Biden Administration Targets Stablecoin Digital Currency for Banklike Oversight
A Treasury-led panel asked Congress to set up a regulatory framework to address growing risks
WASHINGTON—The Biden administration on Monday took the first significant step to impose banklike oversight on the cryptocurrency companies involved in the issuance of stablecoins, outlining a process that could shape the future of that digital money.
A Treasury-led panel recommended that Congress impose a new regulatory framework around stablecoins—digital currencies pegged to national currencies like the U.S. dollar—and limit the issuance of such digital assets to banks. The legislative request is a tall order given both chambers of Congress are narrowly divided.
In the absence of congressional action, the panel recommended that a broader group of regulators charged with detecting risks to the financial system—the Financial Stability Oversight Council—consider whether to designate certain stablecoin activities as systemically important. Such a process could ultimately lead to the Federal Reserve writing more-stringent risk-management standards for stablecoin companies.
“The rapid growth of stablecoins increases the urgency of this work,” the regulators said in Monday’s report, issued by the President’s Working Group on Financial Markets, which includes the heads of several regulatory agencies. “Failure to act risks growth of payment stablecoins without adequate protection for users, the financial system and the broader economy.”
Stablecoins are issued by companies such as Tether Ltd. and Circle Internet Financial Inc. and are designed to combine the ability to trade quickly online like bitcoin with the stability of national currencies like the dollar. But the Treasury-led panel said stablecoins could fuel instability if users come to doubt the value of their underlying assets that keep their prices stable, among other risks.
Stablecoins are used mainly by investors to buy and sell crypto assets on exchanges such as Coinbase, which process trades 24 hours a day. They are also used as collateral for derivatives—contracts to buy or sell an underlying security at a specified price.
That could quickly change over the coming years. Administration officials say the coins may be used more broadly as a swift means of payment for consumers and businesses, putting them into competition with banks and card networks such as Visa Inc. and Mastercard Inc. Diem Association, a group backed by Meta Platforms Inc., formerly Facebook Inc., and 25 other members, is seeking to launch a stablecoin that will leverage the social network’s three billion users. Diem is partnering with a bank regulated by the Fed on the project.
The transition to broader use of stablecoins “could occur rapidly due to network effects or relationships between stablecoins and existing user bases or platforms,” Monday’s report said.
The administration said it would prefer if Congress were to create a regulatory framework for stablecoin issuers, but signaled it is prepared to move forward through FSOC if Congress doesn’t act.
The regulatory route has drawbacks, officials have said. The FSOC process for targeting firms for stricter regulation is historically cumbersome and would have to be applied in a novel manner in this case—to cover stablecoin-related payment activities, instead of targeting a specific set of nonbank financial firms. It could also face legal challenges.
“Legislation could be helpful, but the downside of course is how long that will take to get,” said Timothy Massad, who was a member of the working group when he led the Commodity Futures Trading Commission during the Obama administration. “That’s why FSOC is another way to go that provides a means to create a pretty comprehensive framework.”
At present, many stablecoins are lightly overseen at the state level, though some companies, such as Circle, have said they are seeking to become banks and welcome the development of clear standards.
Stablecoins are a relatively small but fast-growing corner of the $2 trillion crypto world. The value of the three largest—Tether, Circle’s USD Coin and Binance USD—has grown to about $116 billion from about $11 billion a year ago.
Jeremy Allaire, chief executive and co-founder of Circle, praised Monday’s report. “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,” he said.
Representatives of Tether and Binance didn’t respond to requests for comment Monday afternoon.
Because stablecoins are backed by assets such as Treasurys, they should maintain a tight link to the dollar and easily be redeemed for dollars, the issuers say. This contrasts with cryptocurrencies like bitcoin that aren’t backed by assets and can fluctuate wildly in value.
Current and former regulators worry that stablecoins could be vulnerable to the equivalent of a bank run if large numbers of investors suddenly rush to redeem them, forcing sponsors to sell the assets at fire-sale prices and potentially putting stress on capital markets, as well.
“Fire sales of reserve assets could disrupt critical funding markets,” Monday’s report said. “Runs could spread contagiously from one stablecoin to another, or to other types of financial institutions.”