SEC to Rein in Stablecoins

Wall Street’s top watchdog won concessions in a debate between U.S. regulators over how to police stablecoins, clearing a path for the Securities and Exchange Commission (SEC) to crack down on the $131 billion market.

Stablecoins play a crucial role in the crypto sphere. Their value is tied to other assets, like the U.S. dollar, and companies typically commit to keeping reserves that ensure investors can exchange the tokens for regular currency. As the sector has grown rapidly, financial regulators have become increasingly concerned about the risks stablecoins pose to the financial system . For example, the market value of Tether has grown to nearly $70 billion this year, up from $21 billion at the end of 2020, according to CoinMarketCap.com. USD Coin, the second-largest stablecoin, increased tenfold, from $3.9 billion last year to $32.6 billion.

Authorities have been already cracking down. In February, Tether settled with the New York Attorney General over allegations that it lied about the reserves backing the coin. Earlier this month, the Commodity Futures Trading Commission (CFTC) ordered Tether to pay $41 million over similar claims.

Now, the Treasury Department and other agencies are expected to publish a report detailing how the SEC has significant authority over tokens like Tether, said people familiar with the matter. The report will also urge Congress to pass legislation specifying that these cryptocurrencies should be regulated similarly to bank deposits, one of the people said, asking not to be named because discussions are private.

Language was added to emphasize the SEC’s powers after its chair, Gary Gensler, pushed for changes behind closed doors, the people said. The revisions he sought make clear that the government will take an active role in regulating stablecoins even as it waits for longer-term plans to be implemented. For industry executives, Gensler’s successful lobbying is likely to come as bad news. The industry is already arguing the SEC has been overreaching, and the new recommendations could reinforce the agency’s ability to pursue enforcement actions and policies for cryptocurrencies.

Early versions of the report called for lawmakers to pass legislation that would, among other things, create a new type of bank charter for companies that issue stablecoins. In recent weeks, Gensler pushed to clarify that the SEC has existing powers to oversee tokens when they’re involved in investment transactions, the people said. It’s worth noting that any bill faces long odds in a divided Congress and could take years to enact.

The report will also reaffirm that the CFTC has a role in overseeing stablecoins. Spokespeople for the SEC, CFTC, and Department of Treasury declined to comment on the report.

The pending report is being prepared by the President’s Working Group on Financial Markets with goals of ensuring that coins don’t threaten the economy and clarifying how the Biden administration will regulate the sector across the different agencies likely to have a role. The group is also likely to propose that the Financial Stability Oversight Council, another council of regulators, formally assess whether tokens pose a systemic risk.

“You aren’t helping the system at all if what is called a ‘stablecoin’ is actually not stable, so you don’t want to allow that kind of risk to build,” said Treasury Undersecretary for Domestic Finance Nellie Liang at a financial-technology conference hosted by Georgetown University Law Center last week.

Gensler had previously said that many stablecoins, which sometimes invest in corporate bonds and other assets, look similar to money-market mutual funds and could fall under his authority. The SEC is investigating some tokens, including one started by Coinbase Global Inc. and Circle Internet Financial Inc.

Stablecoin executives, including at Circle and Paxos Trust Co., have said they support bank-like regulation.

In contrast, some investor advocates have lobbied officials to emphasize regulators’ powers rather than to recommend Congress take action, given how long that process can take. The Americans for Financial Reform Education Fund sent a letter on October 19 to Treasury Secretary Janet Yellen expressing “alarm” that the report could suggest the legislative path.

One of the things regulators fear most is a sudden, unregulated surge in public adoption of stablecoins, a possible scenario if a technology giant such as Facebook Inc. issues a token. Facebook’s proposal to back a future token—currently known as Diem—hasn’t yet come to pass.

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