Reiter is a former chairman of the Federal Deposit Insurance Corporation of the United States and is currently a board member of Paxos, a blockchain company and regulated stablecoin issuer. Her view is her own.
Everything old is new again, and nothing new about financial ventures that tell investors that something is safe, even though it’s not a safe bet.
So it was very predictable last month Meltdown at TerraThe so-called Stablecoin cryptocurrency promised by the issuer maintains a fixed value in the US dollar, but upheld that promise only with the wings and prayers of the algorithm.
Prevention of such disasters is believed to be under the jurisdiction of US regulatory agencies. Unfortunately, it’s not clear who has the authority because of the alphabet soup of US financial institutions. It’s time for regulators to be creative and use their current strengths. To the Securities and Exchange Commission, Stablecoin Issuer: Government money market fund. Both Stablecoin and government MMFs promise liquidity and stable value to investors — dollar-in, dollar-out. Both rely on stability for the reserve safety that underpins them.
Government MMFs have proven safe and resilient in times of stress, as reserves need to be invested in cash and liquid federal-backed securities. They are subject to strict rules regarding investor disclosure and transparency. By applying these rules to stablecoin issuers, this market will be safer for investors.
At such a step, the SEC must determine that Stablecoin is a security. This is an untested interpretation. Traditional legal testing of securities includes investor profit expectations, and most stablecoins do not generate profits. At the very least, the SEC will pursue voluntary oversight to provide responsible stablecoin issuers with a credible regulatory framework for doing business, allowing investors to differentiate themselves from higher-risk services. can.
An alternative is bank regulation.this is suggestion Created by a group of top US financial regulators. However, forcing banks to do stablecoin business requires legislation, and the idea is largely undriven by Congress. Banking regulators can approve the voluntary application of the Bank Charter by stablecoin issuers, but this has its drawbacks.
One is to give stablecoin issuers access to safety net programs such as deposit insurance and borrowing from the Federal Reserve Bank. Therefore, it provides stability for Stablecoin, but it is a government dime. In addition, moving this business to banks exacerbates the risk of excessive money generation — already incorporated into the cryptocurrency surge. Banks “make money” by lending most of their deposits, and borrowers deposit in other banks and refinance them. Creating more money is the last thing we need.
These concerns can be partially addressed if bank regulators supervise stablecoin issuers as trustbanks. This model was pioneered in regulating three stablecoin issuers by the New York State Department of Financial Services. (Disclosure: I’m on the board of directors of one of those trusts, Paxos.) NYDFS has a Stablecoin reserve for bank deposits and a short-term US Treasury obligation to regulated issuers. Released guidance to limit to.
Trust banks are subject to strict capital and liquidity requirements, but do not receive deposits and therefore do not benefit from deposit insurance. Still, banking regulations lack the facilities to address the issues of investor protection, transparency, manipulation, and fraud that plague the crypto world. These are the specialty of market regulators such as the SEC, not the supervisors of banks that specialize in credit risk.
Other partial solutions include the Commodity Futures Trading Commission further leveraging its extensive fraud and tamper-proof enforcement powers. Alternatively, the Financial Stability Oversight Commission, a group of US regulatory agencies responsible for financial stability, has designated Stablecoin as potentially systemically important and has set some health standards in the US Federal Reserve. Can be empowered to impose.
None of these steps exclude the law. Indeed, if regulatory agencies move forward, they could urge Congress to take action. One of the things Congress shouldn’t do is create a new regulatory agency for crypto assets. Already too many. One or more require explicit authority from Congress to act. Until then, people, including retirees, general investors and young people, are being hurt. It’s time to do something.