SEC’s Peirce sees room to regulate stablecoins through bank ‘lens’

Some fintech companies support bank-like regulation

Sen. Cynthia Lummis says requiring stablecoin issuers to be insured like depository institutions will serve big banks at the expense of startups. (Tom Williams/CQ Roll Call file photo)
Sen. Cynthia Lummis says requiring stablecoin issuers to be insured like depository institutions will serve big banks at the expense of startups. (Tom Williams/CQ Roll Call file photo)
Posted November 9, 2021 at 7:30am

The Biden administration's recommendation that Congress pass legislation that would require stablecoin issuers to be regulated like banks may make sense for many of those assets, according to Hester Peirce, a Republican commissioner at the Securities and Exchange Commission, and to some stablecoin issuers.

While some Republican lawmakers slammed the recommendation issued in a report from the President’s Working Group on Financial Markets last week, Peirce was less dismissive. Support from regulators such as Peirce may be essential to move the idea forward, especially if Republicans are opposed.

Stablecoins, or digital tokens whose value is tied to national currencies such as the U.S. dollar, are a common way to trade virtual assets, including bitcoin. The President’s Working Group on Financial Markets, a task force of regulators focused on promoting market stability, issued a report on Nov. 1 calling on Congress to move quickly to enact legislation that would install safeguards.

The group — led by Treasury Secretary Janet L. Yellen and including regulators from the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation — recommended legislation that would treat stablecoin issuers like banks and require custodial wallet providers, which protect customers' funds and the private keys that users employ to access their crypto, to be subject to federal oversight.

Peirce said in an interview with CQ Roll Call that it makes sense for a lot of stablecoins to be regulated through a bank "lens." 

“There might be specific facts and circumstances that would suggest that something is within our jurisdiction,” Peirce said. “But generally speaking, I don’t have an issue with bank regulators taking stablecoins into their jurisdiction.”

Ultimately, Peirce said she wants a framework for stablecoins that makes sense and allows them to be used. 

“I think private stablecoins are a good alternative to a central bank digital currency, so whatever regulatory framework is put around them … should recognize that they play a valuable role,” Peirce said. “They now play a valuable role in the crypto world in decentralized finance, but they could play an even more valuable role more broadly in a lot of different ways.”

The task force’s report raises jurisdictional challenges that regulators face when it comes to stablecoins, said Rep. Patrick T. McHenry, R-N.C., the ranking member on the House Financial Services Committee. 

“The Biden administration seems determined to stop innovation in its tracks — harming American consumers and our international competitiveness,” McHenry said after the working group issued its recommendations. “Unfortunately, congressional Democrats and the administration appear committed to blocking technology they don’t understand." 

Republican Sen. Cynthia Lummis of Wyoming, the first senator to publicly acknowledge owning bitcoin, said she agreed with the need for legislation but requiring issuers to be insured like depository institutions is “misguided and wrong.” The group’s recommendation will serve big banks at the expense of startups, she argued.

“As of now, it’s not even clear that FDIC insurance is available for stablecoins,” Lummis said. “There are other, safer ways of achieving the same objectives.”

Many financial technology and crypto companies have said they want responsible innovation and want to embrace regulation, Josh Sterling, a former director of the Commodity Futures Trading Commission’s Market Participants Division, said in an interview. 

“I think a comprehensive, simple, regulatory regime will make sense eventually,” said Sterling, a partner in the financial markets practice at law firm Jones Day. “I wouldn’t say the time is now because the market is dynamically evolving, but there is a place for regulation.” 

There should be one set of rules, and it should be simple to promote innovation in the long run, he said.

“What this report essentially says is, let’s take the standards we have now that worked from the 1930s until today and apply that to stablecoins,” Sterling said. That's not being "pro-innovation," he added. 

Innovators' support

Federal agencies’ staff sought input from Circle, Tether and other stablecoin issuers and found that some fintech companies are on board.

Circle CEO Jeremy Allaire said at a Brookings Institution event last week that he supports the task force’s recommendation to treat stablecoin issuers as banks. The company offers a stablecoin USD Coin, which it says is fully backed by reserves. The goal of the company's foray into commercial banking was to establish the first national fully reserved digital currency bank in the United States.

“That remains our intention, and it’s good that it’s aligned with how the Fed and Treasury and others are thinking about this,” Allaire said.

At the same time, he said the recommendation that Congress require custodial wallet providers to be subject to federal oversight has components that make sense and others that are problematic.

“To use an overused phrase, we don’t want to throw the baby out with the bathwater,” he said. “And so in a scenario where, where we say, well, any wallet that an intermediary is responsible for should be under the Fed supervision is sort of like saying anyone who wants to run [an email] server should be under [Federal Communications Commission] supervision.”

In October, Circle revealed it received an investigative subpoena from the SEC's Enforcement Division requesting documents on its programs and operations. Circle said it was cooperating with the investigation. 

Tether, a company that has a popular stablecoin, supported the task force’s report. 

“The ecosystem has been waiting for clarity about stablecoin regulation for a long time,” the company said in a Nov. 1 statement. “Once proper guidelines are implemented, we believe that it will be a catalyst for further adoption of digital assets and financial innovation.”

Tether settled with the CFTC in October over allegations it made misleading statements on whether its stablecoin was fully backed by national currencies, such as the U.S. dollar.

Protecting investors

Public Citizen, a consumer rights advocacy nonprofit, said it supports many of the recommendations in the report, although “relying on this Congress to rewrite the law for all cryptocurrencies could be a jump ball in a game that Wall Street knows all too well how to rig,” said Bartlett Naylor, the group's financial policy advocate.

“Regarding legislation, we’re concerned that too many members of Congress trumpet crypto regardless of some of the obvious potential problems,” Naylor said in an email. 

Congressional action may be needed to “bridle" Facebook and other companies over their crypto plans, Naylor said in a statement. Facebook's stablecoin Diem, formerly called Libra, was criticized by regulators and lawmakers who said it would threaten monetary stability and the U.S. dollar’s dominance. Facebook Inc. renamed itself Meta Platforms Inc. last week; it will continue to operate the Facebook brand.

Consumer Financial Protection Bureau Director Rohit Chopra said his agency is actively monitoring and preparing for broader consumer adoption of cryptocurrencies after release of the stablecoin report. The agency was not part of the working group.

But the financial technology industry also has opponents to the group's recommendations.

“My sense is, is that no one is happy with the report,” Alan Konevsky, chief legal officer of tZero, a blockchain company, said in an interview.

People arguing for immediate, aggressive regulation because they're concerned about adequate reserves and systemic stability were probably disappointed because the report doesn’t emphasize the existing powers of the SEC and other regulators, he said. Others might say the industry is already striking the right balance and the suggested requirements will have a negative impact on the market and innovation.

"On balance, however, we believe that a dialogue in consultation with industry around the regulatory approach at the legislative level is a positive step," Konevsky said.