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US authorities should prioritise developing regulation of stablecoins and consider a digital dollar, write Amy Caiazza and Neel Maitra of international law firm Wilson Sonsini Goodrich & Rosati.
As Congress and US regulators develop policy around digital assets, two principal priorities should be a regulatory framework for stablecoins and consideration of a digital dollar.
Stablecoins are digital assets that are designed to maintain a stable value relative to a national currency or other reference assets. As a result, stablecoins can be used reliably as a form of payment in transactions. Stablecoins may represent one of the most viable use cases for digital assets; they have the potential to reduce settlement times for financial transactions to zero, or close to zero, and to reduce the number of intermediaries involved in financial and commercial transactions, while protecting against market volatility.
Importantly, stablecoins represent the ‘payment rails’ of digital asset exchanges – they facilitate smooth crypto-to-crypto transfers, instead of requiring exchange users to alternate between fiat and digital assets.
Broader adoption of stablecoin usage depends, however, on clear, decisive, and supportive policy-making, and neither Congress nor any federal regulatory agency (at least some of which may need congressional authority to act) has taken action of this type. As a result, the market is largely proceeding as if regulation is irrelevant.
Yet recent events show the need for a coordinated and prompt federal regulatory approach to stablecoins – the industry has seen one important stablecoin, Terra, collapse. This collapse has had knock-on effects on a range of digital assets and market participants. The collapse of Terra also served to raise questions about, and lessen confidence in, stablecoins generally and digital assets as a class.
Failure to act
Congress and federal regulators have many options before them. Congress could, for example, require issuers of stablecoins to become licensed banks or banking-like entities and impose capital requirements that fully back stablecoins on a one-to-one basis with a dollar or other currency.
Federal authorities could also regulate certain stablecoins as securities by requiring registration of some type with the Securities and Exchange Commission (SEC), an option that the SEC has publicly considered.
None of this has happened. Instead, the SEC has not provided regulatory clarity about when stablecoins should be considered securities, and how market participants transacting in such security stablecoins can comply with the federal securities laws. The Department of the Treasury, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Commodity Futures Trading Commission have not proposed enforceable rules governing stablecoins. And Congress has not clearly provided these regulators with the mandate to do so.
To be sure, federal regulators have made a number of statements about their focus on stablecoins, and the Biden administration has developed an inter-agency working group to develop a regulatory approach governing stablecoins. Various federal agencies have expressed legitimate concerns about these stablecoins, including investor protection considerations, questions about the effect of stablecoins on the US money supply, illicit financing risks, and systemic and safety and soundness concerns related to financial institutions that use and trade stablecoins.
These risks are powerfully expressed in the Report of the President’s Working Group, which recommended that “Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis”.
It's been nearly a year since the report was published. But in that time, have Congress or any other authorities provided regulatory clarity? Investor protection? Not yet.
State action is not enough
In contrast, several states (especially New York) have stepped into the federal void and begun regulating trust companies and others that issue stablecoins, and various domestic and foreign entities have issued a number of purported stablecoins, some of which are widely traded and used. These efforts have limited value to the US market as a whole, however.
Meanwhile, foreign jurisdictions are moving decisively towards stablecoin regulation. The EU is on the verge of adopting its Markets in Crypto Assets (MiCA) regulation. MiCA would, among other things, extensively regulate ‘asset-referenced tokens’, including their governance, reserves, capitalisation, and investor disclosures.
Regardless of how the digital dollar develops, it’s well past time to act quickly on stablecoins
In addition to the public policy imperatives for the development of a coordinated and prompt federal approach for developing and distributing stablecoins, there also are important advantages to the markets in such an approach. It is expensive and difficult to create and support a well-designed stablecoin. Regulatory uncertainty works against well-designed current and future stablecoin development and distribution and instead permits (and potentially encourages) poorly designed and questionably implemented stablecoins and stablecoin protocols.
Congress, the relevant financial regulators and the digital asset industry should work together promptly, collaboratively, and in good faith to develop a workable and sound approach for regulating stablecoins.
A digital dollar
As one part of this effort, the US government should fast-track consideration of a digital US dollar. This digital dollar could provide the unmatched protections and stability of the US dollar. Presumably, a US government-issued digital dollar would also be easier for banks to hold on behalf of customers, who as a result could have general banking protections.
Unfortunately, it is unclear when and if that will happen – a top Treasury official recently suggested it could be years before the US issues a digital dollar, and a Federal Reserve governor suggested he sees little benefit in one. It may be that, ultimately, a digital dollar proves unworkable, but Congress and other federal authorities should at least explore the question of whether there are significant benefits to creating one.
Regardless of how the digital dollar develops, it’s well past time to act quickly on stablecoins. Congress and federal regulators should adopt clear regulations that protect users of these assets, rather than stop at pointing out the risks and problems these assets raise. Years of regulatory uncertainty have not made markets safer for stablecoin users.
Amy Caiazza and Neel Maitra are partners in the Washington, DC office of international law firm Wilson Sonsini Goodrich & Rosati.
