Stablecoin issuance should extend well beyond banks, credit unions, Fed governor asserts

The use of stablecoins deserves a look – and issuance should be broader than just that by banks and credit unions, the newest Federal Reserve Board governor indicated in a speech delivered Wednesday.

Speaking via webcast to a conference sponsored by the Federal Reserve Bank of Cleveland, in Cleveland, Federal Reserve Board Gov. Christopher Waller noted that a report issued Nov. 1 by the President’s Working Group on Financial Markets (PWG) urged Congress to limit issuance of “payment stablecoins” to banks, credit unions, and other federally insured depository institutions.

“Fostering responsible payments innovation means setting clear and appropriate rules of the road for everyone to follow,” Waller said. “We know how to handle that task, and we should tackle it head-on. The PWG report lays out one path to responsible innovation, and I applaud that effort.

“However, I also believe there may be others that better promote innovation and competition while still protecting consumers and addressing risks to financial stability,” he said. “This is the right time to debate such approaches, and it is important to get them right. If we do not, these technologies may move to other jurisdictions – posing risks to U.S. markets that we will be much less able to manage.”

The most junior Fed governor (he was confirmed in December 2020) said he disagrees that stablecoin issuance can or should only be conducted by federally insured banks credit unions “simply because of the nature of the liability.”

“I understand the attraction of forcing a new product into an old, familiar structure. But that approach and mindset would eliminate a key benefit of a stablecoin arrangement – that it serves as a viable competitor to banking organizations in their role as payment providers,” Waller said. “The Federal Reserve and the Congress have long recognized the value in a vibrant, diverse payment system, which benefits from private-sector innovation. That innovation can come from outside the banking sector, and we should not be surprised when it crops up in a commercial context, particularly in Silicon Valley. When it does, we should give those innovations the chance to compete with other systems and providers – including banks – on a clear and level playing field.”

Waller asserted that a regulatory and supervisory framework for payment stablecoins should address the specific risks that these payment systems pose, and “directly, fully, and narrowly.”

“This means establishing safeguards around all of the key functions and activities of a stablecoin arrangement, including measures to ensure the stablecoin ‘reserve’ is maintained as advertised. But it does not necessarily mean imposing the full banking rulebook, which is geared in part toward lending activities, not payments,” Waller said.

He suggested a series of conditions that may be considered in supervising stablecoin issuance outside of federally insured financial institutions. Those include: if an entity were to issue stablecoin-linked liabilities as its sole activity; if it backed those liabilities only with 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, “that might provide enough assurance for these arrangements to work.”

“There should also be safeguards for other participants in a stablecoin arrangement, like wallet providers and other intermediaries,” he said. “Again, however, not all of the restrictions that apply to bank relationships might be necessary. For example, there is no need to apply restrictions on commercial companies from owning or controlling intermediaries in these arrangements. The separation of banking and commerce is grounded in concerns about captive lending – the idea that banks might lend to their owners on too favorable terms, giving the owners an unfair subsidy and putting the bank on shaky ground. These traditional concerns do not apply to wallet providers and other intermediaries who abstain from lending activities. There are new questions to consider, such as around the use of customers’ financial transaction data, but where anticompetitive behavior happens, existing law (and particularly antitrust law) should still apply.”

Federal Reserve Board Gov. Christopher J. Waller: Reflections on Stablecoins and Payments Innovations

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