Regulate stable coins. Please! | Finance times

The author is the former chairman of the US Federal Deposit Insurance Corporation and is currently on the board of Paxos, a blockchain company and regulated StableCoin emitters. The views are their own.

Everything old is new again and there is nothing new to a financial company that says investors that something is certain if it is not.

It was also the case with Terra's overly foreseeable melt in the past month, a so-called StableCoin cryptocurrency, from which the issuers had promised that they would be kept a value coupled to the US dollar, but that the promise with little more than an algorithmic wing and prayer.

One might think that the prevention of such disasters would fall into the responsibility of a US regulatory authority. Unfortunately, due to the letter soup of the US financial authorities, it is not clear who has authority. It is time that the regulatory authorities become creative and use their current powers to act. The Securities and Exchange Commission has a regulatory model that is tailored to StableCoin issuers: state money market funds. Both stable coins and state money market funds promise investors liquidity and stable value - a dollar in, one dollar out. In their stability, both rely on the safety of the reserves.

State money market funds have proven to be safe and resistant in stress times, since they have to invest their reserves in cash and highly liquid federal securities. They are subject to strict rules in relation to the disclosure of investors and transparency. Submit stable coin emitters to these rules would make this market more secure for investors.

Such a step would require the SEC to find that stable coins are securities. This would be an unchecked interpretation. The traditional legal test for a securities contains a profit expectation of the investor, and most stable coins do not drop a return. At least the SEC could pursue a voluntary supervisory system in order to give responsible stable coin emitters a credible regulatory framework for their business and to help investors distinguish them from risky offers.

An alternative would be bank regulation. This was the proposal by a group of leading US finance supervisory authorities. However, laws would be necessary to force the StableCoin business into the banks, and the idea was not very well received in the congress. Banking supervisory authorities could approve voluntary applications from Stablecoin emitters on banking licenses, but this has disadvantages.

On the one hand, there would be stable coin emitters access to safety network programs, including deposit insurance and the possibility of taking out loans from Federal Reserve banks. So it would give stable coin stability, but at the government's expense. In addition, the relocation of this business in banks would exacerbate the risk of excessive money creation - which is already embedded in the spread of cryptocurrencies. Banks "create money" by lending most of their deposits, the borrower in turn invests with other banks that they will resist, and so on. More money creation is the last thing we need.

These concerns could be partially cleared if the banking supervision of stable coin emitters were supervised as trust banks, a model developed by the regulation of the New York State Department of Financial Services in the regulation of three stable coin emitters. (Disclosure: I am on the board of Paxos, one of these trusts.) For the issuers it regulated, the NYDFS has just published guidelines that limit the stable coin reserves on bank deposits and short-term US state bonds, with credible confirmation by third parties.

Treuhand banks are subject to robust capital and liquidity requirements, but do not accept any deposits and therefore do not benefit from the deposit insurance. Nevertheless, the bank regulation is poorly equipped to deal with the problems of investor protection, transparency, manipulation and fraud that plague the crypto world. This is the specialty of market supervisory authorities such as the SEC, not from banking supervisors who specialize in credit risks.

Other partial solutions include the Commodity Futures Trading Commission, which uses its comprehensive enforcement authority to combat fraud and manipulation. Or the Financial Stability Oversight Council, a group of US regulatory authorities who are responsible for financial stability, could describe stablecoins as potentially systemically systematic and give the US Federal Reserve the authority to provide them with some supervisory standards.

None of these steps would rule out legislation. If the regulatory authorities progress, this could actually spur the congress to act. One thing that the congress should not do is create a new regulatory authority for crypto-assets. We already have too many. One or more only need a clear authority of the congress to act. Until then, people are injured - pensioners, ordinary investors and young people. It's time to do something.