Report urges Congress to lead in regulation of stablecoins

A high-level task force of financial regulators recommended Monday that firms that issue stablecoins — a type of cryptocurrency linked to real-world assets — be more tightly regulated but called on Congress to write the necessary laws, suggesting the regulators lacked the power.

The report — written by a Treasury-led group that includes Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and Securities and Exchange Commission Chairman Gary Gensler — was widely anticipated as the administration’s first attempt at establishing a framework for the $2 trillion cryptocurrency industry.

The report advocates requiring each firm that issues stablecoins to register with a federal or state banking regulator — which it did not specify — and maintain an adequate cushion of capital and enough liquidity to meet any short-term obligations. It also suggests investors in stablecoins should get at least some of their holdings covered by deposit insurance.

At the same time, the report suggested that existing regulators don’t have the authority to impose such requirements on the industry under current laws.

“If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options,” the report says. But it notes stablecoins also present “a variety of risks” and there are “key gaps” in regulators’ ability to address them.

Stablecoins are a subset of the cryptocurrency industry. Unlike bitcoin and other popular digital currencies, which are purely speculative assets, stablecoins’ value is pegged to that of hard currencies like the dollar or metals like gold.

Currently, stablecoins mainly serve to make it easier for cryptocurrency investors to conduct trades. In the future, boosters of stablecoins say a much broader swath of consumers could use them for everyday retail purposes.

Critics argue firms issuing stablecoins — whose circulation has skyrocketed from $29 billion at the start of the year to more than $133 billion today — too often make it impossible for regulators and consumers alike to see what assets are backing up the tokens and how easily those who buy them could trade the tokens back in for their face value.

These critics worry without stronger oversight, a misstep could prompt a sort of bank run that poses a risk to the broader financial system. They slammed the report for punting the matter to Congress, where they said cryptocurrency lobbyists will overrun the process.

“I have deep concerns about this report,” said Todd Phillips, who focuses on financial regulation at the liberal Center for American Progress. “I don’t think this Congress is interested in addressing stablecoins alone. So if Congress were to intervene, I expect they’d work to weaken the regulatory apparatus for all cryptocurrencies currently in existence.”

The SEC and the Commodity Futures Trading Commission already are flexing some regulatory power over stablecoins. Gensler, who has described the tokens as “poker chips at the casino” of the cryptocurrency trading frenzy, argues stablecoins display properties of securities and should be overseen by his agency. The SEC recently threatened to sue Coinbase if it launched a program that allowed stablecoin investors to earn interest on their holdings by lending them out; the company shelved the plan.