The President’s Working Group (PWG), a federal interagency working group of financial regulators established by Executive Order in 1988, has issued a statement outlining key regulatory and supervisory considerations related to stablecoins and digital payment systems. Beginning with a declaration that the United States encourages responsible payments innovation, the statement outlines various high-level regulatory principles that participants in stablecoin arrangements need to account for. The statement may be interpreted as a sign of what is to come in terms of federal regulation and supervision of stablecoins and other digital assets in the new year.
Among the various benefits of stablecoins, the PWG specifically highlights the ability of U.S. dollar-backed and other similar stablecoin arrangements to “improve efficiencies, increase competition, lower costs, and foster broader financial inclusion.” Stablecoins intended to realize these benefits should be designed in such a way that allows for effective management of risk while maintaining the overall stability of the U.S. and international financial and monetary systems.
The statement focuses on three primary areas, in addition to reminding participants in digital payment systems and stablecoin arrangements of the general obligation to comply with applicable legal, regulatory, and oversight requirements.
First, the PWG stresses that stablecoin participants and arrangements are required to satisfy all applicable anti-money laundering and combating the financing of terrorism (AML/CFT) obligations. Before products are brought to market, regulators expect that adequate risk assessments have been conducted to identify the risks posed by the particular stablecoin and that comprehensive compliance programs designed to mitigate identified risks are put in place.
Second, the statement highlights the fact that the specific design of a particular stablecoin may result in the coin constituting a security, commodity, or derivative. Depending on the ultimate classification of the stablecoin, it may be subjected to federal securities, commodity, or derivative laws, or a combination of these laws. The SECs recent announcement that it filed an action against one of the main digital asset companies, albeit not in relation to a stablecoin, underscores the need for understanding up front what regulations will apply to a specific digital asset.
Third, the statement outlines the key principles that should be addressed by any stablecoin designed to be adopted at large scale. Properly addressing the key principles identified by the PWG should result in the stablecoin facilitating:
Financial stability – stablecoin issuers need to maintain strong reserve management practices, which practices should include the ability to ensure a 1:1 reserve ratio and that adequate financial resources exist to absorb losses and meet liquidity needs.
End user protection – holders of stablecoins should have clear, enforceable rights to make claims against issuers or reserve assets in order to timely exchange stablecoins for the underlying fiat currency on a 1:1 basis. This includes developing clear and conspicuous disclosures that can be understood by a reasonable end-user in order for such user to make informed decisions. In a nod to the basic rules governing existing payment systems, the PWG emphasizes that stablecoin arrangements “should offer clear processes around error resolution, protect users from unfair or deceptive acts or practices, and protect user data.”
Market integrity – in addition to meeting applicable AML/CFT obligations, stablecoin arrangements should be designed with appropriate mitigation measures in mind in order to restrict potential evasion of key public policy objectives. The statement specifically refers to the need for identifying all transacting parties, including parties using unhosted wallets. Regulatory comments surrounding unhosted, or noncustodial, wallets have attracted some criticism from the industry as potentially intruding on basic privacy rights of citizens.
Operational resilience – ensuring a high degree of operational reliability and security is fundamental with respect to stablecoins demonstrating robust risk management frameworks. Stablecoins should be designed with systems that allow for the collecting, storing, and safeguarding of data. This should include processes designed to ensure business continuity management practices will allow for full and rapid recovery of operations in the event of a disruption.
Well-functioning payments and trading markets – aside from storing and maintaining data for operational purposes, stablecoin arrangements should involve processes for the recording, retention and reporting of real-time data regarding price and transaction information for dissemination to market participants and regulators.
Macroeconomic and international monetary stability – the PWG stresses that stablecoin arrangements should not undermine the confidence in and stability of domestic fiat currencies. This may result in regulations that place specific limitations on stablecoins that are not exchangeable for the underlying fiat currency 1:1 net of fees or stablecoins for which the value is based on a basket of fiat currencies.
Comprehensive, cross-border supervision – stablecoin arrangements operating in multiple jurisdictions should account for the ability to provide the necessary information and documentation to all relevant national authorities. The PWG raises the possibility for stablecoin participants to rely on existing regulated entities to serve as intermediaries in order for stablecoins to provide regulators with the requisite information.
Acknowledging the cross-border nature of digital assets, the PWG encourages U.S. authorities to continue engaging in robust international collaboration with regard to cross-jurisdictional information sharing and designing cooperative oversight arrangements. As the technological and market landscape continue to evolve, U.S. authorities are expected to continue identifying issues relating to stablecoin regulatory activities.
Although not a member of the PWG, the group specifically reached out to Acting Comptroller Brooks for his views on these issues. This may be seen as a tacit acknowledgement that the PWG respects Brooks’s significant expertise in this space and could even be interpreted as an approval of the steps the OCC has taken with respect its regulatory stance on stablecoins.
Considering the PWG consists of the heads of the major federal financial regulators, it is reasonable to expect more guidance in line with the PWG statement stemming directly from the SEC, CTFC, and Federal Reserve in the new year. In fact, the Federal Reserve staff is already focused on creating a more uniform definitional framework for common digital asset terminology, as evidenced in its latest FEDS notes post on tokens and accounts in the context of digital currencies, which is a critical first-step in establishing a more transparent regulatory framework.