Chair Waters, Ranking Member McHenry and members of the U.S. House Committee on Financial Services:
The Bank Policy Institute appreciates the opportunity to submit comments to the Committee on today’s hearing titled “Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins.”
Innovation is occurring at a rapid pace within the financial services sector. BPI members support innovation and welcome competition when it is conducted responsibly and in a way that ensures that customers are protected through consistent regulation and oversight.
To date, much of the innovation in cryptocurrencies — including stablecoins — has occurred outside the regulated banking sector, largely in nonbank fintech firms subject to little to no government oversight. Now that these innovations are well past proof-of-concept stages, gaining steam and becoming more widely understood and accepted by consumers, many banks are becoming more and more interested in finding ways to give their customers the ability to access, invest and transact in them. As banks enter this space, ordinary consumers will benefit by being able to access these innovations through trusted intermediaries. Banks are subject to an extensive federal regulatory and supervisory framework that allows policymakers to ensure consumers are protected and that the banking and financial system remains resilient. That framework does not apply equally to the nonbank fintech providers, leaving consumers more exposed to potential harm.
U.S. banking regulators should move swiftly to finalize long-promised guidance about supervisory expectations for banks that choose to engage in broader digital assets, including crypto and stablecoin, activities. Absent such guidance, the highly regulated banking sector will be left on the sidelines as digital asset innovations continue to advance unchecked in the unregulated sectors, with little to no government oversight to ensure the safety and soundness of our financial system and the protection of ordinary American consumers.
BPI has long argued that both consumers and the U.S. financial system are put at risk when entities operating outside the federal bank regulatory perimeter offer banking products and services without adhering to appropriate consumer and prudential regulatory protections and with far more limited – if any – onsite supervision to determine compliance with those protections. By way of example, BPI has repeatedly identified significant risks posed by stablecoins and stablecoin issuers, both of which exist almost entirely outside the regulated financial system. Many of these risks have been identified by members of this Committee, domestic and international regulatory bodies and members of the President’s Working Group — whose recent report is the focus of today’s hearing. Most notably, BPI has expressed serious concern about issuers of stablecoins that market their products as being “backed 100% by reserves” when that is in fact false.
In banking, “reserves” refers to vault cash and deposits at the Fed, both of which are short-term loans, highly-liquid and whose values experience inconsequential fluctuation. Many of the leading stablecoins — including the two largest stablecoin issuers that together represent 77% of all stablecoins in circulation[1] — claimed up until recently to hold 100% reserves while also applying a broad definition to “reserves” to count commercial paper (i.e., short-term corporate debt that can be volatile in periods of stress), including in the case of Tether investing in Chinese commercial paper of dubious value. Thus, it’s a risk to consumers and potentially also financial stability when these products are called “stablecoins” and the assets that back them are anything but stable. In substance, they are actually more like 2008-style prime money funds that contributed to the destabilization of the financial sector during the Global Financial Crisis. Some stablecoin issuers have committed to greater transparency. However, this transparency has not fully materialized, and oversight of these activities has largely been confined to state-level money transmitter rules that may not be sufficiently robust to address the run risk of these products.
BPI is encouraged by the Committee’s attention to this important topic. It is critical that Congress and other policymakers pursue measures that would address the risks posed by stablecoin issuers and further ensure that they adhere to existing consumer protections.
The attached note delves deeper into the aforementioned concerns. Thank you for considering our perspective.
[1] Nelson, B., & Paridon, P. P. (2021, December 10). Stablecoins are backed by ‘reserves’? give us a break. American Banker. https://www.americanbanker.com/opinion/ststablecoins-are-backed-by-reserves-give-us-a-break
