President’s Working Group Stablecoin Report Provides Opportunity with Uncertainty Remaining

After months of industry anticipation, on November 1, 2021, the President’s Working Group on Financial Markets (PWG) released their report outlining the regulatory landscape for stablecoins. The report provided some insight on the administration’s views on stablecoins but largely punted the regulatory clarity to Congressional action.

The report was the first in a series of government reports to set the landscape on stablecoin and cryptocurrency regulation and legislation. Regulators from the Securities and Exchange Commission (SEC) to the Commodity Futures Trading Commission (CFTC) have been jockeying for months over jurisdiction of the industry, with more regulators such as the Consumer Financial Protection Bureau (CFPB) recently entering the fight for authority.

At the same time, the digital asset industry has awoken to the threats of Washington and the need to better educate their value and shape their oversight as the report will trigger further action throughout Capitol Hill from hearings across several Committees to agency staffers meeting with key stakeholders.

The report argues that stablecoins could pose risks to the financial services sector if left unmanaged while acknowledging the potential benefits of stablecoins if well-designed and adequately regulated. The PWG report highlights regulatory gaps in the authority to reduce these risks. While stablecoins make up a smaller portion of the broader crypto market, the group’s decision to release a report on the topic acknowledges their potential impact on the financial services sector and showcases the need for those in that industry to educate around their benefits and any perceived risks.

The agencies recommend that Congress act promptly to enact legislation that will ensure that stablecoins and payment stablecoin arrangements are subject to a federal framework on a consistently basis and subject stablecoins to bank-like supervision. While this report is limited to stablecoins, work on digital assets and other innovations related to cryptographic and distributed ledger technology is ongoing throughout the Administration. Key takeaways for the industry of the report include:

• Attention turns to Legislation – The report calls on Congress to take the lead in regulating stablecoins by giving agencies the ability to regulate stablecoin issuers like banks with robust capital requirements, constant supervision, and Federal Reserve supervision. The report goes as far as suggesting companies should be barred from offering stablecoins unless they are insured depository institutions. The report also suggests Congress subject stablecoin issuers to federal oversight and prevent stablecoin issuers from partnering with commercial entities.
• Financial Stability Oversight Council (FSOC) Designation Threat- If Congress does not give the agencies the authority to regulate stablecoin issuers like banks, they will turn to the Financial Stability Oversight Council, which could declare stablecoins a systemic threat to financial stability. As with Congressional action, the FSOC process may also be drawn out as it is a 15-member council (10 of which have a voting seat) with competing agencies.
• Agency Jurisdiction Largely Unanswered- Amid an ongoing turf war over authority on stablecoins, the report left the question over which regulator will take the lead on regulation unanswered. Instead, the report states that the SEC and CFTC have shared authority on stablecoins for now, with broad enforcement, rulemaking, and oversight authorities on the topic. The Treasury Department will continue to lead efforts at the Financial Action Task Force (FATF), pushing other countries to implement international anti-money laundering (AML) standards, while supervising domestic AML regulatory efforts. The report also states that the Consumer Financial Protection Bureau (CFPB) could have a role in regulating customer payments involving stablecoins. Lastly, it admits that some activities fall “outside of the regulatory perimeter altogether.”
• Security Versus Commodity Classification Left in the Air- The report does not give a definition or set of guidelines to determine whether a stablecoin is a security or commodity, acknowledging that depending on their structures, stablecoins can be either securities or commodities. This further complicates the ongoing turf war between the CFTC and SEC for leading authority over the broader industry.

While the report largely punts to Congressional action, it’s a long road ahead. Prompt Congressional movement on the legislation suggested in the report seems unlikely as influential Republican members, House Financial Services Ranking Member Patrick McHenry (R-NC) and Senate Banking Ranking Member Pat Toomey (R-PA), swiftly released criticism of the report. Hearings are likely next from the House Financial Services, Senate Banking, Senate and House Agriculture Committees. And more government reports are coming including a report on a central bank digital currency from the Federal Reserve. This next phase is clearly an opportunity.

In recent years, banking-related legislation moved through Congress, typically the Senate, with an element of unanimous consent. The PWG’s call for legislation on certain aspects of stablecoins and wallets are far from gaining unanimous support. The tight margins in Congress make passing legislation of this complex nature difficult but not impossible.

For this to happen, successful negotiations need to occur and interested firms need to begin to actively engage in a government affairs and public affairs strategy to properly focus on the road ahead in Washington. The digital asset space is already outnumbered by traditional financial services industry influence in Washington and the need for greater awareness is clear among multiple stakeholders. Legislation to limit financial innovation, collect individual users’ wallet data, or give the CFPB additional authority would be difficult to pass through the normal Congressional process. Other recommendations including an overall framework could take time and stakeholder input to develop, but absent an effort by crypto supporters to pass any legislation and begin real negotiations, the recommendations won’t become law. The uphill battle on the Hill provides an opening for the digital asset industry to engage, educate and activate in Washington.

This summer, the digital asset industry was caught off guard with a crypto tax provision in the infrastructure bill and they were left to scramble with a response. Lawmakers continue to lack appropriate knowledge on the topic. Education is critical. In its report, PWG acknowledged the industry actors that engaged with them in the report. The PWG opens the door to the industry to help shape the next Congressional response. More of that is needed. Now more than ever regulators and Congressional leaders need that input and the expertise of the crypto industry on this landscape to ensure the new regulatory environment continues to foster the necessary innovation.

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