On November 1, 2021, the President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint report that, among other things, calls on Congress to adopt legislation to enable federal oversight of stablecoin issuers, custodial wallet providers that hold stablecoins, and others (e.g., certain DeFi products, services, and arrangements related to stablecoins).
The report highlights the agencies’ views on risks related to consumer protection, payments and settlements, “runs” due to price fluctuations, illicit finance, and other perceived risks to the US financial system. Specifically, the report calls for legislation that would:
- Require stablecoin issuers to operate as insured depository institutions subject to federal oversight at both the depository institution and holding company levels;
- Subject custodial wallet providers holding stablecoins on behalf of users to federal oversight and empower federal supervisors to impose risk-management standards on “any entity that performs activities that are critical to the functioning of [a] stablecoin arrangement.”
- Limit the ability of stablecoin issuers’ and custodial wallet providers that hold stablecoins to affiliate with commercial entities (e.g., non-financial companies with access to consumer data) to discourage the “concentration of economic power” or to use users’ transaction data and empower federal agencies to promote interoperability among stablecoins.
In the meantime, the report states that “federal financial agencies are committed to taking action to address risks falling within each agency’s jurisdiction,” including through existing investor and market protection measures. The report also calls on the Financial Stability Oversight Council to take steps which could include designating certain stablecoin activities as systemically important payment, clearing, and settlement activities, allowing for additional federal oversight.
According to the report, US federal agencies will continue to cooperate with international groups such as the Financial Action Task Force (FATF) to promote global standards for regulation of stablecoins.
Several days earlier, on October 28, 2021, the FATF issued updated guidance on risk-based regulation of virtual assets and virtual asset service providers for anti-money laundering and counter-financing of terrorism purposes. The updated guidance affirms that stablecoins fall within the scope of the FATF recommendations, whether a country treats them as virtual assets or financial assets (e.g., securities) under national regulation.
For more information on how these developments could impact your company, contact a member of Steptoe’s Blockchain & Cryptocurrency practice.