How can we regulate stablecoins now, without congressional action
While stablecoins could yield significant consumer benefits and valuable competition in the payments space, current regulation of stablecoin issuers is woefully inadequate. Legislative solutions are possible but may not materialize anytime soon. Meanwhile, markets continue to evolve and other regulatory systems may overtake the United States in payments innovation.
We propose a federal framework for issuing stablecoins within the existing regulatory framework for insured depository institutions, a structure that would require no new legislation. In our view, a well-designed regulatory platform would put the “stable” in stablecoins, protecting consumers from illiquidity risks and potential losses should a stablecoin issuer default, and protecting the financial system. instability as the stablecoin market grows. in size and importance. The market value of all stablecoins, which was around $5 billion at the beginning of 2020, exceeded $140 billion at the beginning of August 2022. The framework described in this whitepaper is in line with the recommendations of the President’s Task Force on Financial Markets in its November 2021 Stablecoin Report.
Under current law, the Comptroller of the Currency could authorize a national fiduciary bank charter, organized as an operating subsidiary of an insured depository institution, to create stablecoins through the use of a dedicated fiat vehicle. . Under our proposal, the supervisor would adopt standards limiting the investment of stablecoin reserves to high-quality liquid assets and address, among other things, redemptions and operational resilience. Our approach could foster increased competition in payment services and potentially preserve the role of the dollar in international finance. Although our framework is not mandatory, our approach would provide substantial benefits to sponsors of stablecoins, increasing the likelihood of them opting into the framework.
Coordination between government agencies would be required to effectively implement our recommendations. Federal banking agencies – the Federal Reserve Board, the Comptroller and the Federal Deposit Insurance Corporation – should support this framework. The FDIC would not insure stablecoin holdings under our proposal, but could be responsible for resolving a national stablecoin trust bank in the event of a problem. Membership of the Securities and Exchange Commission and the Commodity Futures Trading Commission would be highly desirable. We recommend that a working group of the Financial Stability Supervisory Board ensure this coordination. Our proposal is deliberately progressive and cautious, imposing strict overlapping safeguards and preserving the separation of banking and commerce. If successful, our proposal could later be liberalized in various ways. The experience gained in developing our approach could also be useful in developing more comprehensive legislation.
The implementation of our proposal would undoubtedly be a substantial administrative relief, but it would represent a viable and realistic path.
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Timothy Massad is a member of PayPal’s Advisory Council on Blockchain, Crypto and Digital Currencies. Howell Jackson is a board member of Commonwealth, a non-profit organization that promotes financial inclusion and access. The authors have received no financial support from any company or person for this article or from any company or person with a financial or political interest in this article. Other than the above, the authors are not currently an officer, director, or board member of any organization with a financial or political interest in this article.
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