As the cryptocurrency world awaits the Biden administration’s proposals for how to regulate stablecoins, one of the industry’s biggest lobbying groups is out with a wish list of what regulation should look like.
Stablecoins, cryptocurrencies whose values are tied to fiat currencies like the U.S. dollar, precious metals, or short-term securities, are a way to mitigate the inherent volatility of digital coins. They are used by traders to get in and out of trades, and are increasingly being used for more traditional banking products like savings accounts – yet there’s little regulatory oversight or FDIC backing.
In a new 17-page letter to top officials at the U.S. Treasury, Federal Reserve and Securities and Exchange Commission, the Chamber of Digital Commerce argues that stablecoins should not be regulated as securities or money market funds.
Rather the asset class should be regulated as payment systems by standardizing the current system of oversight using money transmission licensing laws applied at the state level, according to the organization, which counts major stablecoin issuers like Binance.US, Circle and more traditional financial players Citigroup and Mastercard among its executive committee.
“Stablecoins are a critical component of the crypto ecosystem and essential that any new policies or regulations allow this technology to grow in a sustainable way,” said Perianne Boring, the Chamber’s founder and president.
“It’s really important we get this right. If we get policy recommendations that don’t allow for stablecoins to operate as payment system instruments it will be pushed overseas,” she added.
Watching and waiting for guidance
The crypto industry’s recommendations come as President Joe Biden’s Working Group on Financial Markets (PWG) — comprised of the Treasury, Fed, SEC and other major U.S. financial regulators — is expected to issue a report soon with recommendations for a regulatory framework for stablecoins.
This week, Bloomberg reported the SEC will have significant authority over regulating stablecoins. But an official involved in the report told Yahoo Finance the SEC won't be granted new authority to oversee stablecoins, and will likely restate what the SEC's existing authorities already are.
Regulators have been considering applying new rules to regulate stablecoins akin to those that govern money-market funds, as well as new banking rules.
The Chamber recommended that stablecoins be regulated as digital payment systems and not investments or a security, since they settle transactions instantaneously using blockchain technology.
The organization cited a Supreme Court opinion that for an investment contract to meet the definition of a security, there must be an expectation of profit. In that vein, they argued that stablecoins are not designed not to increase in value and don’t carry an expectation of profit.
“If stablecoins are classified as securities it would restrict use as retail payments,” Boring warned.
Still, SEC Chair Gary Gensler has repeatedly compared stablecoins to poker chips at a casino — telling Yahoo Finance at the All Markets Summit this week that crypto is like "the Wild West"— and has called on regulators to give the agency more authority to regulate them.
We think the notion that stablecoins pose systemic risks is gravely misguided.Perianne Boring, Chamber of Digital Commerce
The Chamber recommends the federal government should offer the option to obtain a national bank charter, but should not mandate it. The Office of the Comptroller of Currency (OCC) has granted preliminary conditional approval for some virtual currency businesses.
The industry also opposes regulating stable coins as money market funds, arguing that the assets don’t resemble a money market fund, and that money market funds are used as a passive investment. Most stablecoins are not designed to increase in value, and are used for digital payments.
Regulators are increasingly aware of systemic risk, given the rapid growth of the stablecoin market. It sits at over $130 billion right now, up from $37 billion at the beginning of 2021, with some of the more popular stablecoins being Tether (USDT-USD), BinanceCoin (BNB-USD) and Paxos.
While growing quickly, the industry says the global stablecoin market at approximately $132 billion is much smaller compared with the total asset value of U.S. money market funds at over $5 trillion.
“We believe that stablecoin regulation should be tailored to reflect the different risk profiles of varying types of stablecoin payments systems,” the letter said to regulators.
“Accordingly, it would be appropriate for federal regulators to consider additional safeguards only when stablecoin payments systems are adopted at significant scale nationwide,” it added.
The Chamber argues the size of most stablecoin payments systems is similar in size to corporate rewards programs, like airline miles or Starbucks gift cards.
“We have concerns about what we have seen and heard from the PWG so far,” Boring said. “We think the notion that stablecoins pose systemic risks is gravely misguided.”
However, officials are worried about runs on stablecoins. Issuers hold massive amounts of commercial paper or other short-term securities like Treasuries or certificates of deposit, and investors could choose to pull their money out suddenly if cryptocurrencies plunge, leading to losses for investors, or worse, potential runs on the financial system.
“There’s nothing that I can point to that makes a case [stablecoins] are even remotely systemic,” says Boring.
The Digital Chamber of Commerce is focused on U.S.-based stablecoin issuers like Circle, and does not include Tether. Boring points to reserves of U.S. stablecoin issuers like Circle, which are held almost entirely in cash, not commercial paper like Tether.
The Chamber also argues that U.S.-based stablecoin issuers– unlike banks – are not leveraged, and pose little systemic risk. Right now, the organization doesn’t think any U.S.-based stablecoin issuer has reached a significant size that would warrant extra oversight.
“I don’t see how a run could happen in that scenario if the disclosures are correct,” she said. “There is nothing that leads us to believe investors won’t be made whole.”