Stablecoins, a popular type of digital asset pegged to traditional currencies, could transform the way Americans pay for everything from cell phones and gasoline to haircuts and cups of coffee, according to a long-awaited report released by the Biden administration.
When regulated, stablecoins could “support faster, more efficient, and more inclusive payments options,” said the President’s Working Group on Financial Markets, which includes several top economic advisors to President Joe Biden.
“Moreover,” the report reads, “the transition to broader use of stablecoins as a means of payment could occur rapidly due to network effects or relationships between stablecoins and existing user bases or platforms.”
Still, Biden’s economic advisors said Congress must introduce regulatory oversight and formal market structure as soon as possible to both protect and inform investors, issuers and exchanges.
Specifically, the Biden team recommended Congress pass legislation that limits stablecoin issuance to insured banks, a move that would give regulators far greater jurisdiction over the industry.
Senior administration officials told CNBC that their report focuses on risks but that the nation’s top regulators think stablecoins offer a compelling digital payments option that needs far more oversight from lawmakers.
Unlike their volatile crypto cousins, the $130 billion stablecoin market is prized in large part thanks to stablecoins’ steady valuation and link to national currencies. This steadiness has made them a growing source of liquidity in cryptocurrency markets around the globe. They are used by traders and investors to buy and sell other assets or as a safe place to park wealth.
In that sense, stablecoins are more a medium of exchange and store of value like a traditional fiat currency. It also sets them apart from crypto securities like bitcoin, which investors often see as a source of capital appreciation and potential market returns.
Like other digital assets, stablecoins need to be monitored to make sure they aren’t bankrolling criminal activities, Securities and Exchange Commission Chairman Gary Gensler said in a press release Monday. Gensler is a member of the President’s Working Group on Financial Markets.
“The use of stablecoins presents a number of public policy challenges with respect to protecting investors,” he said. “Further, stablecoins may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money laundering, tax compliance, sanctions, and other safeguards against illicit activity.”
The administration said it spoke with several key players in the crypto industry in drafting its analysis, including payments platforms Visa, Mastercard and Square, as well as exchanges Coinbase, Gemini and Kraken.
Of paramount concern to the working group was what they called “prudential” risk. Prudential risks include a run on stablecoins, issuers’ inability to honor redemption requests or market concentration.
The report’s authors recommended that “Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis.”
To remedy those broad concerns, the report recommended lawmakers limit stablecoin issuance to insured banks.
Classifying stablecoin issuers as banks would give government agencies — including the Federal Deposit Insurance Corp. and the Federal Reserve — greater jurisdiction over their operations, risk management and a better sense of the industry’s overall health.
Regulators would be able to impose capital and liquidity standards designed to keep financial institutions safe and ensure issuers are able to honor coin redemptions.
That recommendation in particular drew pushback from some, including GOP Sen. Cynthia Lummis of Wyoming, who said the requirement goes too far and would disadvantage smaller start-up businesses.
“I agree with many of the recommendations, including the need for Congressional legislation and prudential risk management, proposing that only insured depository institutions may issue a stablecoin is misguided and wrong,” she said in prepared remarks. “We should all be able to agree that startups should have the same chance as Wall Street institutions. As the report clearly states, though, Congress will have the final say.”
Administration officials also noted that discussions with Capitol Hill are still in the early stages.
While lawmakers on both sides of the aisle are likely in favor of better regulation, it’s unclear whether congressional Democrats will have any time to spare as they work to pass both a $1 trillion bipartisan infrastructure bill and their roughly $1.75 trillion antipoverty and climate package before year’s end.
The White House has for months enlisted its top economic advisors in discussions over how to introduce regulations on stablecoins and similar assets.
Those discussions have relied on input from a panel of senior regulators tasked with detecting risks to the financial system and who make up Biden’s working group. Regular members include Gensler, Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and FDIC Chairman Jelena McWilliams.
Sen. Sherrod Brown, an Ohio Democrat and chairman of the Senate Banking Committee, applauded the working group’s recommendations.
“Today’s Presidential Working Group report highlights the risks that the rapid growth of stablecoins present to families and the economy,” he said in a press release. “We must work to ensure that any new financial technologies are subject to all of the laws and regulations that protect investors, consumers, and markets, and that they compete on a level playing field with traditional financial institutions.”
Stablecoins’ relative calm and potential uses have draw attention from Capitol Hill and financial regulators alike. The Fed, for example, has for months been studying the possibility of a U.S. stablecoin, or central bank digital coin.
Asked in September about the Fed’s plans for a U.S. digital currency, Powell acknowledged that CBDCs offer both pros and cons.
“We think it’s really important that the central bank maintain a stable currency and payments system for the public’s benefit. That’s one of our jobs,” Powell said at the time.
The Federal Reserve Bank of Boston, which has led the central bank’s research efforts on stablecoins, said in August that sanctioning a CBDC would help the U.S. keep pace with countries such as China and Sweden.
Stablecoin and CBDC advocates argue that a secure digital currency tied to the dollar could help deliver payments to the public in times of crisis and help provide financial services to communities that are unbanked.
Fed governor Lael Brainard, one of Powell’s key deputies, is an outspoken supporter of the central bank’s research.
“Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding CBDC,” she said over the summer. Wall Street widely expects Biden to promote Brainard in the coming weeks.