Regulators Want to Push Crypto’s Shadow Bankers Into the Light
The message from the powers that be in Washington to the shadow bankers of the crypto world couldn’t be clearer: It’s time to become a real bank.
That’s one of the main takeways from a President’s Working Group on Financial Markets report on stablecoins, which are tokens designed to be stand-ins for dollars and other national currencies in crypto markets. The coins, which are meant to track the dollar or another currency or asset 1-for-1, have become an integral part of crypto markets. The value of the top stablecoins has exploded almost 500% over the past 12 months and exceeded $130 billion as of October, according to data from Coin Metrics and The Block cited in the report.
The report urges Congress to pass legislation that requires stablecoin issuers to become insured depository institutions subject to the same supervision and regulation as banks. The goal is to avoid risks, such as fraud, human or computer error, or a crisis of confidence that causes a “run” on stablecoins that triggers losses for coins that investors were led to believe would always be worth $1 each.
There’s a general understanding among the agencies that produced the report that today’s activity can mostly be handled by market regulators, but risks to overall financial stability will increase if stablecoins rapidly grow into real-world uses for payments, according to a senior administration official involved in the report who asked not to be named. To address that risk, regulators believe Congress needs to intervene and explicitly give the banking overseers powers over stablecoin issuers, the official added, because the main weakness of current legal powers is that the Federal Reserve, Federal Deposit Insurance Corp. or other agencies can’t just reach out and define entities as being in their jurisdiction.
Obviously, given the difficulty that Congress has had in passing any new laws this year, the probability that lawmakers will hunker right down and agree to sweeping crypto-world regulations anytime soon is arguably slim. Still, this report sets down a marker that could influence the direction the industry travels as it matures.
Even if the President’s Working Group on Financial Markets, which includes the Fed, Treasury and Securities and Exchange Commission, gets its wish for legislation, it’s unclear if it will be enough to completely snuff out the stablecoin projects in the decentralized-finance world that are run solely on algorithms without the backing of any real-world assets. Still, this proposed legislation would be enough to push those coins further into the margins, and create a bifurcated market between legitimate and gray-market tokens.
For big exchanges like Coinbase Global Inc., which is part of a consortium behind the USDC stablecoin, and Binance, which has its own dollar stablecoin called BUSD, a major choice is at hand. They can simply ignore the report and hope the recommendations it makes never actually get passed as law.
Or they can start taking steps now to create or buy banking subsidiaries to manage their stablecoins as well as some of the other products they offer -- or would like to offer -- that arguably are subject to securities or derivatives regulations. Taking that step won’t be easy. For one thing, succumbing to the oversight of the government goes against the anti-establishment ethos that is part of the DNA of the crypto industry. Not to mention, complying with banking rules and paying for deposit insurance will add another layer of costs that will make it harder to profitably issue a stablecoin, especially in the current environment with barely-there interest rates for the safest assets where they can invest the real dollars backing their coins. Stablecoins, in that case, may need to be viewed as a sort of loss leader rather than something that adds to the bottom line.
Yet, if they’re not willing to play by the government rules, they run the risk of some fierce new competition: Big banks and other financial firms that already are playing by the rules.
©2021 Bloomberg L.P.