\n
![](\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMTIvZGJlYzc4MjUtNzQ4Yy00MjBkLWFkNGEtMGEzYTBhMTBmMTdiLmpwZw==.jpg\")
<\/p>\n
\n<\/p>\n
Regulators around the world have been thinking seriously about the risks associated with stablecoins since 2019 but recently, concerns have intensified, particularly in the United States.\u00a0<\/p>\n
In November, the United States\u2019 President\u2019s Working Group on Financial Markets, or PWG, issued a key report, raising<\/a> questions about possible \u201cstablecoin runs\u201d as well as \u201cpayment system risk.\u201d The U.S Senate followed up in December with hearings on stablecoin risks.<\/p>\n It raises questions: Is stablecoin regulation coming to the U.S. in 2022? If so, will it be \u201cbroad stroke\u201d federal legislation or more piecemeal Treasury Department regulation? What impact might it have on non-bank stablecoin issuers and the crypto industry in general? Could it spur a sort of convergence where stablecoin issuers become more like high-tech banks?<\/p>\n We are \u201calmost certain\u201d to see federal regulation of stablecoins in 2022, Douglas Landy, partner at White & Case, told Cointelegraph. Rohan Grey, an assistant professor at Willamette University College of Law, agreed. \u201cYes, stablecoin regulation is coming, and it\u2019s going to be a dual push\u201d marked by a growing impetus for comprehensive federal legislation, but also pressure on Treasury and related federal agencies to become more active. <\/p>\n Others, however, say not so fast. \u201cI think the prospect of legislation is unlikely before 2023 at least,\u201d Salman Banaei, head of policy at cryptocurrency intelligence firm Chainalysis, told Cointelegraph. As a result \u201cthe regulatory cloud looming over the stablecoin markets will remain with us for a while.\u201d <\/p>\n That said, the hearings and draft bills that Banaei expects to see in 2022 should \u201clay the groundwork for what could be a productive 2023.\u201d<\/p>\n Most agree that regulatory pressure is building \u2014 and not just in the U.S. \u201cOther countries are reacting to the same underlying forces,\u201d Grey told Cointelegraph. The initial catalyst was Facebook\u2019s 2019 Libra (now Diem) announcement that it aimed to develop its own global currency\u2014 a wake-up call for policymakers \u2014 making it clear \u201cthat they could not stay on the sidelines\u201d even if the crypto sector was (then) \u201ca small, somewhat quaint industry\u201d that posed no \u201csystemic risk,\u201d Grey explained. <\/p>\n Today, there are three main factors that are propelling stablecoin regulation forward, Banaei told Cointelegraph. The first is collateralization, or the concern, also articulated in the PWG report, that, according to Banaei:<\/p>\n \u201cSome stablecoins are providing a misleading picture of the assets underpinning them in their disclosures. This could lead to holders of these digital assets waking up to a seriously devalued stake as a function of a repricing and possibly a run.\u201d<\/p><\/blockquote>\n The second worry is that stablecoins \u201care fueling speculation in what is perceived as a dangerous unregulated ecosystem, such as DeFi applications that have yet to be subjected to legislation as other digital assets have,\u201d continued Banaei. Meanwhile, the third concern is \u201cthat stablecoins could become legitimate competitors to standard payment networks,\u201d benefitting from regulatory arbitrage so that one day they may provide \u201cbroadly scalable payments solutions that could undermine traditional payments and banking service providers.\u201d<\/p>\n To Banaei\u2019s second point, Hilary Allen, a law professor at American University, told<\/a> the Senate in December that stablecoins today aren’t being used to make payments for real-world goods and services, as some suppose, but rather their primary use \u201cis to support the DeFi ecosystem [\u2026] a type of shadow banking system with fragilities that could [\u2026] disrupt our real economy.\u201d<\/p>\n Grey added: \u201cThe industry got bigger, stablecoins got more important and stablecoins\u2019 positive spin got tarnished.\u201d Serious questions were raised<\/a> in the past year about industry leader Tether\u2019s (USDT<\/a>) reserve assets but later, even more compliant seemingly well-intentioned issuers proved misleading with regard to reserves. Circle, the primary issuer of USD Coin (USDC<\/a>), for instance, had claimed that its stablecoin \u201cwas backed 1:1 by cashlike holdings\u201d but then it came out that \u201c40 percent of its holdings were actually in U.S. Treasurys, certificates of deposit, commercial paper, corporate bonds and municipal debt,\u201d as the New York Times pointed out<\/a>.<\/p>\n In the past three months, a kind of \u201cpublic hype has entered a new level,\u201d continued Grey, including celebrities promoting crypto assets and nonfungible tokens, or NFTs. All these things nudged regulators further along. <\/p>\n \u201c2022 is probably too early for comprehensive federal stablecoin legislation or regulation,\u201d Jai Massari, partner at Davis Polk & Wardwell LLP, told Cointelegraph. For one thing, it\u2019s a midterm election year in the U.S., but \u201cI think we\u2019ll see a lot of proposals, which are important to form a baseline for what stablecoin regulation could be,\u201d she told Cointelegraph.<\/p>\n If there is no federal legislation, the Financial Stability Oversight Council, or FSOC, might act on stablecoins in 2022. The multi-agency council\u2019s 10 members include heads of the SEC, CFTC, OCC, Federal Reserve and FDIC, among others. In that event, non-bank stablecoin issuers might expect to be subject to liquidity requirements, customer protection requirements and asset reserve rules \u2014 at a minimum, Landy told Cointelegraph, and regulated \u201clike money market funds.\u201d <\/p>\n Banaei, for his part, deemed an FSOC intervention in stablecoin markets \u201cpossible but unlikely,\u201d though he could see Treasury actively monitoring stablecoin markets in the coming year.<\/p>\n A stronger step might require stablecoin issuers to be insured depository institutions, something recommended in the PWG report<\/a> and also suggested in some legislative proposals like the 2020 Stable Act which Grey helped to write. <\/p>\n Massari doesn\u2019t think imposing such restrictions on issuers is necessary or desirable. When she testified<\/a> before the Senate\u2019s Committee on Banking, Housing and Urban Affairs on Dec. 14, she stressed that a \u201ctrue stablecoin\u201d is a form of a \u201cnarrow bank,\u201d or a financial concept that dates back to the 1930s. Stablecoins \u201cdo not engage in maturity and liquidity transformation \u2014 that is, using short-term deposits to make long-term loans and investments.\u201d This makes them inherently safer than traditional banks. As she later told Cointelegraph:<\/p>\n \u201cThe superpower of [traditional] banks is that they can take deposit funding and not just invest in short-term liquid assets. They can use that funding to make 30-year mortgages or to make credit card loans or investments in corporate debt. And that is risky.\u201d <\/p><\/blockquote>\n It\u2019s the reason traditional commercial banks are required to buy FDIC (i.e., deposit) insurance through premium assessments on their domestic deposits. But, if stablecoins limited their reserve assets to cash and genuine cash equivalents such as bank deposits and short-term U.S. government securities they arguably avoid the \u201crun\u201d risk and don\u2019t need deposit insurance, she contends.<\/p>\n There\u2019s no question, however, that fear of a stablecoin run remains on the minds of U.S. financial authorities. It was flagged in the PWG report and again in FSOC’s 2021 annual report<\/a> in December:<\/p>\n \u201cIf stablecoin issuers do not honor a request to redeem a stablecoin, or if users lose confidence in a stablecoin issuer\u2019s ability to honor such a request, runs on the arrangement could occur that may result in harm to users and the broader financial system.\u201d<\/p><\/blockquote>\n \u201cWe can\u2019t have a run on deposits,\u201d commented Landy. Banks are already regulated and don\u2019t have issues with liquidity, reserves, capital requirements, etc. All that\u2019s been dealt with. But, that\u2019s still not the case with stablecoins.<\/p>\n \u201cI think there are positives and negatives if stablecoin issuers are required to be insured depository institutions (IDI),\u201d said Banaei, adding: \u201cFor example, an IDI could issue FDIC-protected stablecoin wallets. On the other hand, fintech innovators would then be compelled to work with IDIs, making IDIs and their regulators effectively the gatekeepers for innovation in stablecoins and related services.\u201d<\/p>\n Grey thinks a deposit insurance requirement is coming. \u201cThe [Biden] Administration seems to be adopting that view,\u201d and it\u2019s gaining traction overseas: Japan and Bank of England both appear to be leaning in this direction. Those authorities recognize that \u201cIt\u2019s not just about credit risk,\u201d he told Cointelegraph. There are operational risks, too. Stablecoins are just so much computer code, subject to bugs and the technology might fail, he told Cointelegraph. Regulators don\u2019t want consumers to be hurt.<\/p>\n Looking ahead, Grey foresees a series of convergences in the stablecoin ecosystem. Central bank digital currencies, or CBDCs, many of which appear close to roll-out, will have a two-tier architecture and the retail tier will look like a stablecoin, he suggests. That\u2019s one convergence. <\/p>\nTemperature is rising<\/h2>\n
Regulation by FSOC?<\/h2>\n
Will stablecoins have deposit insurance?<\/h2>\n
What\u2019s coming next?<\/h2>\n