Stablecoin Expansion Raises Policy Questions in Washington and on Main Street

March 14, 2022

Total stablecoin circulation has reached $177 billion, up more than 350% since last February. The two largest stablecoins are Tether and USDC, worth $78 billion and $52 billion in circulation, respectively. USDC is expanding rapidly and could eclipse Tether this year.

Regulatory Concerns

With the wider crypto market—including Bitcoin and Ethereum—now worth close to $2 trillion, there is a growing concern among policymakers about the deepening connections between the crypto and real-world economies.

The Financial Stability Board in February issued a report warning that crypto markets “could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.”

The Federal Reserve conveyed similar sentiments in its latest Financial Stability Report, which included an industry survey that rated cryptocurrencies and stablecoins as one of the most-cited potential financial shocks in the next 12-18 months.

President’s Working Group Report

Given these concerns, there have been several key policy developments related to stablecoins in recent months and ICBA has been paying close attention on behalf of community banks.

In November, the President’s Working Group on Financial Markets released a much-anticipated report that urged Congress to enact legislation to limit stablecoin issuers to FDIC-insured depository institutions. The report also said:

  • Lawmakers should subject wallet providers to federal oversight to ensure they adhere to risk management standards.
  • Legislation should “require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities” due to concerns with marketplace monopolization and systemic risk.

The volume of stablecoins in circulation has grown rapidly in recent months, drawing increased attention from policymakers and the media. Here’s a breakdown of where this increasingly significant market stands and how community banker concerns align with those in Washington.

The Stablecoin and Crypto Market

Stablecoins—digital assets pegged to reserve assets to promote price stability—have in recent months continued their rapid expansion.

In response, ICBA told the PWG that community banks are alarmed at the rapid growth of these unregulated technologies and companies. We urged greater federal oversight to address myriad risks and prevent crypto contagions from spreading into Main Street economies.

Additional Policy Developments

More recently, Acting Comptroller of the Currency Michael Hsu described stablecoins “as the oxygen of the crypto ecosystem” and “a key link to the fiat currency world” that nevertheless can pose significant risks if users lose confidence in a stablecoin and initiate a run to redeem their coins. He warned that a stablecoin run would pose the risk of collateral damage that continues to grow as the crypto market expands.

The new conflict between Russia and Ukraine has brought even more attention from policymakers due to worries that cryptocurrencies may offer Russia a way to evade sanctions. While the crypto market might not be large enough to substitute for Russian banks, North Korea has reportedly used crypto assets to avoid sanctions and obtain funds for its weapons programs.

With so much attention directed at stablecoins, they are of course a key part of President Joe Biden’s executive order directing the federal government to develop policies on digital assets.

Looking Ahead

While policymakers continue scrutinizing stablecoins, the debate over regulating this rapidly growing financial sector remains unresolved. My next post will focus on the big policy questions posed by stablecoins, what’s next, and how ICBA and community bankers are joining the debate.

Meanwhile, community bankers with thoughts or questions about the development of stablecoins and their impact on community banks can follow me on Twitter and contact me directly at [email protected].