On Nov. 1, the United States President’s Working Group on Financial Markets (PWG) released its long-anticipated report and policy recommendations on stablecoins. The document’s main focus is on prudential risks that “payment stablecoins” — or those meant to maintain a stable value against a reference fiat currency — could pose to users and financial stability.
The PWG’s key message is that while stablecoin use is currently largely limited to facilitating digital asset transactions, under certain conditions the asset class could achieve much wider retail adoption, necessitating a comprehensive federal prudential framework to be enacted by Congress soon.
Here is a rundown of the consequential points that the report raises — and some that it does not.
All the president’s men and women
The PWG is composed of the heads of the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and Federal Reserve System, with the secretary of the Treasury Department leading the group. The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) also contributed to the interagency report.
Given this formidable concentration of federal financial regulators, the results of their joint effort have been eagerly anticipated as a reliable representation of where the current administration stands on stablecoin regulation.
Anonymous reports that emerged shortly before the document’s publication alleged that the group had agreed on a plan to hand the SEC significant authority over stable tokens. This further added to the suspense around the interagency report, as such a regulatory designation would necessarily require an attendant recategorization of the underlying asset class.
The prospect of the SEC taking the lead in stablecoin regulation left some actors in the crypto space unsettled. Speaking to Cointelegraph ahead of the report’s publication, C. Neil Gray, partner at law firm Duane Morris, said:
“Industry participants likely see the SEC’s push to take point in this area just as another example of SEC overreach in the cryptocurrency space, and fear that the SEC will regulate stablecoins by enforcement rather than by rule, as some perceive it to be doing in other areas.”
For compliant crypto players, however, any kind of certainty is better than the lack thereof. Sujit Raman, partner in the privacy and cybersecurity practice of law firm Sidley and a former associate deputy attorney general at the U.S. Department of Justice, observed that clarity on the limits of each regulator’s responsibilities was still welcome. Raman noted:
“In the absence of new legislation, stablecoins remain subject to the concurrent and potentially overlapping jurisdiction of a number of federal and state regulatory regimes. That is why any agreement among the relevant federal agencies about who will take the lead in regulating stablecoins is important.”
Claims to authority
In the buildup to the report’s publication, there had been signs that the SEC was not the only U.S. regulator seeking to expand its presence on the digital asset scene.
Marc Powers — a law professor, former SEC attorney and Cointelegraph Magazine columnist — believes that while the SEC has been more active in enforcement and guidance on digital assets in the past four years, the CFTC has asserted jurisdiction over Bitcoin (BTC), which it has deemed a commodity.
Furthermore, the acting chairman of the CFTC, Rostin Behnam, claimed last week that as much as 60% of digital assets can be classified as commodities, which amounts to proposing that the agency become the lead U.S. cryptocurrency regulator.
Ultimately, contrary to expectations, the interagency report did not give precedence to either of the regulatory bodies. The authors concluded that “Stablecoins, or certain parts of stablecoin arrangements, may be securities, commodities, and/or derivatives,” invoking the jurisdiction of the SEC and/or CFTC accordingly.
This language remains very similar to what the PWG used at the initial stages of exploring the stablecoin realm. For one, a December 2020 statement from the working group said that “Depending on its design and other factors, a stablecoin may constitute a security, commodity, or derivative subject to the U.S. federal securities, commodity, and/or derivatives laws.”
Furthermore, nothing in the language of the interagency report pointed to the SEC “taking the lead” in supervising the stablecoin sector.
Waiting for Congress
While the central message of the report is the recommendation for Congress to step in and pass relevant legislation as soon as possible, the framers of the document also expand on the way regulators should address stablecoin-induced risks before the legislature takes action.
In addition to the SEC and CFTC, which are to continue applying their existing authorities to safeguard against the outlined prudential risks, the report calls on other relevant authorities — including the Department of Justice, Consumer Financial Protection Bureau (CFPB) and the Financial Crimes Enforcement Network (FinCEN) — to consider how existing laws could be applied to stablecoin activity in domains such as consumer protection, payments and money transmission services.
Notably, the report also leaves it up to the Financial Stability Oversight Council (FSOC), a group of U.S. regulators that was created following the 2008 financial crisis, to designate some stablecoin activities — such as payment, clearing and settlement — as “systemically important,” which would trigger additional oversight. This is a scenario that crypto-friendly Senator Pat Toomey warned against in a recent letter to Treasury Secretary Janet Yellen.
The designation of stablecoins as systemically important doesn’t seem unfeasible, especially in the light of some regulators’ statements in response to the report. For one, CFPB Director Rohit Chopra has pledged to engage with other members of the Financial Stability Oversight Council to determine whether to initiate designation proceedings for certain non-bank stablecoin-related activities or entities to be systemically important.
In for a long wait?
The part of the intergroup report that concerns the distribution of regulatory responsibilities prior to (or absent) congressional action is especially relevant given that the legislature is not at all likely to act fast on the stablecoin matter. Gray commented to Cointelegraph:
“Any significant action from Congress in this area is not expected in the short term, leaving the SEC and other agencies to occupy the space in the interim.”
Powers further validated the point, adding that “The odds are great Congress fails to act with a comprehensive framework covering all kinds of digital assets.”
In the meantime, it remains to be seen how much actual regulatory activity the report will spark, given its non-binding nature.
Jackson Mueller, director of policy and government relations at digital asset firm Securrency, spoke to Cointelegraph shortly before the PWG report’s publication, saying that he expected it to resemble a series of Treasury reports from several years ago responding to former President Donald Trump’s executive order on core principles for regulating the U.S. financial system.
Many of its recommendations, Mueller maintained, were “quite vague or limited to simply encouraging regulators or Congress to continue their work on a particular matter.” In the end, it was unclear “just how many of the recommendations proposed moved beyond the pages of those reports.”
While some of the PWG report’s recommendations are also rather generic, at least one major implication — the potential acceleration of the FSOC designating some aspects of stablecoin activity as systemically important — could affect the sector in very tangible ways.