The U.S. House Committee on Financial Services holds a hearing on Tuesday 8 with only one witness, Nellie Liang, Under Secretary for Domestic Finance at the U.S. Department of the Treasury, who will recommend that the House pass new legislation to regulate stablecoins due to the inherent financial risks that this type of digital asset can pose to the U.S. financial system.
According to Liang’s written statement, the Treasury supports the innovation brought by digital assets, but believes they also raise policy concerns, including illicit finance, user protection and systemic risks. “To mitigate these risks while supporting the potential benefits from innovation, Treasury believes that regulation of stablecoins should be clear and consistent.”
Liang uses the work published by the President’s Working Group (PWG) on Financial Markets to reiterate the idea that “appropriate federal prudential oversight” is needed, and this should come in the form of legislation that would complement existing authorities with respect to market integrity and investor and consumer protection.
Stablecoins have the potential to be used as means of payments given that the design mechanisms they rely on can help these assets to maintain a stable value, unlike cryptocurrencies. But it is precisely this stability that could cause some risks if these digital assets are not properly regulated.
According to Liang, the main risks associated with stablecoins are “run risks” and “payment system risks.”
“Run risk refers to the potential for a scenario in which a loss of confidence in a stablecoin sets off a wave of stablecoin redemptions, which could then be followed by distressed sales of the stablecoin’s reserve assets. Such distressed sales of assets could negatively affect critical funding markets and broader financial conditions.”
“Payment system risks” refer to a disruption in the mechanisms used to store or transfer value, which could interfere with the ability of users to make or settle payments. Payment system risks distinguish stablecoins from certain investment products that are not designed to serve as a means of payment.”
“The current regulatory framework that applies to stablecoin issuers and service providers are inconsistent, creating opportunities for regulatory arbitrage and uncertainty among stablecoin users,” said Liang.
Then Liang continues explaining why the existing authorities — namely, the Securities and Exchange Commission and the Commodities Future Trading Commission — don’t have the necessary regulatory tools to provide a comprehensive and consistent oversight of stablecoins.
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Liang doesn’t go as far as saying which agency should be dealing with the oversight of the stablecoins or if these digital assets may be a security or a commodity. However, she says that even assuming that stablecoins could satisfy the definition of securities, it is not clear if these regimes could effectively address the prudential risks of stablecoins.
The recommendations based on the PWG report include requiring stablecoin issuers to be insured depositary institutions (IDI) because IDI are subject to a regulatory and supervisory framework but also to regulate the intermediaries that participate in digital asset markets. In this category may be included banks, investment companies and traditional financial actors as well as new players like custodial wallets providers, and digital asset exchanges.
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