Letters to Regulators: Letter to the Treasury/President’s Working Group on Stablecoin Regulation

View or download a PDF of the letter here.

October 19, 2021 

The Honorable Janet Yellen
Secretary of the Treasury
1500 Pennsylvania Avenue NW
Washington, DC 20220 

Dear Secretary Yellen: 

We write to share our alarm regarding recent reporting in the Wall Street Journal indicating that  the Treasury Department and President Biden’s Working Group on Financial Markets (PWG)  are considering recommending that Congress create special bank charters as the preferred approach to the regulation of stablecoins. For the reasons stated below, we think this approach  is dangerous. Instead, we urge Treasury and the PWG to (1) clarify and confirm the authorities that federal regulatory agencies already have to regulate stablecoins, and (2) call on those  agencies to act swiftly to exercise their authorities now. Unless federal regulators take prompt  and effective action to deal with stablecoins, there is a grave danger that the $120 billion dollar  stablecoin market will pose severe operational and systemic threats to our financial system. 

Despite widespread claims by the cryptocurrency industry touting the potential for stablecoins to be used as payment instruments for goods and services in the real economy, substantial evidence indicates that stablecoins are not being used to expand financial inclusion or conduct  daily transactions in the real economy. Instead, stablecoins are primarily used as a specialized  payment mechanism for speculating in various types of cryptocurrencies, including  decentralized tokens. As data from DeFi Pulse shows, the growth in stablecoins has closely  followed the growth in the open interest of decentralized tokens. It has also been well  documented that the anonymity that stablecoins provide to buyers is integral to the appeal of  stablecoins, as their anonymity helps to facilitate evasion of tax laws, terrorist sanctions, and  anti-money laundering laws.

In addition, there is growing evidence that the largest stablecoin company, Tether, which  reportedly has issued $69 billion of stablecoins, does not back those stablecoins with 1-to-1 fiat  money reserves. A recent enforcement action by the Commodity Futures Trading Commission  (CFTC) determined that the lack of 1-to-1 fiat money reserves for Tether stablecoins could lead  holders to lose money when they try to redeem their holdings. Recent reporting by Bloomberg  shows that many Tether stablecoins are backed by very risky short-term loans to large Chinese  real estate companies. Worse still, although Tether claims to hold $30 billion of commercial paper, many participants in the tightly knit commercial paper market have not seen transactions  from Tether, despite the fact that, if its reserve attestations are true, it would be the world’s  seventh largest holder of commercial paper. There are also reputational concerns for the  Treasury Department should it provide a perception of legitimacy and an avenue for access to  the federal banking safety net to a firm like Tether, which is reportedly under investigation by the  Department of Justice (DOJ).

Various legal precedents support the view that stablecoins are subject to the federal securities  laws and therefore to regulation by the Securities and Exchange Commission (SEC). In SEC v.  U.S. Reservation Bank & Trust (USRBT) for example, the courts ruled that deposit-like products  offered by USRBT were in fact securities based on a combination of widespread marketing to  profit-driven investors and a lack of investor protection such as the guarantee provided by FDIC  deposit insurance to depositors in FDIC-insured banks. 

Similarly, in the case of the SEC v. Stanford International Bank, where Stanford International  Bank was involved in the sale of foreign certificates of deposit (CDs), the district court held that  the SEC had authority to regulate those CDs as securities. The court ruled that a combination of  features, including the buyers’ profit motives, direct solicitation to investors, and the speculative  status of Stanford’s unbacked financial instruments meant that the CDs issued by Stanford were  in fact securities.

Current law also provides the DOJ with authority to investigate whether non-regulated financial  institutions such as Tether, which offer stablecoins with purportedly “stable” values, are illegally  accepting “deposits” under Section 21(a)(2) of 12 U.S.C. 378. This authority should be  exercised, not ignored or undermined. 

There is no reason to believe that Congress is on a path towards passage of legislation  authorizing a new type of bank charter for stablecoin issuers that would include the public  protections and accountability – including FDIC deposit insurance and regulation of corporate  owners of banks under the Bank Holding Company Act – necessary to protect consumers and  ensure the stability of our financial system. Advocates for the financial industry calling on Treasury to defer to Congress are doing so precisely because they want the financial industry to  be able to shape its own ”regulation-lite” environment and enjoy bank-like powers and privileges  without bank-like protections and responsibilities. 

Given the concerns about the risky reserves backing many stablecoins and the serious hazards  presented by weak non-bank charters, we urge the Treasury and President’s Working Group  against referring the challenges presented by stablecoins to Congress. Instead, we ask the  Treasury and the PWG to clarify and confirm how the federal regulators should use their  existing authorities and coordinate their efforts to protect investors, the financial system, and the  broader economy from the very severe dangers posed by stablecoins. 

Furthermore, we urge the Treasury and the PWG to use this opportunity to design a whole-of government approach to improving our current payment system to be more inclusive and less  costly by lowering transaction fees and shortening settlement periods. The fast growth of  unregulated stablecoins highlights why implementing FedNOW12 and building a central bank  digital currency should be top priorities for regulators. 

We appreciate your attention to this matter. If you have any follow up questions, please do not  hesitate to reach out to Andrew Park (andrew@ourfinancialsecurity.org) and Renita Marcellin  (renita@ourfinancialsecurity.org)