Stablecoin Regulation

By Author: Jacob Marshal
Total Articles: 23
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CROSSTOWER.COM - The President's Financial Markets Task Force (PWG), which includes the SEC, Treasury and the Federal Reserve, published its expected report on stablecoins on November 1, 2021. The report addresses the risks associated with stablecoins and makes recommendations on how to communicate with them. According to our analysis, the report appears to be well researched and intensive, and the recommendations presented appear to be in line with cryptotrek expectations. First of all, the report calls for legislation that would allow regulators to manage the potential risks arising from the rapid growth and development of stablecoins. It called on Congress to implement the legislation, but without it the Financial Stability Board (FSOC) recommended that it consider taking risk management measures.

The report states that stablecoins used to facilitate speculative digital asset trading lead to market integrity and investor protections risks, specifically possible fraud and misconduct, market manipulation, insider trading, front running, and a lack of trading or price transparency. Other risks posed by stablecoins include ...
... illicit finance, such as AML and terrorism financing.

Stablecoin runs could occur when users lose confidence in a stablecoin issuer’s ability or intent to honor redemption requests, which could reverberate to the broader financial system. Specifically, a situation in which users lose confidence in a stablecoin could lead to fire sales of reserve assets, which the report says, “could disrupt critical funding markets”.

Moreover, if stablecoins are used as payments, there is risk stemming from any potential disruptions to the system (blockchains) they are present on. There is operational risk, such as transaction verification and the risk of regulating the blockchains they use.

The report also discusses systematic risk and the concentration of economic power. Too large a stablecoin can systematically pose a risk of failure for one of the participants involved in the stablecoin arrangement. In addition, there may be a compelling economic power concentrated by the issuer of stablecoins if it is also a commercial company. Potentially anti-competitive effects can also occur if stablecoin becomes the primary payment method.

Once the recommended legislation is enacted, current issuers of stablecoins, such as Circle and Tether, will have to become banks, presumably by creating or acquiring banking units, in order to continue to offer their stablecoins. Lower federal oversight, insurance, and lower risk management requirements can potentially make stablecoins more transparent and help eliminate risk in the stablecoin operating scenario. Legislation would also allow large banks to issue their own stablecoins or facilitate the digital dollar.

However, it is not clear whether such regulation will have a significant impact on algorithmic stablecoins such as DAI and UST, which continue to grow in light of potential regulatory controls such as their centralized stablecoin counterparts. This may lead to lower demand, marked "gray" stablecoins, or may be converted for use only by DeFi, which is currently outside the banking system. Legislation requiring the exclusion of stablecoin issuers from commercial entities would limit the ability for companies such as Facebook to list their own stablecoins. Such measures appear to be aimed at maintaining the power to issue stablecoins within the government and regulated entities.

It is important to note that such legislation is only a recommendation, and that if Congress does not take action, it may remain so no matter how divided Congress is. While the report suggests that the FSOC, made up of PWG members, would act if there were no action in Congress, the group would be reluctant to act in the past, but could act to engage in certain activities. Stablecoin arrangements are systematically important, allowing supervisors to intervene further.

Find out more information about the future of stablecoin regulation here www.crosstower.com/resources/reports/the-future-of-stablecoin-regulation/

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