On Monday, the President’s Working Group on Financial Markets, the FDIC, and the OCC issued their long-awaited report on stablecoins. The report states that stablecoins and stablecoin-related activities present the following risks:
- Speculative digital asset trading, which may involve the use of stablecoins to move easily between digital asset platforms or in decentralized finance arrangements, presents market integrity and investor protection risks. These risks encompass possible fraud and misconduct in digital asset trading, including market manipulation, insider trading, and front running, as well as a lack of trading or price transparency. The report states the SEC and CFTC have “broad” enforcement, rulemaking, and oversight activity that could address certain of these concerns.
- Anti-money laundering and countering the financing of terrorism and proliferation risks. The report states that the Treasury Department will continue to lead efforts at the Financial Action Task Force to encourage countries to implement AML/CFT standards and pursue additional resources to support supervision of AML/CFT regulations.
- Prudential risks from the increased use of stablecoins as payment. For example, if stablecoin issuers do not honor a request to redeem stablecoin or if users lose confidence in an issuer’s ability to honor a request, runs on the arrangement could harm the broader financial system.
- Disruptions to the payment chain that allows stablecoins to be transferred among users could lead to a loss of payment efficiency and safety and undermine the functioning of the economy.
The report recommends that Congress promptly enact legislation to ensure stablecoins and stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis, and provide regulators with flexibility. It recommends that legislation:
- Require stablecoin issuers to be insured depository institutions;
- Require custodial wallet providers to be subject to appropriate federal oversight, and provide the federal supervisor of stablecoin issuers with the authority to require any entity that performs activities critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards; and
- Require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Federal supervisors should have authority to implement standards to promote interoperability among stablecoins.
The report adds that federal agencies are committed to “taking action to address risks falling within each agency’s jurisdiction, including efforts to ensure that stablecoins and related activity comply with existing legal obligations.” It also recommends that the Financial Stability Oversight Council consider designating certain stablecoin activities as, or as likely to become, systemically important payment, clearing, and settlement activities.
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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking. This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.