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Biden administration weighs stablecoin regulation outside of traditional banks

The President’s Working Group (PWG) on Financial Markets is open to regulating stablecoin issuers through methods other than as banks, according to an administration official.

The PWG – a group composed of the heads of Treasury, the Federal Reserve, and the Securities and Exchange Commission, among other financial regulatory bodies – met in a closed door meeting Thursday morning.

The group discussed oversight of stablecoins following the run on TerraUSD, which caused shockwaves in crypto markets in early May.

This meeting also comes as negotiations over legislation to regulate stablecoins intensify on Capitol Hill. According to an administration official, there is a concerted effort to get stablecoin legislation done this year.

The PWG initially recommended last fall that only banks, which are subject to more rigorous oversight and regulation, should be allowed to issue stablecoins.

Now, however, officials are open to exploring other models outside of insured depository institutions, including a remote subsidiary option. This is the first time the administration has acknowledged a model outside of traditional banks that could suffice. Stablecoins are cryptocurrencies pegged to a fiat currency like the US dollar.

The PWG feels any legislation has to reflect how stablecoins are used today and how they may be used in the future, according to the administration official, including as a form of payment.

Any legislation would need to preserve the existing authorities of regulators at the very least. The financial agency heads feel that the status quo is unacceptable and are working together to offer constructive feedback to lawmakers.

Evolving plans in Congress

The meeting comes as a new legislative effort is emerging in the House Financial Services Committee by Chairwoman Maxine Waters (D-CA) and ranking member Patrick McHenry (R-NC) to regulate stablecoins.

This follows two bills in the Senate: a comprehensive bill put forth by Senators Cynthia Lummis (R-WY) and Kirstin Gillibrand (D-NY) that would not require that all stablecoin issuers become banks overseen by banking regulations. Instead, the bill would require stablecoins to be 100% backed by reserve-like assets, such as Treasuries or dollars, and include detailed disclosure requirements for all issuers to guarantee that stablecoin holders can redeem the stablecoin in exchange for the equivalent dollar value at any time.

Another draft proposal, by Senator Pat Toomey (R-PA), would create a new federal license to allow companies to issue stablecoins while still allowing for the state-registered money transmitter status for many existing stablecoin issuers, or insured depository institutions to issue stablecoins.

Ranking member Senator Pat Toomey, questions Treasury Secretary Janet Yellen during the Senate Banking, Housing, and Urban Affairs Committee hearing titled “The Financial Stability Oversight Council Annual Report to Congress,” in Dirksen Senate Office Building in Washington, D.C.,U.S., May 10, 2022. Tom Williams/Pool via REUTERS
Senator Pat Toomey in Washington, D.C.,U.S., May 10, 2022. Tom Williams/Pool via REUTERS (POOL New / reuters)

The Financial Stability Oversight Council, a group composed of heads of all financial regulatory agencies formed following the financial crisis to keep a pulse on threats to the financial system, continues to keep an eye on stablecoins and the potential threat they pose to the financial system. The group has not made a decision on whether to take action yet, and still favors legislation as the best way to police stablecoins.

The meeting comes following a run on stablecoin TerraUSD and its sister token Luna shook crypto markets in early May. Crypto markets have been under pressure for much of 2022, with bitcoin (BTC-USD) and ethereum (ETH-USD) both trading at their lowest levels since late 2020.

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