This article summarizes the latest statements of major US regulatory agencies on stablecoins

Since the beginning of the year, the total market value of cryptocurrencies has evaporated about $1 trillion as investors' concerns about the macro environment have led to a decline in US stocks . Last week, the collapse of the stablecoin TerraUSD (UST) dealt another blow to the troubled market. US regulators are worried that the systemic failure of algorithmic stablecoins will cause greater risks. Stablecoin regulation has become a hot topic. This article will take you to the latest statements of major US financial regulators on stablecoins.

U.S. Securities and Exchange Commission (SEC)

As one of the most comprehensive and powerful regulators in the United States, the SEC enforces federal securities laws and regulates most of the securities industry, including stock exchanges, options markets, options exchanges, and all other electronic exchanges and other electronic securities markets. It is also the most active participant in the U.S. crypto regulatory field.

Many officials believe that the inconsistent regulatory frameworks applicable to stablecoin issuers and service providers create opportunities for regulatory arbitrage and uncertainty for stablecoin users. In addition, the ease with which stablecoins can be transferred, coupled with their peg to the U.S. dollar, has led SEC Chairman Gary Gensler to worry that they pose some unique risks to the financial system and the broader economy.

Last Wednesday, Gary Gensler told a congressional subcommittee that most token issuances are subject to the SEC's securities laws and that the agency will deploy the SEC's enforcement tools to bring tokens under a regulatory framework. In response to a question about black minorities losing the most in the speculative crypto industry, Gensler said that all individual investors are not well protected in this regard, saying: "In the last three weeks alone, there was a crypto project that went from $50 billion in value to close to zero. I mean these are highly speculative, volatile, and dare I say, the public is not protected."

Earlier this month, the SEC expanded its crypto investigations unit (now renamed the "Crypto Assets and Networks Unit") to 50 people, who will be responsible for overseeing crypto trading, lending and staking services, decentralized finance (DeFi), stablecoins, and NFT projects. Gensler emphasized that his agency needs more human resources and funds to regulate the crypto market, saying, "I wish we could do more to do this, we really don't have enough people," and the U.S. Congress is reportedly weighing the SEC's $240 million budget request for fiscal year 2023.

Gensler added that the SEC will be a "cop on call" and will investigate matters such as anti-fraud measures, anti-manipulation and order authenticity.

"Crypto Mom" ​​and SEC Commissioner Hester Peirce recently stated in an interview with Bloomberg that the jurisdiction of stablecoins in the United States is still relatively vague, and the involvement of Congress can help resolve the issue faster.

Commodity Futures Trading Commission (CFTC)

The CFTC is responsible for regulating the U.S. commodity futures and options markets, protecting participants from market manipulation, investigating abusive trading practices and fraud, and maintaining liquidity in the clearing process.

Commodity Futures Trading Commission ( CFTC ) Chairman Rostin Behnam said last Monday that he believes a true cryptocurrency crash would lead to "ripple effects on traditional assets and traditional markets " and that the CFTC will step up enforcement efforts in crypto-related cases.

According to Behnam, the CFTC has filed more than 50 activity-related enforcement actions since 2015, 23 of which were filed in the last fiscal year, and more than half of the total crypto-related cases involved allegations of fraud.

Last October, the CFTC accused Tether of making untrue or misleading statements and omissions regarding material facts related to the USDT stablecoin. According to it, Tether misrepresented to customers and the market that Tether held sufficient U.S. dollar reserves to back each USDT in circulation, as well as an equal amount of corresponding fiat currency held by Tether and securely deposited in Tether's bank account. The CFTC claimed that Tether's reserves were not adequately backed in most cases. In the end, Tether agreed to pay a $41 million fine to settle with the CFTC.

The Federal Reserve and the Treasury Department

The Federal Reserve and the U.S. Treasury have jointly pointed out potential risks associated with certain aspects of stablecoins.

The Fed confirmed that "the total value of stablecoins […] has grown rapidly over the past year, exceeding $180 billion in March 2022," while the Treasury Department acknowledged that stablecoins and other digital assets "provide opportunities to promote innovation and improve efficiency," with both warning of potential systemic risks, including liquidity and valuation issues and vulnerability to runs during periods of market stress. Both agencies proposed addressing regulatory gaps in the digital asset space, with Treasury Secretary Yellen calling for a "coherent federal framework" to address "issues and opportunities presented by digital assets," including stablecoins.

On May 9, the Federal Reserve released its Financial Stability Report. In the report, the Fed assessed the "vulnerability of the financial system" from four key areas: asset valuation, corporate and household borrowing, leverage of the financial sector, and funding risks. One funding risk pointed out in the report is that "some money market funds, bond funds, and stablecoins still have structural vulnerabilities," and specifically pointed out that "the stablecoin industry continues to grow rapidly and still faces liquidity risks."

On May 10, U.S. Treasury Secretary Yellen submitted the Financial Stability Oversight Council (FSOC) annual report to the Senate Banking Committee, discussing the need for sensible stablecoin legislation. Yellen cited the findings in the Presidential Working Group on Financial Markets (PWG) report as the reason for concluding that "the current legal and regulatory framework does not provide consistent and comprehensive standards for the risks of stablecoins as a new type of payment product, and urged Congress to enact legislation to ensure that stablecoins and such businesses have a federal regulatory framework."

Presidential Working Group on Financial Markets (PWG)

While there is consensus at the federal level and among lawmakers on establishing a regulatory framework for stablecoins, there is no consensus on what form it should take.

Last year, President Joe Biden signed a $1.2 trillion bipartisan infrastructure bill — which included some new legislation that will affect the crypto industry. More recently, Biden announced a “whole of government” approach to regulating cryptocurrencies in a sweeping executive order, directing multiple government agencies to answer specific questions about cryptocurrencies.

In November 2021, the President’s Working Group on Financial Markets (PWG), together with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), released a report on stablecoins that acknowledged the benefits of stablecoins, but warned of a range of concerns related to potentially unstable operations, disruptions to payment systems, and concentration of economic power.

The report urges Congress to act quickly to enact appropriate legislation to ensure that stablecoins are subject to a clear regulatory framework on a consistent and comprehensive basis. To this end, the report makes several legislative recommendations, including (i) requiring the establishment of an FDIC-backed stablecoin regulatory framework; (ii) subjecting stablecoin wallet providers to appropriate federal oversight and appropriate risk management standards; and (iii) requiring compliance with activity restrictions that limit affiliations with commercial entities and restrict the use of user transaction data.

Also on November 1, the Treasury Department provided a fact sheet on the PWG report, which explains the purpose of the PWG report and the risks and recommendations provided in the report.

Nellie Liang, Undersecretary of the Treasury for Domestic Finance, introduced the report’s findings and stressed the need for lawmakers to introduce a legal framework for stablecoins and other new digital assets. “The current legal and regulatory framework does not provide a consistent and comprehensive standard for the risks of stablecoins as a new type of payment product.”

Liang stressed that the legal framework must address the prudential risks of stablecoins: (i) risks of stablecoin operation; (ii) risks of payment systems; and (iii) risks arising from the concentration of economic power. Liang commented that despite the establishment of a crypto sprint team by banking institutions and the ongoing assessment of digital exchanges by the SEC and CFTC, much work remains to be done.

Stablecoin Trust Act

On April 6, 2022, Senator Pat Toomey (R-PA) released a discussion draft of the Stablecoin Reserve Transparency and Uniform Secure Transactions Act, also known as the Stablecoin TRUST Act. This would make the United States the only, or at least the only, Western country to fully regulate and accept stablecoins as part of the official financial and banking system.

The TRUST Act would apply to custodial, fiat-backed stablecoins and would only allow three types of entities to issue payment stablecoins: (1) money transmitters authorized under state banking law, (2) insured depository institutions, and (3) a new type of entity called a “state limited payment stablecoin issuer.”

This means that stablecoin issuers will have to choose between obtaining an Office of the Comptroller of the Currency (OCC) license, a federal money transmitter or similar license, or a traditional bank charter. Stablecoin issuers operating in the United States will be subject to a disclosure regime that requires them to conduct regular audits, detail a clear redemption policy, and specify the actual backing factors of the stablecoins they issue.

One of the best parts of the Stablecoin Trust Act is that it does bring stablecoins into the traditional U.S. financial system. OCC-licensed issuers will have access to the Federal Reserve’s master account system, which will give them the ability to leverage the broader financial system and greater liquidity in their transactions.

Summarize

Although cryptocurrency regulation is a hot topic, there is a long way to go before any new rules or regulations are officially introduced. The United States remains a global leader in regulating and embracing the cryptocurrency industry, with the White House at the forefront of cryptocurrency regulation. As the adoption and use of stablecoins continue to develop and grow, how the various federal agencies and lawmakers determine the regulatory framework for stablecoins will be important.