A Treasury Department report says stablecoin issuers should operate like banks to avoid destabilizing runs that could erode financial stability.

The Treasury Department released a report on Monday that identified regulatory gaps that it said Congress would need to address to regulate stablecoins.
Credit…Stefani Reynolds for The New York Times

WASHINGTON — Federal regulators say they urgently need more power from Congress to properly regulate stablecoins, a fast-growing type of cryptocurrency that they warn could result in bank runs, consumer abuse and payment snafus unless lawmakers act quickly, according to a report issued Monday by the Treasury Department.

The report, which was undertaken by the President’s Working Group on Financial Markets, called on Congress to pass a law that makes issuers of stablecoins subject to requirements like those of traditional banks and financial institutions. Such a change would require that those institutions hold adequate reserves to ensure they can meet the demands of customers to cash out quickly.

The call for congressional action comes at a pivotal moment, as cryptocurrencies are exploding in growth with limited federal oversight in place to regulate them.

Stablecoins, which are ostensibly pegged to the value of a stable reserve asset like the dollar, have not always proved as securely backed as companies claim, which the Treasury report warns could pose significant problems for customers, investors and the overall financial system.

Some regulatory powers already exist, the report said, including the ability of the Securities and Exchange Commission and other federal agencies to police certain stablecoin issuers.

But after months of studying the growing risks presented by stablecoins, the leaders of the President’s Working Group on Financial Markets said they had identified regulatory gaps that legislators must address, essentially throwing the issue to Congress.

“The rapid growth of stablecoins increases the urgency of this work,” says the report, issued by the President’s Working Group, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

“Failure to act risks growth of payment stablecoins without adequate protection for users, the financial system, and the broader economy.”

More than $130 billion worth of stablecoins are in circulation, up from $28 billion in January. The cryptocurrencies are issued by a new breed of financial technology companies like Tether and Circle. They are not banks, at least so far, and they are not simply tech companies that sell online services. They operate as both and have few rules to guide them.

“Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options,” Treasury Secretary Janet L. Yellen said in a statement. “But the absence of appropriate oversight presents risks to users and the broader system.”

The working group determined that authority to regulate stablecoin issuers would have to come from an act of Congress and that the group could not currently mandate standards for digital payments reliant on stablecoins. That lack of authority, the report said, makes these types of crypto-based transactions more vulnerable to “human errors, management failures or disruptions” that could result in consumers losing money, becoming victims of fraud or being unable to get their money.

Federal law also cannot now prevent retailers and other commercial companies from issuing their own stablecoins, potentially creating risky overlaps between commerce and banking.

“Stablecoins and stablecoin arrangements raise significant concerns from an investor protection and market integrity perspective,” the report says.

Leaders of the Senate Banking Committee, which has jurisdiction over banking law, welcomed the new report, saying it highlighted the risks associated with stablecoins and would help prod Congress to act. Whether lawmakers can agree on how to proceed remains unclear.

“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 Senator Sherrod Brown, Democrat of Ohio, the committee chairman.

Senator Patrick J. Toomey, Republican of Pennsylvania, a vocal champion of cryptocurrencies who has questioned the S.E.C.’s approach to digital assets, said the report was an acknowledgment by the Biden administration that “it is the responsibility of Congress to clarify whether, and to what extent, federal agencies have jurisdiction over stablecoins.”

Tyler Gellasch, a former S.E.C. lawyer who now leads the Healthy Markets Association, questioned if Congress would take the necessary steps. “Given the incredible growth of the industry and its lobbying prowess, there’s no guarantees that new legislation will lead to more oversight and frankly, it’s likely to lead to less,” he said. “This report is unquestionably the starting gun for the crypto lobbying games.”

The rise of stablecoins is tied to the wider crypto boom this year.

Stablecoins are used to underpin a growing number of crypto trades and transactions in the $2.6 trillion crypto industry because most cryptocurrencies, including Bitcoin, are extremely volatile and impractical for those purposes. These include accounts where stablecoin holders can get loans or earn high-yield returns on deposits, similar to a bank savings account, but without the federal insurance that protects those bank accounts.

If Congress fails to act, the report suggests that a regulatory body created after the 2008 financial crisis, known as the Financial Stability Oversight Council, could step in and designate stablecoins as a potential systemic risk, immediately granting federal regulators new powers to demand changes in how stablecoins operate. The report does not recommend that as a first step, but it suggests that if Congress does not act quickly, regulators will consider turning to the oversight council.

“Stablecoins involve issues that go well beyond just stability, like financial inclusion and even web infrastructure, and as such, in an ideal world, would be subject to congressional action,” said Chris Brummer, a law professor at Georgetown University and a fintech expert who has served on the Commodity Futures Trading Commission’s panel on virtual currencies. “The question is whether or not Congress will be able to act quickly and effectively.”

Treasury officials repeatedly emphasized the magnitude of the risk if Congress does not act swiftly.

“Some stablecoin arrangements are already sizable, and many stablecoins are growing,” the report says, detailing the risks from a potential rush by consumers to cash out of a stablecoin. “A run occurring under strained market conditions may have the potential to amplify shock to the economy and the financial system.”

Some industry participants viewed the report as both a recognition of the potential that stablecoins have to transform the payments system and the legitimacy of cryptocurrencies overall.

Jeremy Allaire, chief executive of the stablecoin issuer Circle, said the company is “fully supportive” of increased oversight and new rules. “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 in a statement.

Matt Phillips contributed reporting.

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