Unstable: the PWG's Report on Stablecoins

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On November 1, 2021, the President's Working Group on Financial Markets (the "PWG"), the Federal Deposit Insurance Corporation (the "FDIC") and the Office of the Comptroller of the Currency (the "OCC") issued a Report on Stablecoins (the "Report").1 While the Report does not contain any specific new rules or guidance, its recommendations could have a broad impact if applied to the existing stablecoin markets. The Report notes that the market capitalization of stablecoins issued by the largest stablecoin issuers exceeded $127 billion by October 2021, representing a 500 percent increase over the past year. All of these issuers would be forced to become insured depository institutions or be regulated in a similar way should the Report's recommendations be fully implemented.

Below, we take a deep dive on a number of the key issues and conclusions from the report.


1. A banking activity and only a banking activity

In perhaps the most significant and specific recommendation, the Report recommends that Congress enact legislation to "limit stablecoin issuance, and related activities of redemption and maintenance of reserve assets, to entities that are insured depository institutions ("IDIs"). The legislation would prohibit other entities from issuing payment stablecoins."2 Let's unpack what this recommendation would mean in practical terms:


In recommending that stablecoin issuance (and related functions such as transfer, redemption, and cash management) should be performed by insured depository institutions, the federal bank regulatory agencies appear to implicitly confirm that such activities can be fully performed by banks. While the Report recommends legislation to implement the restriction on non-bank issuance, we believe that it would be illogical and inconsistent for those same agencies to interpret current law to prohibit IDIs from engaging in these activities, subject to all relevant prudential regulatory and supervisory requirements.3


A move to limit stablecoin issuance to IDIs is a step towards the conclusion that stablecoins are deposits under the Federal Deposit Insurance Act ("FDIA") and Section 21 of the Glass-Steagall Act ("Section 21").4 Stablecoins have yet to be either fully defined or classified under federal law. They are often compared to other existing financial instruments, including especially money market mutual funds ("MMMFs").5 As the Report notes "[d]epending on the facts and circumstances, a stablecoin may constitute a security, commodity and/or derivative implicating the jurisdiction of the SEC, and be subject to the US federal securities laws, or implicating the jurisdiction of the CFTC, and be subject to the [Commodities Exchange Act]." This and similar analysis within the Report appear to focus on non-bank stablecoin issuers, which include all of the issuers identified within the Report, and not to focus on the characterization of IDI issued products.

Indeed, the Report defines stablecoins as "digital assets that are designed to maintain a stable value relative to a national currency or other reference assets."6 The Report distinguishes a demand deposit held at an IDI as a different type of instrument: "a claim on the issuing bank that provides the depositor with the right to receive US dollars upon request." Deposits may carry deposit insurance and resolution preferential treatment upon the insolvency of the issuing IDI, and IDIs may have access to emergency liquidity and ongoing supervision and regulation.

The Report notes that "[r]elevant authorities, including the Department of Justice, may consider whether or how section 21(a)(2) of the Glass-Steagall Act may apply to certain stablecoin arrangements." While awkwardly phrased, this sentence implies that the Federal Reserve will consider whether non-bank issued stablecoins are deposits.7 Section 21(a)(2) provides that no person can engage "in the business of receiving deposits" unless they are incorporated under State or federal law and authorized to do so (in essence, are chartered or licensed as banks).8 The Report also identifies a "run risk" that is characteristic of deposits, stating "[i]f stablecoin issuers do not honor a request to redeem a stablecoin, or if users lose confidence in a stablecoin issuer's ability to honor such a request, runs on the arrangement could occur that may result in harm to users and the broader financial system."

A formal determination by the responsible US regulatory agencies that stablecoins are deposits would accomplish an intended goal of the Report – limiting stablecoin issuance to IDIs – without the need for legislation. Section 21 is a criminal provision and provides up to five years in prison for any person or entity that willfully violates it or knowingly participates in any such violation. This explains the reference to DOJ in the Report; should the Federal Reserve determine (likely in consultation with the FDIC, which is the primary agency interpreting the definition of "deposit" pursuant to the FDIA) that stablecoins are deposits, then the DOJ would investigate whether non-bank issuers are violating Section 21. There are many other follow-on issues from a determination that stablecoins are deposits, but they are beyond the scope of this client alert.

Such a determination would also validate the position of many IDIs that stablecoins issued by banks are just deposits and are not a distinct category of financial instruments. IDIs believe that a stablecoin is merely a token representation of the deposit held on an IDI's books and records. A contrary determination by regulators would, at least in theory, call into question the status of certain other obligations issued by IDIs, such as transferable certificates of deposit ("CDs").


2. Payments stablecoins versus other stablecoins

While noting that stablecoins are used currently in the US primarily to facilitate trading, lending or other borrowing, the Report notes the potential function of stablecoins as a payment mechanism in the future.9 The term "payments' is noted 21 times in the Report. This focus appears to narrow the effect of the recommendations of the Report to payment stablecoins, and list the beneficial and detrimental effects of the use of stablecoins as payment devices.

The Report defines stablecoin broadly based on the instrument, rather than its proposed use. The Report appears to imply that a payments stablecoin would be used for payments, while a non-payment stablecoin would likely be a product that may be used for, or is intended to be used for, investment or trading purposes. Stablecoins by nature are not intended to have value that may appreciate or depreciate separate from the fiat currency linked to such stablecoin – hence the use of the term "stable," which is reflected in the definition. Therefore, the value of a stablecoin should not vary, making use of a stablecoin as an investment unlikely.10

Notwithstanding this, there are many reasons why the value of a stablecoin may change and give rise to a market for trading such products. A few such reasons: (i) the view of the creditworthiness of the issuer may change, (ii) demand for a product may exceed the available supply, whether for a short- or long-term time frame, (iii) the underlying reserve currencies or assets may gain or lose value, or (iv) the issuer or some other interested party may fail to perform (e.g., freeze redemptions). The Report's analysis and conclusions seem to be intended to apply to "payments stablecoins." So, what rules should apply to non-payments stablecoins?

This is an important issue because there are many similar instruments currently existing that likely meet the terms of the definition of stablecoin while being more accepted examples of investment instruments, such as MMMFs, CDs, certain bond issuances and many other products.


3. Process moving forward

As noted, the Report does not contain any regulatory guidance that is currently applicable. Instead it contains analysis, guidance and recommendations to be executed by Congress, the Financial Stability Oversight Council ("FSOC") or the regulatory agencies. The road to implementation of some or all of the recommendations in the Report is unclear and complicated. However, the Report does provide a few options, as we review below.

Congressional action. The Report makes clear that the agencies involved would like Congress to act promptly to "ensure that payment stablecoins are subject to appropriate prudential oversight on a consistent and comprehensive basis." The Report further recommends that the legislation provide for prudential standards, supervision on a consolidated basis, and potential access to appropriate elements of the federal safety net for stablecoin issuers. According to the Report, the best way to accomplish this goal is for Congress to act to limit stablecoin issuance, redemption and maintenance of reserve assets to IDIs.

The Report also indicates that Congress should require "custodial wallet providers, which is a wallet provider that users may rely on to hold stablecoins, to be subject to appropriate federal oversight … [including] authority to restrict these service providers from lending customer stablecoins, and to require compliance with appropriate risk-management, liquidity and capital requirements … [and] other standards … such as limits on affiliation with commercial entities or on use of users' transaction data." This proposal looks to implement a similar restriction between cross ownership of financial and commercial entities as is provided for in Section 4 of the Bank Holding Company Act of 1956, as amended,11 which would preclude large technology or commercial entities from being part of the stablecoin ecosystem.12

Finally, the Report notes that Congress should require application of the Principles for Financial Market Infrastructures to "any entity that performs activities critical to the functioning of the stablecoin arrangement … and promote interoperability among stablecoins, or between stablecoins and other payment instruments."13

Interim Measures – Regulatory Agencies. As with any proposed Congressional action, no action is the most likely outcome. Therefore, the Report recommends certain "interim measures" that may be taken in the absence of Congressional action. The Report suggests that the federal regulatory agencies (which includes those mentioned above as well as the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC")) should continue to review whether payment stablecoins are securities, commodities, deposits or other financial instruments. It notes that the agencies will look to apply consumer financial provisions and AML/CFT obligations to stablecoins. Finally, the Report notes the authority of the Federal Reserve to examine certain third-party service providers to IDIs pursuant to the Bank Service Company Act.14 IDIs are also subject to supervisory expectations with respect to their relationships with third-party service providers, as described in a recent proposed interagency guidance.15 Such service providers will include many stablecoin issuers, wallet providers and other service entities that create relationships with IDIs.

Interim Measures – FSOC. The Report spends perhaps most of its discussion analyzing whether stablecoins represent or may represent a risk to financial stability. The Report identifies various risks that it believes are raised by stablecoin issuance due to, among other factors, the lack of consolidated prudential regulation of the instrument and its issuers. Among those risks are (i) rapid growth, (ii) loss of value, (iii) payment and transfer risk, (iv) operational risk, (v) settlement risk, (vi) liquidity risk and (vii) risks related to economic concentration. These risks can proliferate due to a lack of consistent prudential regulatory standards caused by regulatory gaps.

This analysis and the exercise done in the Report to reach its conclusions are clearly precedential steps to FSOC acting to designate certain activities as systemically important and/or acting to designate certain non-bank stablecoin issuers as "systemically important financial institutions" ("SIFIs"). FSOC was granted these authorities in the Dodd-Frank Act ("DFA").16 FSOC's authority pursuant to Title VIII of the DFA is less known but more used than its authority under Title I of the DFA. Under Title VIII, FSOC may designate entities that are engaged in activities that are or are likely to become systemically important payment, clearing and settlement activities. Such entities generally are known as Financial Market Utilities ("FMUs"). Presently there are eight entities designated as FMUs: they include securities clearing agencies, clearinghouses that operate payments systems, and foreign exchange clearinghouses. Once so designated, FMUs become subject to heightened prudential and supervisory provisions that are enforced by the Federal Reserve (and perhaps other regulators).

FSOC also has the authority to designate entities as SIFIs. However, no entities are currently designated as SIFIs. Designation as a SIFI would also bring prudential regulation and supervision by the Federal Reserve. In practice, SIFI designations under Title I of DFA have been more difficult for FSOC to make as opposed to FMU designations under Title VIII.

The authority for FSOC to designate FMUs and SIFIs requires a determination that the failure of an entity or the cessation of an activity would cause systemic failures in the financial system that current regulation does not address. Given the analysis and statements on systemic risk in the Report, it would likely not be overly difficult for FSOC to proceed with a designation process for stablecoins. It is also worth noting that numerous entities involved in drafting and approving the Report are also voting members of FSOC.17



The Report is a significant occurrence in the path to federal regulation of stablecoins. It contains dramatic recommendations, the most significant of which is that stablecoin issuance should be limited to IDIs. The clear goal of the PWG, OCC and FDIC is to bring stablecoins and their attendant risks under the umbrella of federal financial services regulation, whether by Congressional act, regulatory action or FSOC designation. While this has been the first collective federal regulatory action with respect to stablecoins, it is unlikely to be the last.


1 The Board of Governors of the Federal Reserve System (the "Federal Reserve") also contributed to the Report and its conclusions as part of the PWG.
2 We wrote about banks' ability to engage in stablecoin activities earlier in Stabilized: OCC settles debate about regulatory characterization of bank-issued stablecoins (White & Case, January 2021). We continue to believe that characterization of bank issued stablecoins as banking products precludes application of the securities laws under many circumstances.
3 The OCC has addressed these issues in two letters, Interpretive Letter 1170 (July 22, 2020), which held that national banks can hold cash deposited pursuant to stablecoin issuance and Interpretive Letter 1174 (January 4, 2021), which held that national banks may use stablecoins "to engage in and facilitate payment activities", including by issuing a stablecoin. The OCC has, however, publicly stated that it is reviewing the conclusions from those letters. It would be incongruous for the OCC to join the conclusions of the Report and then disclaim or materially alter the conclusions of ILs 1170 and 1174. See also IL 1172 (permitting national banks to hold reserves for stablecoins backed by fiat currency on at least a 1:1 basis where there is a hosted wallet) (September 21, 2020). We note that the Report does not ask Congress for legislation granting authority for IDIs to become stablecoin issuers and to engage in all related activities, as it would do if the federal bank regulators believed that IDIs did not already have such authority.
4 12 U.S.C. § 378 (2021).
5 See Oversight of the Treasury Department's and Federal Reserve's Pandemic Response, 117th Cong. (September 30, 2021) (testimony of Jerome Powell). https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408306.
6 The OCC in IL 1174 had previously defined a stablecoin as "a type of cryptocurrency that is designed to have a stable value as compared with other types of cryptocurrency. Some stablecoins are backed by a fiat currency, such as the US dollar."
7 We note again that the Report only identifies non-bank stablecoin issuers.
8 12 U.S.C. § 378(a)(2).
9 OCC IL 1174 also notes this potential use, basing its analysis on the ability of national banks to issue stablecoins on their use for payments purposes.
10 This difference parallels the discussion of "securities tokens" versus "utility tokens." See https://www.sec.gov/news/speech/speech-hinman-061418.
11 See 12 U.S.C. § 1843.
12 Acting Comptroller Hsu recently said that "the rapid expansion and mixing of wholesale and retail activities at some crypto firms raise the question of whether there ought to be Glass-Steagall-like separation of activities in the crypto space." See Acting Comptroller Michael J. Hsu Remarks before the American Fintech Council Fintech Policy Summit 2021_Leveling Up Banking and Finance (occ.gov)
13 See Principles for Financial Market Infrastructures (bis.org).
14 See 12 U.S.C. § 1867(c).
15 See Proposed Interagency Guidance on Third-Party Relationships: Risk Management, RIN 3064-ZA26 (July 12, 2021).
16 See 12 U.S. C. § 5322(a)(1)(A), § 5322(a)(2)(J) (Dodd-Frank Act § 112(a)(2)(J), § 112(a)(2)(J)).
17 The regulatory agencies that are members of the PWG or that joined in the Report – the Treasury Department, the Federal Reserve, the SEC, the CFTC, the OCC and the FDIC – represent six out of the ten voting members of FSOC. The other voting members of FSOC are the Bureau of Consumer Financial Protection, the Federal Housing Finance Agency, the National Credit Union Administration and an independent member with insurance expertise who is appointed by the President and confirmed by the Senate for a six-year term. FSOC also has five non-voting members, including a member designated by each of the state banking supervisors, the state insurance commissioners and the state securities commissioners as well as the federal Office of Financial Research and the Federal Insurance Office.


Prat Vallabhaneni (White & Case, Partner, Washington, DC), Duane Wall (White & Case, Partner Of Counsel, New York), Glen Cuccinello (White & Case, Counsel, New York), James Kong (White & Case, Associate, New York), and Yuri Nesen (White & Case, Legal Assistant, New York) contributed to the development of this publication.

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