A call for legislation creating a framework providing for issuance of stablecoins by federally insured depository institutions only – both to help preserve financial system stability and close an avenue for illicit finance – was highlighted in a speech Monday by Treasury’s top domestic finance official, Nellie Liang.
Liang, Treasury’s deputy under secretary for domestic finance, said in remarks prepared for an international banking conference in Washington that the President’s Working Group on Financial Markets (PWG) as well as the Financial Stability Oversight Council (FSOC) – both headed by Treasury – are focused on devising a consistent, comprehensive regulatory framework for stablecoins that is proportionate to the risks posed. She noted the November 2021 PWG report that highlighted gaps in the current regulatory framework to address such risks, which include limited regulatory oversight of some of the largest stablecoin issuers and a lack of supervisory visibility into the broader ecosystem supporting the stablecoin.
She said existing regulations “are not designed to address the financial stability or payment system risks for new products based on distributed ledger technology, which has the potential to significantly change how some financial services are provided. Legislation proposed by the working group, she said, “would complement existing authorities with respect to market integrity, investor and consumer protection, and illicit finance.”
Last year’s report by the PWG, along with the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corp. (FDIC.), Liang said, suggested limiting issuance of stablecoins to insured depository institutions, which would reduce the risk of investor runs; giving supervisors of stablecoin issuers authority to set risk management standards for critical activities related to use of stablecoin as a means of payment, helping to ensure the resilience of critical payment systems; and measures to reduce concerns related to concentration of economic power that would limit competition and harm consumers.
The FSOC has identified digital assets as one of its priorities for 2022, and Liang said the council plans to bring together its member agencies to assess any potential risks posed by digital assets and ways to increase financial system resiliency to those risks. This work is not focused only on stablecoins but on all digital assets, she said. She said these efforts are part of a broader Biden-Harris administration strategy to develop a comprehensive strategy that ultimately would work to prevent increased use for illicit finance, risks to financial stability, and harm to consumers and investors.
“If well-designed and appropriately regulated and supervised, digital asset innovations could enhance financial system efficiency and resiliency, as well as help provide access to financial services for those outside of the traditional banking system,” she said.
Liang, in her speech, pointed to digital assets as one of two emerging risks to the financial system; the other she noted is climate change.
She said the National Oceanic and Atmospheric Administration (NOAA) has reported numerous $20-billion-or-more weather and eliminate disasters last year that caused a combined $145 billion in damages – a 50% increase in damages from 2020. Last November, she noted, the FSOC identified climate change an emerging threat to financial stability. The panel also recognized that the scope and uncertainties of climate change on the financial sector “represents a new challenge to existing regulatory frameworks and supervisory practices,” she said.
To address this challenge, Liang said Treasury and its FSOC colleagues have been working to expand capacity to assess, monitor, and quantify climate-related financial risks and to advance climate-related scenario analysis. She said U.S. regulators are also continuing to incorporate climate risks into their regulatory and supervisory programs.
Along that line, she said, the Federal Reserve has established two committees which are focused on climate-related risks at supervised financial firms and for financial stability and is developing a program for scenario analysis. Among other efforts underway include the OCC’s release of draft principles for identifying and managing climate-related financial risks for large banks and plans the FDIC has announced to seek comment on guidance designed to help banks manage climate-related risks.
Among other, broader efforts are a focus on disclosure to provide markets with the information necessary to price climate related risks.