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FRB Governor Waller Supports Prudential Regulatory Framework for Stablecoins

Federal Reserve Board ("FRB") Governor Christopher J. Waller advocated for strong regulatory oversight of stablecoins through a combination of "robust, consistent supervision and regulation and appropriate public backstops," but criticized the approach recommended by the President's Working Group on Financial Markets ("PWG"). As previously covered, the PWG issued a report on November 1, highlighting the financial and economic stability risks posed by stablecoins and providing legislative solutions to address such risks.

In his speech at the 2021 Financial Stability Conference, Mr. Waller asserted that stablecoins are essentially a new version of the bank deposit. He explained that stablecoins "mimic the safe-asset features of commercial bank money" by offering a fixed exchange rate and some form of redemption rights. He noted differences between traditional bank deposits and stablecoins, however, pointing out that stablecoin redemption rights are "not always well defined," and that payment networks for stablecoins are very different from those of traditional bank deposit. He said that commercial bank money allows customers to transfer it through various payment platforms, but with stablecoins, transfer is limited to platforms that support digital asset trading.

Mr. Waller listed the benefits of a "well-designed, well-regulated stablecoin," saying suggesting it could:

  • facilitate different activities on DLT platforms, such as a "wider range" of smart contracts;

  • serve as an "atomic" settlement asset due to the improved speed and efficiency of digital asset markets as compared to traditional financial markets;

  • improve cross-border payments and retail payments overall;

  • promote healthy competition for established payment systems; and

  • address old risks through increased visibility into the resources and obligations underpinning the existing payment system.

To realize such benefits, Mr. Waller advocated for strong regulatory oversight of stablecoins through a combination of "robust, consistent supervision and regulation and appropriate public backstops."

Mr. Waller disagreed with the PWG proposed prudential approach to federal regulation of stablecoins, which would restrict the issuance of payment stablecoins to insured depository institutions and impose strict limits on wallet providers and other nonbank intermediaries. Mr. Waller argued that an approach to stablecoin issuance based on concern for bank liability removes one of the key benefits of stablecoins: healthy competition for "banking organizations in their role as payment providers." He argued instead that the regulatory and supervisory framework for stablecoins should "directly, fully, and narrowly" address the specific risks around all key functions and activities of stablecoin arrangements. Mr. Waller stated that this "does not necessarily mean imposing the full banking rulebook." He added that sufficient assurances for stablecoin arrangements might include:

  • "if an entity issues stablecoin-linked liabilities as its sole activity;

  • if it backed those liabilities with only very safe assets;

  • if it engaged in no maturity transformation and offered its customers no credit; and

  • if it were subject to a full program of ongoing supervisory oversight, covering the full stablecoin arrangement."

Mr. Waller stated that safeguards should be also be applied to other participants in a stablecoin arrangement, such as wallet providers and other intermediaries. For these participants, he suggested that it is likely that certain restrictions that apply to bank relationships would not apply in the stablecoin context, such as restrictions on commercial companies from owning or controlling intermediaries in these arrangements or the separation of banking and commerce rooted in captive lending concerns. Rather, he said, regulations for stablecoins should focus on the use of the customer's financial transaction data and anticompetitive behavior.

Additional Comments

Mr. Waller reiterated his skepticism for a Federal Reserve-issued, general purpose central bank digital currency (CBDC) (see prior coverage), but supported regulator efforts to facilitate the emergence of stablecoins in the private market to keep markets safe and within the U.S.'s jurisdiction.

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XI, Number 323
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