Bretton Woods Committee | Fri, Mar 17, 2023
by Ousmène Jacques Mandeng
The collapse of Silicon Valley Bank and subsequent jitters at USDC shall serve as a reminder that stablecoin regulation remains far too lax. Circle, the U.S. company and issuer of USDC, a stablecoin denominated in U.S. dollar, is mostly regulated in the U.S. as a money transmitter. This is grossly insufficient for a company with US$40 billion in stablecoins outstanding. Regulation and supervision need to impose sufficient obligations for stablecoin issuers to adopt best industry practices.
Stablecoins represent a monetary liability and should be regulated like other monetary liabilities. They are representations of value convertible into a unit of national currency. Stablecoins exhibit properties akin to bearer instruments and are usually issued, and the transfer of ownership is performed and recorded on a blockchain or other DLT platforms. The stablecoin issuer normally maintains proceeds from issuance as reserves to ensure convertibility at par and on demand. As such they resemble conventional arrangements like bank deposits, e-money, and money market funds.
Stablecoins can only be stable if there is unencumbered recourse to its reserves and if reserves are adequately invested. Like any monetary liability, stablecoins need to maintain sufficient liquid and high-quality assets to be able to meet redemption requests on demand and at par. Bank deposits, e-money and money market funds are regulated to ensure convertibility into other claims can be maintained at all times. Stablecoins lack such obligations. Obligations under anti-money laundering provisions do not offer any protection towards preserving convertibility.
In the U.S., money transmitter licences aim to safeguard the transmission of money between the payer and the end beneficiary. The concern of such licences is to ensure the funds are kept safe during the transmission. Under a money transmitter licence, the issuance of a stablecoin to the payer concludes the transmission. To protect consumers and meet liabilities due to fraudulence, money transmitters need to acquire so-called surety bonds that vary in amount by U.S. State typically from US$25 thousand to US$7 million. No consideration is given for the future redemption of a claim.
Stablecoins typically do not represent a claim on the stablecoin issuer. They also do not constitute a proportional share of the assets held in reserves. Stablecoin issuers at best commit to convertibility but any obligation is contractual at best. In the event of bankruptcy, it is unclear how stablecoin holders rank compared with other creditors.
Stablecoins should be regulated either as banks, e-money institutions, or money market funds. As banks, they may act as narrow banks to minimise bank-specific risks but be regulated and supervised accordingly. As e-money institutions, they would adhere to the provisions of safeguarding assets and the stablecoins would represent claims on the e-money institution. Money market funds provide strict investment guidelines and money market fund units or shares constitute typically ownership of the money market fund’s assets. Stablecoins issued under a bank or e-money licence would represent payment instruments and typically be supervised by the bank supervisor. Stablecoins issued under a money market fund regime would constitute securities and be supervised by a capital market authority.
Existing regulations should cover most needed regulations for stablecoin issuers. Stablecoin issuers could elect to be regulated as banks, e-money institution, and money market funds. Where there is uncertainty regarding the applicability of existing regulation to stablecoins as instruments, regulation at the issuer level would already provide a much firmer framework and involve supervisory institutions with the needed experience to exercise oversight over at least the larger stablecoin issuers.
SVB affirms that stablecoin reserve management remains inadequate. Stablecoin issuers need to be subject to obligations similar to other issuers of monetary liabilities also to establish a level playing field and avoid regulatory arbitrage.
To argue that poorly regulated stablecoins are too unstable when tightly regulated banks fail seem contradictory. Stablecoins have operated successfully and there is no reason why they should not. But the sudden loss of confidence in USDC to maintain its peg is indication that they remain inadequately regulated and supervised and as such represent an unnecessary vulnerability in the current financial environment. Stablecoins could serve a variety of use cases where token-based mediums and blockchain offer needed functionalities. As such they would represent important and welcome extensions to the existing payments landscape.
Ousmène Jacques Mandeng is Senior Advisor with Accenture’s Metaverse Continuum Business Group and a Visiting Fellow at the London School of Economics and Political Science