins as one of the assets of a pair exchange, or exchange, on “automated market maker” platforms like Uniswap.
Large amounts of stablecoins are stuck in “smart contracts” used for DeFi transactions and loans on the market.
blockchain, including 20% of the USDT in circulation, 43% of the USDT and 56% of the DAI token. Additionally, although stablecoins only make up 5% of crypto assets, more than 75% of trades are between a stablecoin and another token, according to data from The Block.
“Digital asset trading platforms and DeFi raise broader questions about the regulation, supervision and enforcement of the digital asset market,” the report said. “These matters are under review by the CFTC and the SEC.”
SEC Chairman Gary Gensler issued a statement in support of the report, saying the exhibits present “a number of public policy challenges with respect to investor protection.”
The crypto industry has long been irritated by the prospect of sweeping federal regulation. The industry has lobbied hard against the new tax reporting rules that have been incorporated into the infrastructure bill awaiting passage in the House. And crypto lobbying has intensified as Congress considers additional measures to boost industry revenues, which could be included in the pending $ 1.75 trillion social and climate change bill. ‘a vote in the House.
The administration argues that a clear set of security rules and procedures would be positive for the industry, instilling confidence and leading to wider adoption of stablecoins. Issuers that agree to be regulated like banks could tap into the federal backstop, including both FDIC insurance to reimburse consumers in the event of default, and “orderly resolution” mechanisms in the event of default. of a coin issuer.
Treasury officials say they have had productive but preliminary conversations with congressional lawmakers and hope the report will lead to more substantive discussions.
The administration does not call for a “crypto czar”, something that
(COIN) and other companies in the sector lobbied. Officials say the goal is for existing agencies to be tasked with overseeing the cryptos.
Expect protracted negotiations, like those underway for much of Biden’s agenda. At least the battle lines have been drawn.
Corrections & amplifications: XRP is a cryptocurrency managed by Ripple and used for global payments. A previous version of this article incorrectly classified it as one of the biggest stablecoins.
Write to Daren Fonda at [email protected]