What the PRG Report Will Mean for Stablecoins
Image by Gerd Altmann from Pixabay
As we approach the holidays, looking forward to time with family and friends and some R&R for ourselves, this also seems the season of R&R (Reports and Regulations) for the Crypto space. The latest to appear under the microscope and into the crosshairs is stablecoins.
The President’s Working Group on Financial Markets, otherwise known as the PWG, consists of these heads of U.S. government regulatory bodies: U.S. Treasury Secretary Janet Yellen, Federal Reserve Chairman, Jerome Powell, SEC Chairman, Gary Gensler, and Commodity Futures Trading Commission Chairman, Rostin Behnam. The PWG was created in 1988 by executive order by President Reagan as a response to the stock market crash “Black Monday” of 1987. The PWG was then known as the “Plunge Protection Team” since it was formed to help prevent any further sudden jolts in the market.
In addition to government regulatory heads, the PWG included input from a wide range of current market participants in its latest report. Executives of Tether, Circle, Paxos, Gemini, and the Diem Association, which has not yet launched its eponymous token, were consulted on the report.
However, it is unclear how much involvement these market participants were actually allowed. For example, Senator Pat Toomey, a well-known advocate of cryptocurrency and technical innovation, took issue with the group’s report. In a letter to Janet Yellen, he said, “Since the PWG announced its stablecoin review, the administration has revealed very little about the process it is using to draft this report. It is my understanding that stakeholders have had only minor involvement in the process, with just a few stablecoin providers invited to participate. Those invited participants were given a mere five minutes each to make highly structured presentations.”
The full text of the “President’s Working Group on Financial Markets Releases Report and Recommendations on Stablecoins” may be downloaded here.
The PRG sees “Stablecoins and stablecoin arrangements” (possibly indicating DeFi) as concerning investor protection and “market integrity.”
Namely, the threat of runs on stablecoin reserves and the lack of transparency of reserve holdings concern the PRG. With the stablecoin supply increasing over 500% in 2021, and a $127 billion market capitalization, the widespread use of stablecoins cannot be ignored.
The report calls for verification of high-quality backing of U.S. stablecoins and calls for only: “high-quality U.S. denominated assets” to be held at U.S. regulated entities, utilizing “multiple custodians; and secure investments with high-quality obligors.”
The report calls for end-user protection, with “enforceable direct claims by holders...to exchange their stablecoins in a timely manner for the underlying fiat currency 1:1 net of fees.”
The report states that “Stablecoin arrangements should have the capabilities to attain and verify the identity of all transacting parties, including for those using unhosted wallets.” This could pose complications for stablecoin issuers and could mean those holding a stablecoin in their crypto wallet could see funds frozen until these requirements are met.
Not only does the report call for Congress to enact laws to limit stablecoin issuers and hold them to similar standards as U.S. banking institutions, in effect, but it may also prohibit new entries into the field.
From the report: “To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level. The legislation would prohibit other entities from issuing payment stablecoins.”
Until such legislation arrives, the group urges existing authorities to step in. Exactly how this will be carried out and by whom is yet to be determined, but the SEC and CFTC will most likely play dominant roles, along with the Financial Stability Oversight Council.
Perhaps in response to the PWG report and other factors, MakerDAO has stepped up its plans to dissolve its foundation to become fully decentralized. Rune Christensen, the founder of MakerDAO, publicly stressed the importance of regulation in the stablecoin space calling the new report a “milestone” and hailed it as “thoughtful.” He mentions footnote 5* of the report as it distinguishes between “algorithmic” stablecoins (like DAI) and stablecoins convertible to fiat currency.
Continuing the conversation, the U.S. Congress Joint Economic Committee held a hearing, “Demystifying Crypto: Digital Assets and the Role of Government,” in Washington, D.C. on the government’s role in digital assets. The Joint Economic Committee’s YouTube channel live-streamed the hearing.
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* Stablecoins that are purportedly convertible for an underlying fiat currency are distinct from a smaller subset of stablecoin arrangements that use other means to attempt to stabilize the price of the instrument (sometimes referred to as “synthetic” or “algorithmic” stablecoins) or are convertible for other assets. Because of their more widespread adoption, this discussion focuses on stablecoins that are convertible for fiat currency.
