Regulators Plot Plan B for Stablecoin Rules If Congress Fails

(Bloomberg) -- A key group of financial overseers said it will take action to rein in stablecoins if Congress fails to pass comprehensive legislation to regulate the tokens, the latest sign that the U.S. government is becoming increasingly alarmed by threats cryptocurrencies pose to the financial system. 

Digital assets are some of the top concerns outlined by the Financial Stability Oversight Council in its annual report published on Friday, which also highlighted the dangers posed by climate change, meme stocks and vulnerabilities exposed by the failure of Archegos Capital Management. The council -- a panel including all the heads of the U.S. financial agencies -- is ramping up again this year after remaining largely dormant during the Trump administration. 

The regulators noted that purported reserves backing stablecoins aren’t reliable and any losses could spark a panic akin to a bank run. Last month, another panel, the President’s Working Group on Financial Markets, called for Congress to take the lead in setting bank-like rules for coin issuers.

But the financial council took that one step further in its report Friday, indicating it will consider additional steps “in the event comprehensive legislation is not enacted.” That could mean directing regulatory agencies to stretch their existing powers to impose some safeguards. In a briefing with reporters, a senior Treasury Department official said FSOC expects -- and hopes -- that Congress will pass a law. 

The council said staff is developing a “framework” to address hazards of overly leveraged hedge funds. Also, the meltdown of Archegos -- Bill Hwang’s family office that racked up billions of dollars in losses for some of the world’s largest banks -- highlighted risk-management problems on Wall Street that “might have been more significant” had the fallout happened during a period of market stress, the report said. 

Climate Change

Climate change is a top priority for the Biden administration and Friday’s report is the first of its kind to highlight risks a warming planet poses to the financial system, according to a Treasury official. The officials said financial firms need to brace themselves for the potential costs, and said a new staff committee will be collecting data and developing strategies to assess potential threats. 

“Increased frequency and severity of acute physical risk events and longer-term chronic phenomena associated with climate change are expected to lead to increased economic and financial costs,” according to the FSOC.

The FSOC is scheduled to meet on Friday to approve the report. The document also called out:

• Global financial risks include “the possibility that financial vulnerabilities in China could lead to a hard landing” and weigh on the economy
• Risks to financial stability are more severe now than they were before the pandemic, and economic growth is likely to be uneven across sectors and countries
• The rise of GameStop Corp. and other meme stocks earlier this year raised questions about how investors coordinate on social media
• On crypto, the regulators cautioned against using DeFi applications to leverage their investments and said those who do “face considerable market risk from volatile market prices”
• The transition away from Libor “is entering a critical stage” and “market participants should act with urgency to address their existing Libor exposures and transition to robust and sustainable alternative rates”

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