Timothy Massad, former chairman of the Commodity Futures Trading Commission (CFTC) and a current research fellow at Harvard‘s Kennedy School of Government, argued that regulatory progress on stablecoins can be made immediately by utilizing the current laws.
Guesting on Bloomberg’s Odd Lots podcast, Massad discussed a stablecoin proposal he co-authored with two law professors, Howell Jackson and Dan Awrey, stating that they are “not sure [legislation] will happen,” and if it does, there is a question of how comprehensive it would be.
“So what we’re saying is financial regulators today have the authorities they need to create a framework to try to bring this activity within the banking perimeter,” he said. “Wouldn’t be regulated exactly as a bank, but what you would do technically is you set up what’s called a national trust bank, which then has a trust below it that is the payment vehicle.”
This would then enable supervision by a banking regulator, but done in a way where there’s no deposit insurance, he added. The stablecoin issuer should just hold cash and Treasuries and “so forth.” This could be coupled with access to a Federal Reserve master account, which would be useful for “settlement efficiency.”
Furthermore, the Office of the Controller of the Currency could set various other standards, such as operational resiliency, basic consumer disclosure, consumer protection, etc., Massad said, adding:
But the point is that administratively, this could be done. It would require all the bank regulators to get together and cooperate something that doesn’t always happen in our system very well. But it could be done today under existing law. And again, we’re not against legislation. That would be fine, but let’s not wait around. We could do this today.
The regulator of a bank such as this would primarily be the Office of the Controller because it would issue a national trust bank charter. However, there would also need to be cooperation with the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), while, ideally, the Securities Exchanges Commission (SEC) and the Commodity Futures Trading Commission (CFTC) would join too. “But you know, we created the Financial Stability Oversight Council to bring the regulators together,” said Massad.
As for the objections stablecoin companies might have, he listed two potential worries:
- limiting potential competition.
However, Massad argued that,
I think both those things can be dealt within the process. It really depends on how much flexibility regulators want to build into the system.
Going into more detail about why the US regulators have paid so much attention to stablecoins, Massad said that this sector is “not that big” relative to the financial sector, but that it is growing very quickly – which causes concern.
Add to this the recent crypto market crash, as well as the crash of the infamous Terra /LUNA algorithmic stablecoin, and the regulators’ concern reached a new high.
And what really prompted the regulators to focus so much on stablecoins in the first place was Facebook‘s – now Meta‘s – failed Libra coin proposal, he said.
Massad stated that,
“There’s a view that, you know, these things could grow very quickly and frankly that there’s an opportunity here. They could help modernize payments and increase competition. So I think it is right for regulators to be focused on them.”
Stablecoin regulations differ from crypto regulations because stablecoins are seen primarily as payment mechanisms, Massad argued.
What an adequate and comprehensive framework would involve is ensuring that stablecoins are fully reserved, meaning they have cash or Department of the Treasury securities backing them. Furthermore, it would ensure “good resolution and oversight as well as we’ve got to deal with the operational risks here, because these stablecoins are trading on a number of decentralized blockchains.”
Talking about the stablecoin-related companies and events that could endanger stablecoin holders, he concluded that,
“This is a financial institution. And it’s a payment company. We don’t want it to go through the normal bankruptcy where people are held up. So that’s why I think we really need a more comprehensive approach.”