On November 1, 2021, the President’s Working Group on Financial Markets issued its long-awaited “Report on STABLECOINS.”  The Working Group is an inter-agency group made up of the Treasury Department, the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.  The Federal Deposit Insurance Company and the Office of the Comptroller of the Currency contributed to the Report as well.

A stablecoin is a digital currency that is pegged to a “stable” reserve asset like the U.S. dollar or gold.  The value of each stablecoin token is kept at $1.  In this way, stablecoins are deemed less volatile than other cryptocurrencies.  They are used primarily on cryptocurrency exchanges to purchase others digital assets.

One of the problems the Report identifies is the promise of stablecoins being backed 100% by dollars in cash and short-term Treasuries, which can be quickly converted to cash.  Reality has proven that is not always the case.  Some stablecoin issuers hold their cash reserves in riskier assets such as commercial paper, corporate and municipal bonds, and other cryptocurrencies.  The Report identifies a prudential concern that lack of liquidity could lead stablecoin issuers to not being able to honor redemption requests if investors lose confidence and there is a “run on the bank.”  A cascading effect could harm the broader financial system.

The Report identifies other risks as well.  Stablecoins pose illicit finance concerns and risks to financial integrity, including concerns related to compliance with rules governing anti-money laundering (AML) and countering the financing of terrorism (CFT) and proliferation.  And, market integrity and investor protection risks encompass possible fraud and misconduct in digital asset trading, including market manipulation, insider trading, and front running, as well as a lack of trading or price transparency.

To address these risks, the Report recommends that “Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis.”  The legislation should address the following concerns:

  • To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.
  • To address concerns about payment system risk, in addition to the requirements for stablecoin issuers, legislation should require custodial wallet providers to be subject to appropriate federal oversight. Congress should also provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards.
  • To address additional concerns about systemic risk and concentration of economic power, legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Supervisors should have authority to implement standards to promote interoperability among stablecoins. In addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on use of users’ transaction data.

The Report says Congressional action is “urgently needed” because failure to act risks growth of payment stablecoins without adequate protection for users, the financial system, and the broader economy.  If Congress does not act, the agencies recommend that the Financial Stability Oversight Council consider steps available to it to address the risks outlined in the Report. Such steps may include designation of certain stablecoin activities as “systemically important payment, clearing, and settlement activities.”  That would give federal agencies the authority to draft their own regulations around stablecoins.  


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.