Stablecoin issuers are insured custodians who are regulated at both the custodian and holding company level.
Wallet providers are subject to federal supervision.
Any company that carries out activities that are critical for the functioning of stablecoin is subject to the relevant risk management standards.
Different degrees of activity restrictions between commercial entities and stablecoin issuers and wallet providers. The report calls for “urgent” action by Congress regarding the oversight and regulation of issuers, wallet providers and affiliates. In particular, the report calls for legislation that requires:
A wide spread of stablecoins as a means of payment could h -pen quickly. The report focuses on the use of stablecoins as a means of payment, but notes that stablecoins are used primarily in the United States to facilitate trading, lending, and borrowing of other digital assets. However, the PWG believes that the promotion of stablecoins by “commercial” companies such as telecommunications or technology companies (or social media) could quickly accelerate the use of stablecoins as a means of payment.
calls for increased regulation of the providers of depot wallets. The recommendations for vendors of custody wallets are potentially far-reaching and are likely to raise significant concerns in the industry. The proposal on activity restrictions is particularly surprising as the concerns about the risks to the FDIC insurance fund that typically support such restrictions are absent for wallet providers and such a restriction would treat custodian providers differently than virtually any other financial services company except Banks.
The PWG (mostly) asks whether stablecoins are securities. The PWG qualifies the report by stating that it “does not make any recommendations on topics or risks in accordance with the federal securities laws or the Commodity Exchange Act (CEA)” and that the recommendations of the report “have no impact on analyzes in accordance with the federal securities laws”. or the CEA. ”However, it is difficult to look at these issues in isolation. For example, the report requires that issuers of stablecoins be insured custodians (i.e. banks), but securities issued by banks are exempt from the Securities Act under Section 3 of the Securities Act. Notwithstanding the limitation, the report repeatedly states that stablecoins may be securities, commodities and / or derivatives that are subject to the jurisdiction of the SEC or the CFTC. The report also notes that certain digital asset issuers and platforms may be “investment companies” or “investment advisors” subject to registration and subject to regulation.
Certain stablecoin agreements can qualify for deposit insurance. While the report provides for the option of FDIC insurance if the requirements for “pass-though” deposit coverage are met, it does not address the technical and operational challenges of meeting those requirements or suggest whether the FDIC is about to do so is to -prove potential solutions to these challenges.
Regulators are focused on DeFi. Without giving specific recommendations for DeFi, the PWG commented extensively on DeFi activities and the role of stablecoins in DeFi. The report cites a number of perceived risks related to DeFi that are of particular concern to the SEC and the CFTC. Although the report focuses on stablecoins that are convertible into the underlying fiat currency (as opposed to “algorithmic” stablecoins), the report includes data showing that an algorithmic stablecoin is most commonly used for certain DeFi activities.
The report identifies three main types of risk associated with stablecoins: (1) risk of loss of value, (2) payment system risk, and (3) scale risk. It is noteworthy that the report does not specifically define stablecoins. While the PWG recognizes that stablecoins can include a wide variety of tokens designed to maintain stable value relative to a benchmark, including algorithmic tokens, the report focuses on those stablecoins that are minted in exchange and for fiat -Currency can be redeemed. For this reason, the report emphasizes the use of stablecoins as a means of payment and not for any other purpose, and the risks highlighted in the report reflect that emphasis.
1. Risk of loss of value (i.e. running risk)
The report emphasizes that an instrument requires public confidence in its value in order to serve as a reliable means of payment or a store of value. With regard to stablecoins, the report identifies four potential factors that can undermine the required confidence: use of foreign reserves that can depreciate or become illiquid, lack of adequate protection of foreign reserves, lack of clarity on redemption rights and operational risks related to cybersecurity and Privacy. The report warns that a stablecoin that does not maintain the requisite confidence could pose a “systemic risk” of a run on a single stablecoin or, worse, a run on other stablecoins or other types of financial institutions or instruments believed to be that they have a risk profile. As a result, the report suggests that a fire sale of the underlying currency reserves could disrupt critical finance markets. The volume and liquidity properties of the currency reserves sold would determine the dynamics of a stablecoin run as well as its degree of risk for the economy as a whole.
2. Payment system risk
The report assumes that stablecoin agreements are “exposed to many of the same types of operational risk as existing payment systems.” While recognizing that stablecoins can in some ways be more resilient than other payment systems, the report identifies “novel operational risks” related to transaction validation and confirmation, and the management and integrity of the distributed ledger. For example:
A. Operational Risk
Participants may not be motivated enough to validate transactions to adequately respond to the processing demand, resulting in network congestion.
Operational risk can be difficult to manage or monitor when the supporting infrastructure is beyond the control of a single organization.
B. Settlement Risk
The report raises concerns about the “increased uncertainty” and “credit and liquidity pressures” emanating from some stablecoin agreements that do not clearly define in their rules and procedures when the settlement will be final. In particular, the combination of open network access with consensus-based processing mechanisms can extend the time required for technical processing. The report notes that this, coupled with the lack of a single party responsible for establishing or ensuring the validity of the settlement, may raise questions about the reliability and finality of payments.
C. Liquidity Risk
Because the timing and processes of stablecoin agreements cannot be aligned with other systems such as payment systems, the report identifies a potential liquidity risk that could result in a temporary shortage of available stablecoins.
3. Risks of scale
The failure of an issuer or key participant can pose a systemic risk.
Combining a stablecoin issuer or wallet provider with a commercial company could lead to an excessive concentration of economic power.
The widespread adoption of a single stablecoin as a means of payment could raise anti-competitive concerns.
In the last year alone, stablecoins have shown that they can grow r -idly on both an individual and an aggregated level. Citing this growth, the report raises three sets of policy concerns related to the r -id scaling of a single stablecoin:
While the exponential growth of stablecoins has been significant over the past year, the use of stablecoins is still dwarfed by the traditional payment system, and the systemic threats identified in the report seem to arise from a cloud of concern that a new stablecoin or entrant is the Drive mass adoption of stablecoin on a scale that goes far beyond current usage. While such mass adoption would carry risks beyond those that exist today, the report does not seek to ad -t its recommendations to limit the burdens that can be placed on issuers who are unlikely to pose the same systemic threats.
In addition to these risks posed by scaling a single stablecoin quickly, the report also raises concerns about the overall impact of scaling stablecoins quickly. In particular, the report points out the possibility that insured depositaries could lose private customer deposits in stablecoins, which could lead to considerable burdens for the “real economy”.
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