With the recent stablecoin surge raising risks for consumers and the financial system, regulators and Congress are increasingly concerned about the risks these digital currencies pose.
While stablecoins are a digital asset designed to maintain a stable value relative to a specified asset pool, unprecedented growth, high-profile hacks, and questions about asset quality are drawing intense scrutiny.
A Facebook-backed project known as the Libra Association proposed an asset-backed stablecoin in 2019. Following the release of the original white paper, officials around the world expressed alarm about Libra’s potential to disrupt national monetary policies, among other systemic risks. These concerns forced Libra back to the drawing board, and they re-branded as the Diem Association and proposed changes to their stablecoin plans.
Facebook now appears to be moving closer to launching a new digital payment solution. Facebook Financial head David Marcus on Aug. 18 published an article detailing the company’s vision for stablecoins and announcing that “Novi is ready to come to market.”
In the article, Marcus blasted the U.S. payments system as “arguably the worst of any developed country in the world” and denounced the ACH Network’s lack of speed and innovation. He said a stablecoin backed 1:1 in cash reserves and short-term Treasuries would rival any mobile wallet in the market today and could combat money laundering and terrorist financing better than legacy systems.
Marcus’s criticism, however, fails to note that Same Day ACH—a critical enhancement launched in 2016—has already processed more than 1 billion transactions totaling more $1 trillion. Moreover, he does not acknowledge the ongoing work to develop and launch FedNow, a 24x7x365 instant payment system, in 2023.
In fact, several community banks participate in the pilot program to help design a system that will support the next generation of innovation at banks across the country.
As Novi’s stablecoin plans take shape and Tether continues to grow, regulators are focusing their efforts to address the risks that stablecoins may pose to consumers, financial stability, and national security.
Boston Federal Reserve President Eric Rosengren in June cited concerns that “a future crisis could be easily triggered as [stablecoins] become a more important sector of the financial market” without effective regulation. He has also said stablecoins could harm short-term credit markets.
In July, Treasury Secretary Janet Yellen convened a meeting of the President’s Working Group on Financial Markets to discuss stablecoins’ rapid growth, potential payment uses, and potential risks to end users, the financial system, and national security.
The PWG received an update from Treasury Department staff on an upcoming report on stablecoins, and it indicated that it will issue recommendations soon. Yellen also emphasized that regulators must “act quickly to ensure there is an appropriate U.S. regulatory framework in place.”
Meanwhile, minutes from July’s Federal Open Market Committee meeting revealed that members considered stablecoins’ growing size and risks.
FOMC members voiced concern that stablecoins “appeared to have the same structural maturity and liquidity transformation vulnerabilities” as prime money market funds, but they have “less transparency and an underdeveloped regulatory framework.”
The Securities and Exchange Commission continues to examine stablecoins as well. In an Aug. 3 speech, SEC Chair Gary Gensler said there is “not enough investor protection in crypto…it’s more like the Wild West.”
Gensler said many of the tokens traded on the cryptocurrency market may qualify as unregistered securities and require further scrutiny.
Gensler also cautioned that stablecoins allow bad actors “to sidestep a host of public policy goals connected to our banking and financial system: anti-money laundering, tax compliance, sanctions, and the like.” He ultimately called for additional congressional authority and resources to focus regulatory efforts on crypto trading, lending, and DeFi.
While the debate continues, ICBA is encouraging regulators to collaborate on a comprehensive approach to prevent the rise of a shadow banking system filled with unregulated platforms that pose risks to consumers, the financial system, and U.S. national security.
Moreover, ICBA also firmly believes that stablecoins require more regulation. Whether stablecoins may be classified as securities, commodities, or demand deposits, they must be regulated.
ICBA also supports the development and implementation of FedNow, the Federal Reserve’s instant payment system. FedNow will equip community banks with a capable new system to help them do what they do best—serve the diverse needs of their customers and provide the payment products and services that form the bedrock of the nation’s economy.
Brian Laverdure is ICBA vice president of payments and technology policy.