D.C. financial regulators release stablecoin report, urge Congress to pass legislation

In a highly anticipated report on stablecoins, the federal government’s top financial regulators urged Congress to pass legislation that would regulate stablecoin issuers similarly to banks and also backed agencies like the Securities and Exchange Commission to enforce rules around stablecoins in the interim.

Monday’s report from the President’s Working Group on Financial Markets (PWG)—which consists of top officials from the Treasury Department, the Federal Reserve, the Securities and Exchange Commission, and other government agencies—outlined recommendations on how the federal government should oversee the newfangled digital asset class.

Most notably, the PWG urged Congress to “act promptly to enact legislation” that would subject stablecoins to a “federal [regulatory] framework on a consistent and comprehensive basis.” Specifically, the working group recommended legislation that would “require stablecoin issuers to be insured depository institutions,” akin to banks, and also subject stablecoin wallet providers to “appropriate federal oversight.”

In a statement, Treasury Secretary Janet Yellen, who sits on the PWG, lauded the potential of stablecoins that are “well-designed and subject to appropriate oversight” as having the “potential to support beneficial payments options.” But she warned that “the absence of appropriate oversight presents risks to users and the broader system.”

“Current oversight is inconsistent and fragmented, with some stablecoins effectively falling outside the regulatory perimeter,” Yellen said.

Absent legislative action, the PWG’s report endorsed the ability of federal regulatory agencies like the SEC and Commodity Futures Trading Commission (CFTC) to oversee the stablecoin sector. Yellen said that while Congress “considers action” on stablecoins, federal regulatory agencies “will continue to operate within their mandates to address the risks of these assets.”

The PWG noted that the SEC and CFTC have “broad enforcement, rulemaking, and oversight authorities” over stablecoins as they concern “investor protection, market integrity, and illicit finance concerns.” Additionally, the Treasury Department “will continue leading efforts” at the intergovernmental Financial Action Task Force to combat any use of stablecoins for money laundering and terrorist financing.

The report was much awaited owing to increased interest in the growing, roughly $130 billion stablecoin market, which has been driven by popular yet increasingly controversial digital tokens like Tether and USD Coin.

Usually backed by currencies like the U.S. dollar or commodities such as gold, stablecoins can help connect the worlds of traditional finance and cryptocurrencies by providing investors with an easier on-ramp into digital asset markets. It’s a promise that has clearly captivated investors in 2021, as the market capitalization of stablecoins has swelled from a little more than $20 billion a year ago to more than $130 billion today.

Lawmakers and regulators have raised plenty of concerns, however—particularly around the nature of the assets backing stablecoins and whether they are properly accounted for.

Questions about the reserves behind stablecoins have long existed. For instance, Tether—the largest stablecoin by market cap—has faced speculation over whether it is actually holding billions of dollars in cash reserves for years. The CFTC recently hit Tether with a $41 million settlement tied to its claims that the token was fully backed by fiat currency. Instead, the CFTC found evidence to the contrary; for one period of time in 2017, as an example, there was only $61.5 million backing Tether—even though more than 442 million coins, each claiming to be backed by $1 in U.S. currency, were in circulation at the time.

With the stablecoin market’s rapid expansion, calls for more structural transparency and oversight have clearly reached a level of irreversible momentum in the eyes of regulators. SEC Chair Gary Gensler, who has broadly raised a flood of questions about crypto, has compared stablecoins to poker chips on multiple occasions. “Stablecoins raise a number of issues,” Gensler told Fortune last week. “What’s backing them? What’s the reserve asset behind them? Are they being used to increase leverage in the system? Are they inside of our public policy around anti–money laundering?”

As indicated by the PWG report, it is unlikely that the SEC will be the only cop on the stablecoin beat in the years ahead. Other regulatory agencies across D.C. have begun to carve out a niche in the space, and officials including CFTC Acting Chairman Rostin Behnam and Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra have begun to lay the groundwork for their agencies’ oversight of the sector.

In a statement after the release of the PWG report, Gensler said the SEC and its “sibling agency,“ the CFTC, “will deploy the full protections of the federal securities laws and the Commodity Exchange Act to [stablecoin] products and arrangements, where applicable.”

In his own statement Monday, Chopra said the CFPB—which was not a part of the PWG that produced the stablecoin report—would be “taking several steps” to regulate the stablecoin market. Those include coordinating with Big Tech companies that may leverage stablecoins on their own platforms and “actively monitoring and preparing for broader consumer adoption” of the asset class, Chopra said.