[co-author: Gabriel Khoury*]
On November 1, the President’s Working Group on Financial Markets (PWG), the FDIC, and the OCC announced the release of a report on stablecoins — virtual currencies that, unlike Bitcoin, are backed by assets like gold or fiat currency. Stablecoins aim to eliminate the hesitation many consumers have about mainstream cryptocurrencies, namely their unpredictable volatility.
While the report recognizes the benefits of stablecoins, it cautions about a range of concerns related to the potential for destabilizing runs, disruptions in the payment system, and concentration of economic power. The report urges Congress to act promptly to enact proper legislation that ensures stablecoins are subject to a clear regulatory framework on a consistent and comprehensive basis. To that end, the report makes several legislative recommendations, including (i) requiring a regulatory framework for stablecoins that is backed by the FDIC; (ii) subjecting stablecoin wallet providers to proper federal oversight and appropriate risk-management standards; and (iii) requiring compliance with activity restrictions that limit affiliation with commercial entities and limits on use of users’ transaction data.
Also on November 1, Treasury provided a fact sheet on the PWG report identifying the purpose of the PWG report, and the risks and recommendations provided in the report. CFPB Director Rohit Chopra issued a statement on the same day noting that while not a member of the PWG, the CFPB “will be taking several steps related to this market,” including its recent order to six large technology companies regarding their payments-related plans and practices (previously discussed in a Consumer Finance and Fintech blog post here). In a similar statement by Acting Comptroller of the Currency Michael J. Hsu, he noted his support for the report’s recommendation that “[s]tablecoins need federal prudential supervision to grow and evolve safely.”
Putting it into Practice: This report should be viewed in light of the recent regulatory push by other agencies to regulate the use and transmission of virtual currencies (we previously discussed this recent trend in earlier Consumer Finance & FinTech Blog posts here, here, and here). Stablecoins, like other virtual currencies, are a hot topic among U.S. regulators where companies are dealing with unclear regulatory guidelines and confusion related to which agency regulates what aspect of cryptocurrencies. It is also anticipated that algorithmic stablecoins, coins that use software to balance supply and demand to ensure its stability, will be a target of regulators as well. Stablecoin issuers and owners should be aware of the rapidly developing field and that stablecoins may be subject to regulation by multiple federal agencies.
*Gabriel Khoury is a law clerk in Sheppard Mullin’s Washington, D.C. office.