Earlier this month the President's Working Group made recommendation that stablecoin issuance be restricted to banks and other insured depositary institutions. The PWG specifically recommended that Congress should pass legislation to this effect. [See, President's Working Group on Financial Markets, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency. Report on Stablecoins. (Accessed November 19, 2021).
Parenthetically, and of no surprise, Federal Reserve Chairman Jerome Powell is a member of the PWG.
However, despite the present Federal interest in regulating stablecoins, not all regulators are on the same page. In a speech to the Federal Reserve Bank of Cleveland and the Office of Financial Research, Federal Reserve Board Governor Christopher Waller stated:
While regulations are necessary, they also limit free entry into at least some of the markets in which banks operate. As a result, regulatory oversight can insulate banks from some forms of direct competition. The Congress has long recognized the importance of private-sector competition and customer choice, particularly in payments, and the Congress and the Federal Reserve take regular steps to preserve a competitive payments marketplace.
[Waller, C. Reflections on Stablecoins and Payments Innovations. (Accessed November 19, 2021).
Waller placed great emphasis on the fact he is not advocating a ban on bank's issuance or provision of stablecoin wallets for their customers. However, he suggested that there exists better methods to ensure safety and encourage innovation rather than an outright ban on non-bank issuance.
Waller stated:
I understand the attraction of forcing a new product into an old, familiar structure. But that approach and mindset would eliminate a key benefit of a stablecoin arrangement—that it serves as a viable competitor to banking organizations in their role as payment providers. The Federal Reserve and the Congress have long recognized the value in a vibrant, diverse payment system, which benefits from private-sector innovation.
[Waller, supra.].
Waller's approach to stablecoin regulation would be narrow and limited:
To do so, the regulatory and supervisory framework for payment stablecoins should address the specific risks that these arrangements pose—directly, fully, and narrowly. This means establishing safeguards around all of the key functions and activities of a stablecoin arrangement, including measures to ensure the stablecoin "reserve" is maintained as advertised. But it does not necessarily mean imposing the full banking rulebook, which is geared in part toward lending activities, not payments.
[Waller, supra.].
And in Waller's thinking, this system would work:
[i]f an entity were to issue stablecoin-linked liabilities as its sole activity; if it backed those liabilities only with very safe assets; if it engaged in no maturity transformation and offered its customers no credit; and if it were subject to a full program of ongoing supervisory oversight, covering the full stablecoin arrangement, that might provide enough assurance for these arrangements to work.
[Waller, supra.].
In many areas of Waller's speech he rightfully spoke to stablecoin competition with the existing traditional banking system. In this regard, he expressed:
With the right network design, stablecoins might help deliver faster, more efficient retail payments as well, especially in the cross-border context, where transparency can still be low and costs can still be high. Stablecoins could be a source of healthy competition for existing payments platforms and help the broader payments system reach a wider range of consumers. And, importantly, while stablecoins and other payment innovations could create new risks, we should not foreclose the possibility that they may help address old ones—for example, by providing greater visibility into the resources and obligations that ultimately support any system of privately issued money.
[Waller, supra.].
Waller does call for supervision of stablecoins, but rejects an outright ban. In Waller's own words:
But to capture those benefits, stablecoins must bridge the biggest gap between them and commercial bank money: robust, consistent supervision and regulation and appropriate public backstops. Strong oversight, combined with deposit insurance and other public support that comes with it, is what makes bank deposits an acceptable and accepted form of money. Today stablecoins lack that oversight, and its absence does create risks.
[Waller, supra.].
Risks identified by Waller with respect to stablecoins as they now exist include: the risk of a destabilizing run; the risk of a payment system failure; and, a risk of scale. The PWG's answer to these risks is to limit issuance of payment stablecoins to insured depository institutions and to further limit other non-bank intermediaries. As there are economic similarities between payment stablecoins and bank deposits, Waller does not oppose banks issuing both instruments. But importantly, he does oppose sole issuance of stable coins by banks. In this regard Waller states:
The Federal Reserve and the Congress have long recognized the value in a vibrant, diverse payment system, which benefits from private-sector innovation. That innovation can come from outside the banking sector, and we should not be surprised when it crops up in a commercial context, particularly in Silicon Valley. When it does, we should give those innovations the chance to compete with other systems and providers—including banks—on a clear and level playing field.
[Waller, supra.].
Waller's sentiment is echoed in Congress by certain members especially when addressing the stifling effect of overreaching governmental regulation on innovation. In particular, Sen Mike Lee (R-Ut.) is on point:
As technology improves and new and growing markets emerge, there will always be a temptation in Washington to expand the federal government’s regulatory role over the private sector and attempt to centrally control our innovation. However, Senator Lee believes a responsible approach to technology policy is one where the federal government restrains itself to its limited constitutional authorities and even then only acts in a manner that is narrowly tailored to address the specific challenge. This authority must be exercised carefully because government intervention tends to hinder, rather than empower, American innovators and can insulate the largest, most powerful companies from their competitors...If we want reforms to successfully combat discriminatory action, ensure competition, and crack down on obscene content to protect our children, all while preserving a fair marketplace and continued innovation, Senator Lee believes Congress must engage in robust debate, exercise its limited, proper role, and consider how its actions may lead to other consequences.
[Lee, M. Technology. (Accessed November 19, 2021)].
Waller's position, which with a high degree of certainty would be echoed by Sen. Lee, is that the PWG recommendations go too far. Limiting stablecoin issuance to banks would be non-competitive and would stifle innovation and would have the effect of putting Tether and Circle out of the market unless they obtain the proposed banking charter.
A totally unacceptable solution under the circumstances present and a clear case of governmental overreaching.*