President’s working group calls on Congress to charter all stablecoin issuers

The President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) released a report today recommending that Congress require all stablecoins issuers to have traditional bank charters and for those banks to have deposit insurance.

Stablecoins are a form of cryptocurrency that maintain their value at a 1-to-1 basis against a reference fiat currency, such as the US dollar (or a basket of currencies). Issuers promise that a holder can redeem a stablecoin for an equivalent quantity of regular currencies at any time. However, stablecoins come in different flavors. Some are collateralized by dollar-denominated assets, but others are backed only by cryptocurrencies. Some use algorithms that expand or contract the number of coins in circulation to maintain their value. 

When answering the fundamental question of whether or not stablecoins should be “in” or “out” of the banking system, the PWG’s resounding answer was in favor of bringing stablecoin issuers under regulatory supervision. The PWG felt that bringing them in would address regulatory gaps, establish capital and liquidity safeguards, and confer important protections. 

I share the PWG’s sense of urgency. The degree of regulatory oversight varies greatly from stablecoin to stablecoin – some issuers have banking charters, some have state licenses, and some operate by their own rules. There is also the prospect that a large technology company could create its own closed-loop stablecoin, creating disruptions to the money supply and blurring the line between banking and commerce. 

Recent news underscores the need to do something soon. In 2019, New York Attorney General Letitia James found that the organization in control of the Tether stablecoin tried to cover up the loss of $850 million. The issuers had co-mingled their funds with those of clients, and although their website claimed otherwise, Tether stablecoins were only 74 percent collateralized

If Congress acts on these recommendations, it will send tremors through the stablecoin market. 

Washington is clearly divided on the question. Senator Patrick Toomey (R-Pennsylvania) prefers a hands-off pro-innovation response, Senator Cynthia Lummis (R-Wyoming) says that stablecoins must be backed by cash, and the Biden administration has signaled that it likes the expansive pro-regulatory views of Securities and Exchange Commissioner Gary Gensler

The report asked Congress to give stablecoin issuers access to Federal Reserve services, which could give regulators the tools they need to prevent a run on stablecoin issuers. If stablecoins were only issued by insured depositories, then consumers would have more security over the ability to redeem their digital assets. 

The PWG’s report also calls for Congress to establish strong rules for controlling systemic risk. For example, it called for prudential regulators to oversee the issuer, and if the issuer is owned by a separate company, for the Federal Reserve to have supervisory authority over the parent. Significantly, the PWG and its two agency partners do not intend to regulate alone. They said that other regulators already have the authority to regulate these services, including the Commodity Futures Trading Commission (CFTC), Financial Crimes Enforcement Network (FinCen), the Securities and Exchange Commission (SEC), and the Consumer Financial Protection Bureau (CFPB). 

From there, it is logical to expect that community reinvestment obligations would follow along with consumer protections and systemic risk rules. 

There is also the issue of what community reinvestment obligations should apply. For example, what kinds of investments, loans, and services fit for a stablecoin issuer? The federal agencies overseeing compliance with the Community Reinvestment Act use geographic assessment areas to determine a chartered institution’s responsibilities to the communities where it does business, but how would that fit in theory or in practice with this market? The largest issuer of stablecoins is registered in New York but headquartered in Hong Kong, and many are issued by “decentralized autonomous organizations” – DAOs – that only exist in the cloud.  

While I appreciate the PWG’s call-to-action, I hope that any community reinvestment obligations will produce meaningful benefits to underserved communities. All too often, policymakers confuse innovation with inclusion. If the benefit is merely to give low-and-moderate income households greater access to an unsafe marketplace, then the solution will fall short. 

In my opinion, everyone should be concerned that this approach could create risks for the Deposit Insurance Fund. No one knows how these assets will perform in a financial crisis, but the PWG emphasized that the market capitalization of stablecoins now exceeds $125 billion – a 495 percent expansion in just the last twelve months

According to the PWG, run risk and other concerns about financial stability weighed most heavily when they developed their approach. They saw a system where existing regulators lacked the authority and the tools to address these products and, absent the power of prudential regulation, a scenario that could lead to destabilizing effects on the economy. 

The CFPB, which was not a formal author of the report, immediately issued a statement saying that it is actively preparing to address the broader adoption by consumers of stablecoins, including the possibility that issuers would act in ways that are deceptive or unfair.

The report pushes policy in the right direction, toward a system that will provide a stabilizing force on financial markets and possibly bring benefits to consumers, but it stops short of action. The next step – selling regulation to a divided Congress – could be much harder.

Adam Rust is a senior policy advisor at NCRC.

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Redlining and Neighborhood Health

Before the pandemic devastated minority communities, banks and government officials starved them of capital.

Lower-income and minority neighborhoods that were intentionally cut off from lending and investment decades ago today suffer not only from reduced wealth and greater poverty, but from lower life expectancy and higher prevalence of chronic diseases that are risk factors for poor outcomes from COVID-19, a new study shows.

The new study, from the National Community Reinvestment Coalition (NCRC) with researchers from the University of Wisconsin–Milwaukee Joseph J. Zilber School of Public Health and the University of Richmond’s Digital Scholarship Lab, compared 1930’s maps of government-sanctioned lending discrimination zones with current census and public health data.

Table of Content

  • Executive Summary
  • Introduction
  • Redlining, the HOLC Maps and Segregation
  • Segregation, Public Health and COVID-19
  • Methods
  • Results
  • Discussion
  • Conclusion and Policy Recommendations
  • Citations
  • Appendix

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