US: Stablecoin Issuance Unlikely to Be Limited to Banks
Yesterday, the US House Committee on Financial Services held a hearing pertaining to the President’s Working Group (PWG) Stablecoin Report published in 2021.
Stablecoin Issuers Could Be Subject to Lighter Supervision
The hearing addressed several concerns that the industry representatives had regarding the legal treatment of stablecoin issuing entities.
Specifically, some representatives had concerns that requiring stablecoin issuers to be banks could stifle innovation and force the entities to relocate to other countries.
At large, the report made three key recommendations:
- To address run risks, all issuers should be insured depository institutions (IDI)
- To address payment system risks, federal regulators should have oversight over custodial wallet providers
- Issuers and wallet providers should have limited association with commercial entities to address systemic risks. And supervisors could enforce interoperability standards.
During the hearing, UnderSecretary at the US Treasury, Nellie Liang, responded to the aforementioned concerns that could, by law, force stablecoin issuers to become banks.
Importantly, Liang noted that not all issuers would be supervised as commercial banks. In fact, some of them can function like state banks or custodial banks with considerably less regulatory oversight.
She said:
“A stablecoin issuer that only issues stablecoins for payments and did not make commercial loans like a commercial bank would be subject to a very different supervisory regime. There is a degree of flexibility within the proposal that we put forward.”
During the hearing, Representative Berr raised the question that why it isn’t enough to oversee the audits of a stablecoin’s backing assets. Responding to this, Liang noted that such disclosures or money market type regulations don’t address another risk, that to the payment system.
Noted blockchain and digital assets lawyer Jake Chervinsky shared his thoughts on the hearing, calling it “positive and constructive” at large.
The Debate on Stablecoins
Concerns over the regulation of stablecoins have increased recently on account of the significant amount of money tied to fiat-pegged digital assets.
At the time of writing, the total market cap of leading stablecoins such as USDT, USDC, DAI, and UST, among others, sits at a whopping $180 billion, according to data from CoinGecko.
The total market cap of Tether — the issuer of the largest stablecoin in the world USDT – alone is more than $78 billion which puts the stablecoin in the 3rd position just behind bitcoin (BTC) and ether (ETH) by reported market cap.
Stablecoins play an important part in the functioning of the wider crypto industry as they function as financial instruments with a relatively stable price and offer investors the option to book profits or minimize losses.
Moreover, stablecoins have also found immense utility in the flourishing DeFi space with protocols such as Curve Finance and others leveraging yield farming strategies to offer users the best returns on their stablecoins stack.
That being said, not all stablecoin endeavors have found success as was evident from Meta’s now-defunct stablecoin project Diem.
As reported by crypto.news on January 26, the ambitious stablecoin project launched by Meta is set to shutter its business and sell off all its assets.
