Two federal bank regulators and a White House commission on Monday called for increasing federal supervision and regulation of digital tokens with values tied to government currencies or other financial assets.
In a Monday report, the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and President’s Working Group on Financial Markets said Congress should pass legislation bringing so-called stablecoins under close federal watch.
Stablecoins have grown rapidly in prominence and value as part of the larger cryptocurrency boom redefining financial markets. Unlike other cryptocurrencies, whose values are determined largely by trading activity, stablecoins are tokens tied to cash or other safer assets held by an issuer. Their relative stability compared to highly volatile tokens has made stablecoins a popular medium for payments and loan products.
“If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options,” the report reads. But the officials also said the tokens psoe serious money laundering, illicit finance and even financial stability concerns given their decentralized nature, gaps in federal regulatory authority and growing reach.
“If stablecoin issuers do not honor a request to redeem a stablecoin, or if users lose confidence in a stablecoin issuer’s ability to honor such a request, runs on the arrangement could occur that may result in harm to users and the broader financial system,” they wrote.
The report called for legislation focused on three basic goals: limiting stablecoin issuance only to banks or credit unions with federal deposit insurance; putting companies that offer cryptocurrency “wallets” under federal supervision; and restricting relationships between stablecoin issuers and commercial firms.
Stablecoins, like most cryptocurrencies, can blur the lines between securities, commodities and currencies, each of which are governed by a different federal entity. Stablecoins also raise bank regulatory concerns given the importance of reserves to marketing and sustaining the token.
Some advocates for tougher financial rules praised the report and called on lawmakers to act quickly on legislation to tackle the issues it raised.
“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,” said Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Committee, in a statement.
Sen. Pat Toomey (Pa.), the top Republican on the Banking panel, said the report laid out the importance of waiting for Congress to act on the issue. He and other Republicans have warned Biden administration regulators not to quash innovation in the cryptocurrency space or stretch the bounds of their authority to do so.
“Digital assets have the potential to be as revolutionary as the internet. It’s important lawmakers and regulators alike work to continue America’s longstanding tradition of fostering technological innovation—not stifling it,” he said in a statement.
The report also received broad praise from both banking industry groups — which support bringing financial technology firms under federal banking rules — and some in the crypto industry.
“The rapid scaling and strategic importance of this to dollar competitiveness in the age of crypto and blockchains is critical,” Jeremy Allaire, co-founder and CEO of stablecoin issuer Circle.
“This is huge progress in the acceptance of stablecoins and provides a path for their adoption as fundamental infrastructure for financial and economic activity in the coming decade.”