U.S. stablecoin issuer Circle supports the Biden administration’s proposal to regulate stablecoin issuers as banks, and views the recommendations as progress in the growth of the stablecoin industry.
“We're supportive of that recommendation. We think [this] represents significant progress in the growth of this industry,” Circle CEO Jeremy Allaire told Yahoo Finance. “There's a real recognition that as these payment stablecoins grow, they could grow at internet scale relatively quickly.”
The president’s Working Group on Financial Markets this month recommended that Congress come up with a new framework to regulate stablecoins, urging lawmakers to mandate that only banks can issue stable coins.
The administration’s recommendations are intended to curtail risks that regulators worry stablecoins pose to the financial system.
Stablecoins — digital currencies with values tied to fiat currencies like the U.S. dollar or short-term securities — are used by traders to get in and out of trades, settle trades and are increasingly being used for lending and borrowing of other digital assets on cryptocurrency exchanges. Regulators worry that if the value of cryptocurrencies plunge suddenly, investors could yank their money out, leading to a run on stablecoins that could hurt the broader financial system and users.
Regulators are also looking at risks stablecoins might present if they became a dominant form of payment in the U.S. or globally. This could lead to substantial sums of money migrating out of FDIC-insured banks with significant ramifications for credit creation, financial stability, and bank funding.
'The future of banking and payments'
Allaire says when you can get into the hundreds of billions in circulation and trillions in transactions, the risks to financial markets and financial stability become much more significant. “We’re really upgrading this to a much more fundamental infrastructure at the core of what potentially the future of banking and payments and capital markets looks like,” said Allaire.
Allaire said Circle— a steward of one of the largest payment systems for stablecoins (USDC-USD) — has been talking with regulators, but hasn’t filed a formal application for a national bank charter yet; the company intends to file for FDIC insurance. “We expect this to be a process that we work kind of hand-in-hand with regulators on this,” he said.
Officials are trying to set rules to ensure that adequate liquidity will exist for stablecoin use, if it is widespread in the payment system. Like ordinary FDIC-insured bank deposits, the FDIC may insure stablecoins, but not all stablecoin users or activities would necessarily be insured.
FDIC Chair Jelena McWilliams said last month that “if issuers have reserves available on demand to satisfy withdrawal requests, regulators should have authority to ensure the funds are there, specifically if issuers are large enough that a stablecoin ‘run’ could result in financial instability.”
Allaire noted that the details on a bank charter for a crypto company might need to get worked out over time with both the FDIC and other agencies that oversee banks as well as with whatever rules Congress stipulates.
Under the administration’s recommendations, only banks could issue stablecoins, which gives those that already have a charter a head start. Yet Allaire said he doesn’t think big banks have an advantage, because they haven't built the necessary infrastructure and don't have the level of understanding to execute like Circle.
“The banks are, frankly, scrambling to begin to understand this,” said Allaire. “I think frankly, they're very much going to take a wait and see approach on this. Until there's specific new rules, they're very likely to avoid trying to do this directly.”