Blockchain Association’s Analysis of the PWG Stablecoin Report

On Monday, November 1st, the President’s Working Group on Financial Markets (PWG) published its long-awaited “Report on Stablecoins.” Divided into three sections, 1) Background 2) Risks and Regulatory Gaps 3) Recommendations, the report recommends that “Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis.” The report also acknowledges that it will take time for Congress to craft legislation that will effectively address the risks associated with stablecoins. To account for this delay, the report recommends that US regulatory agencies take action within their individual jurisdictions to address the risks associated with stablecoins and that the Financial Stability Oversight Council (FSOC) “consider steps available to it to address stablecoin-related risks.”

As a threshold matter, it is important to remember that the PWG is not a policymaking body, which means that any and all recommendations put forth by this report do not hold the force of law. Instead, a policymaking body, like Congress or the Financial Stability Oversight Council, may take the report’s recommendations and craft legally-binding policy around them. This blog post seeks to outline which aspects of the report are positive, which aspects are negative and need to be reconsidered, and which aspects need additional clarity before determining their viability as legislative recommendations for stablecoins.

Overall, the Blockchain Association supports a Congressional effort to craft a regulatory framework that effectively accounts for the risks outlined in this report. Given the different considerations that must be balanced and the challenges with applying existing statutes to the stablecoin ecosystem, legislation will likely be required to build out an effective stablecoin regulatory regime. The Association does not, however, support a referral to FSOC. Designation of stablecoins as systemically important would be a misrepresentation of the state of stablecoins in the United States and around the globe, and the path toward designation is unclear.

Positive Aspects of the Report:

The Blockchain Association believes that many of the stablecoin risks outlined by the PWG, specifically its concerns around transparency, liquidity, and reserve composition, are legitimate issues that the industry in collaboration with regulators and legislators must wrestle with and account for when crafting a regulatory framework for stablecoins. By providing the private sector with their explicit concerns, policymakers can help stablecoin projects more effectively account for these risks as they develop and launch their businesses. Additionally, the report acknowledges the transformative potential that stablecoins offer. The Association completely agrees with this position, although other regulatory agencies have not previously taken this view toward stablecoins. The report also makes an explicit effort to limit the scope of the report to a specific type of stablecoins, fiat-backed, a move that the Association supports given the drastically different nature and function of the different types of stablecoins in the ecosystem. In other words, the Association does not take issue with the substance of the report. Instead, our concerns revolve around the PWG’s legislative recommendations.

Aspects of the Report that Should Be Revised or Reconsidered

The PWG’s report provides three legislative recommendations for Congress to consider when crafting a regulatory framework for “payment stablecoins.” While certain aspects of the legislative recommendations are workable, the bolded sections below (bolded by BA for reader’s convenience) represent problematic areas that will require additional thought and consideration:

• To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.

The recommendation that “legislation should require stablecoin issuers to be insured depository institutions” is problematic in that it could create a regulatory moat around certain stablecoins at the expense of others, and provide larger incumbents like big banks with a competitive advantage in this space. Such a regime would stifle innovation, prevent up-and-coming stablecoin projects from operating in the United States, and upend existing regulatory standards for fintech companies. Indeed, many non-crypto fintech companies, including Paypal and Venmo, have well established and regulatorily compliant partnerships with banks that eliminate the need for the fintech company itself to become a bank in its own right.

This recommendation also fails to acknowledge the existing regulatory frameworks with which stablecoin issuers already comply at the state level. Both Wyoming and New York have existing frameworks with established track records of regulatory success that allow stablecoin issuers to partner with insured depository institutions. Several other states, like Illinois and Texas, are developing similar frameworks. Additionally, every state legislator except Montana requires stablecoin issuers, and all other payments companies, to obtain a money transmitter license in their state prior to conducting money transmission. Since multiple states have demonstrated that there are regulatory solutions to address stablecoin-related risks short of granting banks an exclusive right to issue stablecoins, the Association firmly believes that this recommendation should be reconsidered.

• To address concerns about payment system risk, in addition to the requirements for stablecoin issuers, legislation should require custodial wallet providers to be subject to appropriate federal oversight. Congress should also provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards.

The second recommendation, which asserts that “Congress should also provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards,” suffers from a lack of clarity. Should legislators interpret this recommendation broadly, regulatory obligations could be extended to entities that do not actually take part in a stablecoin arrangement and would not be able to comply with risk-management standards that require collecting users’ personal information.

In other words, because “any entity that performs activities critical to the functioning of a stablecoin issuer” could include entities that are critical to the functioning of public blockchain infrastructure (i.e. miners and software developers), it is essential that legislation explicitly excludes these types of entities. Regulation of entities that support public blockchain infrastructure would be akin to regulating the internet service providers that online banking and payment companies use to support their services. Given that these internet service providers are not currently regulated as part of the payment chain, the Association believes that blockchain service providers should be treated the same way.

• To address additional concerns about systemic risk and concentration of economic power, legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Supervisors should have authority to implement standards to promote interoperability among stablecoins. In addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on use of users’ transaction data.

The Association’s concerns around the PWG’s final recommendation, which states that “legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities,” lie in the lack of detail that was included in the report’s explanation of this recommendation. While the Association supports the separation of banking and commerce, we do not believe that stablecoin issuers should be prevented from any affiliation with commercial entities. For example, legislation that prohibits commercial entities from providing services such as accepting stablecoin payments from their customers is anti-competitive and would not be in the best interest of individual consumers or society at large. This recommendation should be expanded to include clarification around the PWG’s definition of affiliation and how it would be applied to stablecoin issuers working with commercial entities to incorporate stablecoins into their business models.

Conclusion

In conclusion, the Association believes that the PWG’s Stablecoin Report represents a good starting point for the creation of an effective regulatory framework for payment stablecoins in the United States. For that reason, the Association supports the report’s primary recommendation that Congress lead the effort to create this framework, and we acknowledge and appreciate that novel regulation must be crafted to account for the stablecoin-related risks that the report outlined.

The report and the Association diverge, however, when it comes to the report’s recommendations for the content of stablecoin legislation and its recommendation that FSOC consider designation of stablecoins as systemically important. The Association offers itself as a resource for Members of Congress to leverage as they craft appropriate legislation that promotes innovation and competition in the stablecoin ecosystem.