Policy of the United States on Stablecoins - Dictionary of Arguments

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Stablecoins: Stablecoins are a type of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency like the US dollar or euro, or to commodities like gold. They aim to reduce the volatility common in other cryptocurrencies, making them suitable for everyday transactions, trading, and as a bridge between traditional finance and the crypto world. See also Cryptocurrency, Crypto transactions, Crypto and banking. _____________ Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments.

> Policy of the United States	> Stablecoins	Policy of the United States on Stablecoins - Dictionary of Arguments CRS II 29 Stablecoins/Policy of the US/CRS/Tierno/Labonte/Scott: Among various types of digital assets, stablecoins hold the greatest potential for use in payments outside of crypto trading because of their relatively stable value, which would give them a direct overlap with the business of banking.⁽¹⁾ CRS II 30 They also pose the greatest potential systemic risk if their use were ever to become widespread—their commitment to maintain a stable value creates run risk because any stablecoin holder that can sell before the peg to the dollar (or other currency) breaks will avoid losses. Bank regulators are experienced at addressing run risk because uninsured depositors also face similar incentives to run if they think a bank might fail. There is currently no federal regulatory framework specific to stablecoins. Stablecoin operators are currently required to register with FinCEN and may be subject to state money services business regulations that are not comparable to bank regulation. Their potential use in payments and the presence of run risk has resulted in a robust debate about whether stablecoins belong inside or outside the bank regulatory perimeter—or both. Policy questions include (1) should stablecoins be issued by banks or nonbanks or both?⁽²⁾ (2) should they be subject to bank-like regulation and should they be under the jurisdiction of the bank regulators? (3) what legal separation should exist between stablecoins and their issuers? (4) and should they be federally insured? Some of the issues policy makers may consider when determining whether stablecoins should be issued by banks or nonbanks include the fact that they may subject to runs; allowing banks to issue them would expand the regulatory perimeter; bank regulation involves institution-based prudential supervision that does not currently apply to stablecoins and is not found in some other financial markets; and stablecoin issuers may face challenges implementing AML requirements effectively. According to the Financial Stability Oversight Council’s 2024 Annual Report, stablecoins remain “acutely vulnerable to runs.”⁽³⁾ For example, during a liquidity crisis at Silicon Valley Bank in 2023, Circle’s stablecoin USDC fell to $0.88 when the market learned that Circle had deposited $3.3 billion (more than 7.5%) of USDC reserves into the bank.⁽⁴⁾ CRS II 31 For bank deposits, run risk is mitigated through liquidity regulation, deposit insurance, and access to the discount window. If these policies are not applied to stablecoins - whether they are issued by banks or nonbanks - they will remain subject to heightened run risk and a potential source of instability and potential contagion. At present, this run risk may be exacerbated by severe concentration - nearly 70% of the market is dominated by one stablecoin issuer - which could amplify runs, and disrupt crypto and traditional markets.⁽⁵⁾ Bank deposits are protected up to $250,000 by the Deposit Insurance Fund. The FDIC oversees the fund. The FDIC has issued an advisory clarifying that deposit insurance does not apply to digital assets.⁽⁶⁾ However, the President’s Working Group on Financial Markets Report on Stablecoins suggested that “with respect to stablecoin issuers, legislation should provide for … potentially, access to appropriate components of the federal safety net,” which may include FDIC insurance.⁽⁷⁾ Legislators may therefore consider whether deposit insurance would apply to stablecoins issued by banks, if permitted, and whether to extend insurance to nonbanks. If legislation were to omit stablecoins from deposit insurance protection, Congress may consider what priority to give stablecoin holders in the event of a failure.⁽⁸⁾ Money laundry: Finally, current stablecoin arrangements create relatively weak AML controls compared to banks. While stablecoin operators and exchanges are required to implement BSA/AML rules, their implementation has been criticized as lax (see “Crypto and AML Policy” above). Moreover, stablecoins can be off-ramped to self-custody wallets where their use is subject to fewer checks. If banks were to issue stablecoins, uploading and downloading bank-issued stablecoins to unhosted wallets where they could be used on public blockchains and exchanged among users that have not been identified or checked for money laundering concerns is inconsistent with existing bank regulation and would likely need to be reconsidered. >Cryptocurrency risks, >Cryptocurrency, >Crypto transactions, >Fake transactions, >Cross-border payments, >Money laundry, >Crypto regulation, >Blockchain, >Bitcoin, >Crypto Firms, >Crypto and Banking, >Payment systems, >Stablecoins, >Ethereum, >Wash trade, >Crypto and Energy. 1. Christopher J. Waller, Centralized and Decentralized Finance: Substitutes or Complements?, Federal Reserve, October 18, 2024, https://www.federalreserve.gov/newsevents/speech/waller20241018a.htm: “If appropriate guardrails can be erected to minimize run risk and mitigate other risks, such as their potential use in illicit finance, then stablecoins may have benefits in payments and by serving as a safe asset on a variety of new trading platforms.” 2. Some banks already issue tokenized deposits - bank deposits that can be accessed and used on privately-controlled Blockchains - that, like stablecoins, may facilitate payments. This raises the issue of whether there is a significant difference between tokenized deposits and stablecoins. This is a matter of convention and interpretation. Some commentators apply axioms about the traditional financial world to the world of crypto, implying bigger differences. In research, the Bank for International Settlements suggests that tokenized deposits are distinguished from stablecoins because they would settle with central bank money, participants with access to deposits that settle using interbank transfers and central bank money have access to credit from the institution, and tokenized deposits do not trade the way stablecoins do on a secondary market. However, there is not a broader formal legal definition or formal set of legal requirements for stablecoin issuers. Purely by convention, stablecoins issuers hold certain assets - which have recently become composed of higher quality - against which they issue stablecoin liabilities at a 1:1 ratio with an underlying asset, such as the U.S. dollar. While stablecoins are traditionally issued by nonbanks, and only banks are able to hold (tokenized) deposits, the former condition is purely a function of circumstance. 3. Financial Stability Oversight Council, 2024 Annual Report, p. 8, December 6, 2024, https://home.treasury.gov/system/files/261/FSOC2024AnnualReport.pdf. 4. Gracy Chen, “USDC Depegged Because of Silicon Valley Bank, but It’s Not Going to Default,” Coin Telegraph, March 13, 2023, at https://cointelegraph.com/news/usdc-depegged-but-it-s-not-going-to-default; and Circle Internet Financial LLC, “Independent Accountants’ Report and USDC Reserve Report,” p. 2, March 31, 2023, https://6778953.fs1.hubspotusercontent-na1.net/hubfs/6778953/USDCAttestationReports/2023/ 2023%20USDC_Circle%20Examination%20Report%20March%202023.pdf ; and https://x.com/jerallaire/status/1634650306234515460?s=20. The figure of $3.3 billion is based on the tweet. The percentage of greater than 7.4% was calculated using $3.3 billion (from the referenced tweet) as a share of $43.744 billion of USDC in circulation as of March 6, 2024, from page 2 of the March 31, 2023, attestation. 5. Financial Stability Oversight Council, 2024 Annual Report, p. 8. As of December 6, 2024, Tether’s market capitalization was $136.9 billion of a total stablecoin market capitalization of $202.2 billion, according to https://www.coingecko.com/en/categories/stablecoins 6. FDIC, Advisory to FDIC-Insured Institutions Regarding Deposit Insurance and Dealings with Crypto Companies, July 20, 2022, at https://www.fdic.gov/news/financial-institution-letters/2022/fil22035.html. 7. President’s Working Group on Financial Markets, FDIC, and OCC, Report on Stablecoins, p. 16, November 1, 2021, https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf. 8. In a bank resolution, the FDIC guarantees insured deposits at insured depository institutions up to the $250,000 limit. If the resolved bank has any retained net worth, deposits above the insurance limit are repaid before secured creditors, who are repaid before unsecured creditors. If uninsured, stablecoin holders would face lower potential losses if they were secured creditors - secured by the assets backing the stablecoin and segregated from the rest of the company - than if they were unsecured creditors. _____________ Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.	Policy of the United States CRS I Congressional Research Service (CRS) Marc Labonte Fixed Exchange Rates and Floating Exchange Rates: What Have We Learned? Washington: Congressional Research Service of the Library of Congress 2007 CRS II Congressional Research Service (CRS) Paul Tierno Marc Labonte, Banking and Cryptocurrency: Policy Issues. CRS Congressional research Service Report R48430. Washington, DC. 2025 CRS III Congressional Research Service (CRS) Corrie E. Clark Heather L. Greenley, Bitcoin, Blockchain, and the Energy Sector. Washington, DC. 2019 CRS IV Congressional Reserch Service (CRS) Paul Tierno Cryptocurrency: Selected Policy Issues Congressional Reserch Service CRS Report R47425 Washington, DC. 2023

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