REGULATION

Stablecoin Report Released, Issuers Must Be "Reserve Banks," Circle CEO: A Big Step for Stablecoins

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Stablecoin Report Released, Issuers Must Be "Reserve Banks," Circle CEO: A Big Step for Stablecoins

The President's Working Group on Financial Markets (PWG) has finally released the long-rumored stablecoin report. Overall, regulatory authorities believe that despite the pros and cons, the risks associated with stablecoins outweigh their advantages, and they will impose strict qualifications on stablecoin issuers.

Stablecoin Report

The Stablecoin Report, originally scheduled to be included in the 10/18 Financial Stability Oversight Council agenda, despite U.S. Treasury Deputy Secretary Nellie Liang's previous emphasis on "the government will further regulate stablecoins rather than banning them entirely," the report still highlights many potential risks.

Redeemability

The report points out that the redeemability of stablecoins and the level of confidence users have in stablecoins may be affected by the following factors:

    1. The composition of reserve assets may affect the coin price, leading to reduced liquidity
    2. Failure to properly protect reserve assets
    3. Lack of clarity in the redemption mechanism
    4. Security risks related to user operations and relevant data

The lack of transparency in the composition of reserve assets and the lack of control over them may amplify risks, and it is unclear whether holders of stablecoins have the right to claim reserve assets.

In addition, if the "operation" and "redemption" of stablecoins do not meet expectations, the risk is likely to spread from Stablecoin A to Stablecoin B and financial institutions handling similar businesses, thereby impacting the economy and financial system.

Payment System Risks

Stablecoins face many risks at a level similar to traditional payment systems, but regulation falls short of standards, including:

  1. Credit risk
  2. Operational risk
  3. Business risk
  4. Settlement risk
  5. Liquidity risk
  6. Anti-money laundering risk

Since stablecoins are implemented through different new technologies and governance structures, risks may also manifest in new ways. The report specifically points out that some stablecoins operate through decentralized governance and complex decision-making processes, which differ from traditional centralized management and may lead to increased operational risks.

Operational risk refers to internal process or management defects, human errors, etc., which may lead to settlement and fraud risks. The report concludes that the stablecoin sector "lacks consistent risk management standards."

Urgent Legislation Needed

The report mentions that stablecoins may constitute securities or commodities, and may therefore be subject to regulation by the SEC and CFTC. Federal securities laws and the Commodity Exchange Act (CEA) may also apply to stablecoins.

The PWG suggests that the issuance and redemption of stablecoins and related activities should only be carried out by "custodial institutions," or require issuers to become custodial institutions, registered in the United States and accessible to the American public, and legislatively prohibit other institutions from issuing stablecoins.

Custodial institutions include state-level, federal chartered banks, and savings and loan associations, whose deposit reserve assets are protected by deposit insurance. They have the authority to mobilize emergency liquidity and Federal Reserve services, and in the event of institutional bankruptcy, can also limit any potential negative risks.

Public Opinion

The PWG's legislative recommendations are also a controversial part of the report. Senator Cynthia Lummis stated in a statement:

Agree with many of the recommendations in the report, including the need for congressional legislation and prudent risk management, but limiting stablecoins to custodial institutions is wrong. FDIC insurance may not necessarily apply to stablecoins. We can require 100% of stablecoin reserve assets to be held in the Federal Reserve Bank, which by definition is already risk-free.

Jeremy Allaire, CEO of stablecoin issuer Circle, also expressed his agreement, but also tried to alleviate concerns about the settlement mechanism in the report:

Fully support congressional recommendations and actions. We have previously applied for a national digital currency bank license, subject to supervision by the U.S. Treasury, OCC, and FDIC. However, compared to closed, tightly controlled traditional financial systems, digital currencies should be more scalable and accessible, without worrying about settlement of stablecoins on public chains.

However, he emphasized that the report represents significant progress by regulatory agencies in accepting stablecoins.

The report also cited stablecoin market share data from The Block, mentioning stablecoin issuers such as Tether, Circle, Paxos, Gemini, Diem, but according to the PWG's recommendations, it seems that Circle, the issuer of USDC, is at the forefront of regulation.