President’s Working Group Report Attacks Stablecoins As Well As CeFi Platforms And DeFi Protocols – Technology


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President’s Working Group Report Attacks Stablecoins As Well As CeFi Platforms And DeFi Protocols


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In as much an attack on centralized crypto asset trading
(“CeFI”) platforms and decentralized finance
(“DeFi”) protocols as stablecoins, the President’s
Working Group on Financial Markets, the Federal Deposit Insurance
Corporation and the Office of the Comptroller of the Current
(collectively “Regulators”) issued a much anticipated
report on November 1, 2021, making recommendations that Congress
should implement through new laws to better regulate
stablecoins.

Indeed, first and foremost among the risks of stablecoins
spotlighted by the Regulators were stablecoins potential use to
facilitate “speculative digital asset trading” on CeFi
platforms or through DeFi protocols which “presen[t] risks
related to market integrity and investor
protection.” 

Additionally, claimed the Regulators, stablecoins implicate
risks of investor protection and illicit finance, as wells as
prudential concerns. According to the Regulators, “[i]f
stablecoin issuers do not honor a request to redeem a stablecoin,
or if users lose confidence in a stablecoin issuer’s ability to
honor such a request, runs on the arrangement could occur that may
result in harm to users and the broader financial system.”

As result, the Regulators recommended that Congress quickly
enact new legislation to require:

  • stablecoin issuers to be limited to insured depository
    institutions that are subject to “appropriate supervision and
    regulation” at the depository institution and holding company
    level;

  • custodial wallet providers to be subject to
    “appropriate” federal oversight. Also. a supervisor of a
    stablecoin issuer should have the authority to require any entity
    “that performs activities critical to the functioning of the
    stablecoin arrangement to meet appropriate risk-management
    standards;” and 

  • stablecoin issuers to comply with “activities restrictions
    that limit affiliation with commercial entities.” Supervisors
    of stablecoin issuers should also encourage interoperability among
    stablecoins.

In their report, the Regulators extensively discussed the
interrelationship between DeFi protocols, and stablecoins. The
report observed that “[s]tablecoins are central to the
functioning of DeFi, as they are often used in DeFi arrangements to
facilitate trading or as collateral for lending and
borrowing.” In a not-so-subtle warning to CeFi platforms and
DeFi protocols, the Regulators cautioned that these organizations
“also raise broader questions about digital asset market
regulation, supervision and enforcement. These questions are under
active consideration by the CFTC and SEC but are not the subject of
the recommendations in this report.”

The report noted that, prior to Congressional action, to the
extent stablecoins are securities or futures, options or swaps (or
incorporate elements of such Commodity Futures Trading
Commission-overseen products), federal securities or commodities
laws, respectively, would likely apply to transactions involving
such stablecoins. Other regulators, including the Department of
Justice, the Consumer Financial Protection Bureau and the Financial
Crimes Enforcement Network of the U.S. Department of Treasury
likely also have regulatory tools they can apply today said the
Regulators.

In response to the report, one U.S. senator, Senator Patrick
Tomey of Pennsylvania, cautioned that “[w]hile Congress works
on thoughtful legislation, I hope the administration will resist
the urge to stretch existing laws in an effort to expand its
regulatory authority.”

The Regulators’ proposed recommendations appear to track
traditional approaches to the regulation of brick and mortar
financial institutions and products, and suggest little flexibility
to tailor an approach tailored specifically to the characteristics
of decentralized digital assets. 

The PWG, was created in 1988 to help “…enhance the
integrity, efficiency, orderliness, and competitiveness of our
Nation’s financial markets and maintaining investor
confidence…” It consists of the Secretary of the Treasury,
and the Chairs of the Board of Governors of the Federal Reserve
System, the Securities and Exchange Commission and the CFTC.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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