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US and International Regulators Take Aim at Stablecoin Issuers

Regulatory Guidance Aims to Apply Banking Regulations to Stablecoin Issuers
On November 1, 2021, an interagency group consisting of the President’s Working Group on Financial Markets (PWG), the FDIC, and the Office of the Comptroller of the Currency issued a Report on Stablecoins.  The Report calls on Congress to bring payment stablecoins and payment stablecoin arrangements within a “federal prudential framework on a consistent and comprehensive basis.” 
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A link to the report is here.

Specifically, the report recommended legislation:

  • Requiring stablecoin issuers to be FDIC insured and compliant;
  • Granting federal regulators “oversight” over custodial wallet providers; and
  • Limiting issuers’ affiliations or “activities” with commercial entities        

Stablecoins are cryptocurrencies designed to maintain a stable value relative to a reference asset, such as the U.S. dollar. A popular example is Tether USD Coin (USDT), which trades on cryptocurrency exchanges for one dollar per one USDT. The PWG urges Congress to regulate stablecoin issuers like USDT provider Tether Ltd., which could substantially impact the availability of stablecoins or their ability to maintain stable values pegged to assets like dollars.

The report enumerated well-known governmental concerns around stablecoin risks, including runs (the potential for panic-conversion of stablecoin to fiat in large amounts) and illicit activity. Interestingly, the PWG went further, describing as a systemic risk, perhaps the defining element of blockchain technology- namely that any user can participate in a stablecoin’s consensus algorithms without a central authority that is accountable for settlement finality.

As noted above, the PWG’s legislative recommendations are outlined in broad strokes, and this breadth, coupled with PWG’s centrality bias, is already raising concern for some in the blockchain community. 

Mere days before the release of the PWG report, an international anti-money laundering organization, the Financial Action Task Force (FATF), released its own updated guidance on Virtual Assets and Virtual Asset Service Providers. In addition to clarifying FATF’s definitions of virtual assets to include non-fungible tokens (or NFTs) used for payments, the guidance applies FATF’s prior standards to stablecoins by characterizing them as either virtual assets (similar to typical cryptocurrencies whose values fluctuate widely) or financial assets (i.e., securities). Similar to the PWG’s guidance on stablecoin issuers, FATF seeks to subject stablecoin issuers or governance bodies to AML/CFT regulations. The FATF also suggests that stablecoins transactions should be monitored by software to detect suspicious activity. Although FATF’s guidance on licensing is more flexible due to the organization’s international nature and more limited focus, FATF suggests that providers of stablecoins should be licensed where their business is primarily conducted, an especially difficult analysis for many cryptocurrencies used and developed internationally.

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