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Report: Stablecoins Should be Issued Only by Insured Depository Institutions

Report: Stablecoins Should be Issued Only by Insured Depository Institutions

Posted: Nov 03 2021
President Biden’s Working Group on Financial Markets—in conjunction with the FDIC and the OCC—this week released a report which examined potential risks and regulatory gaps around stablecoins, and offering recommendations for mitigating these risks. Stablecoins are typically backed by fiat currencies and carry the expectation that they can be redeemed upon request. However, the report notes that there are currently no standards in place regarding stablecoin reserve assets, which could lead to vulnerabilities.
 
“Failure of a stablecoin to perform according to expectations would harm users of that stablecoin and could pose systemic risk,” the report said. “The mere prospect of a stablecoin not performing as expected could result in a ‘run’ on that stablecoin. . . . Fire sales of reserve assets could disrupt critical funding markets, depending on the type and volume of reserve assets involved. Runs could spread contagiously from one stablecoin to another, or to other types of financial institutions that are believed to have a similar risk profile.”
 
The report calls for a “consistent and comprehensive regulatory framework” to “increase transparency into key aspects of stablecoin arrangements and to ensure that stablecoins function in both normal times and in stressed market conditions.” Specifically, it calls for legislation that would require stablecoins to be issued only by insured depository institutions, and for providers of custodial wallets to be subject to “appropriate federal oversight,” including required compliance with risk management, liquidity and capital requirements.
 
While Congress considers stablecoin legislation, the report calls for the Financial Stability Oversight Council to also consider steps for addressing risks, such as designating certain activities conducted within stablecoin arrangements as—or as likely to become—systemically important payment, clearing and settlement activities, which would subject them to an examination and enforcement framework. Finally, the working group recommended that stablecoin issuers should “comply with activities restrictions that limit affiliation with commercial entities,” to maintain the separation of banking and commerce.
 
To view the report, visit: https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf
 

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