Biden envisions bank-like regulation for stable companies

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The Biden administration is considering ways to impose banking-like regulation on cryptocurrency companies that issue stablecoins, according to people familiar with the matter, including by getting companies to register as banks.

The administration should also urge Congress to consider legislation to create a special-purpose charter for these companies that would be tailored to their business models, people say.

These measures aim to address fears among regulators that stablecoins – digital currencies pegged to national currencies like the US dollar – could fuel financial panics and need to be more tightly regulated.

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Stablecoins are issued by companies like Tether and Circle Internet Financial, and are designed to combine the stability of national currencies like the dollar with the ability to trade quickly online like bitcoin. But some policymakers have said that stablecoins could fuel instability if users come to doubt the value of their underlying assets that are keeping their prices stable.

A Treasury-led group also plans to recommend that a separate group of senior regulators tasked with detecting risks to the financial system – the Financial Stability Oversight Council – consider whether to designate stablecoins business as systemically important, people said.

Such a process could ultimately lead the Federal Reserve to draft stricter risk management standards for companies if they are not already federally regulated.

But the FSOC path is not the Biden administration’s preferred approach, the people said. The decade-old panel process to target companies for stricter regulation is historically cumbersome and should be applied in a novel way in this case – to cover payment activities related to stablecoins, instead. target a specific set of non-bank financial companies.

The administration’s recommendations are expected to be included in an upcoming report from a group led by the Treasury Department, called the President’s Task Force on Financial Markets, which is now expected to be released in late October, the people said. The group includes Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and Securities and Exchange Commission Chairman Gary Gensler.

Officials warn the report is not yet complete and its recommendations are still being negotiated. It is unclear how some of the recommendations might be implemented – a potential weakness of the next report.

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While the report is likely to focus primarily on the risks posed by stablecoins and how to impose a bank-like framework on the companies that issue them, other key issues are likely to remain unresolved, such as protection. investors around the trade in stablecoins, distinct from the regulation of the companies that issue them.

From an administration perspective, it would be better for Congress to impose or allow a banking-like regulatory framework for stablecoins, as well as a series of investor protections for cryptocurrencies. If Congress does not act, the administration would not hesitate to use the FSOC, one of the people said.

Currently, many stablecoins are lightly supervised at the state level, although some companies, such as Circle, have said they are looking to become banks. And at least some members of Congress, like Senator Cynthia Lummis, have recently signaled that stablecoins may need to be regulated in this way.

“It may be that stablecoins are only issued by depository institutions” or by companies regulated like mutual funds, Lummis said in a Senate speech this week.

Stablecoins, which are based on the same blockchain technology as assets like bitcoin, are a relatively small but rapidly growing corner of the $ 2 billion crypto world. The value of the three biggest – tether, Circle’s USD coin, and USD binance – has reached around $ 110 billion, up from around $ 11 billion a year ago.

Since stablecoins are backed by safe assets like treasury bills, they should maintain a strong bond with the dollar and be easily exchanged for dollars, according to issuers. This contrasts with cryptocurrencies like bitcoin which are not asset backed and can fluctuate in value wildly.

Current and former regulators fear that stablecoins will be vulnerable to the equivalent of a bank run if a large number of investors suddenly rush to buy them out, forcing sponsors to sell assets at clearance prices and putting potentially straining capital markets as well.

For now, however, stablecoins are primarily used by investors to buy and sell crypto assets on exchanges such as Coinbase which process 24-hour transactions. They are also used as collateral for derivatives – commodities. contracts to buy or sell an underlying security at a specified price – and many of these contracts are settled in stable coins.

Administration officials say if coins are adopted more widely as a fast payment method for consumers and businesses, it could put them in competition with banks and card networks like Visa and Mastercard.

Diem Association, a group backed by Facebook and 25 other members, is looking to launch a stablecoin that will take advantage of the social network’s three billion users. Diem is partnering with a Fed-regulated bank on the project.

Write to Andrew Ackerman at [email protected] and AnnaMaria Andriotis at [email protected]

This article was published by Dow Jones Newswires


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