Janet Yellen, U.S. Treasury Secretary, during a Senate Committee on Banking, Housing and Urban Development hearing in Washington, DC, the United States, on Tuesday, September 28, 2021.

Kevin Dietsch | Bloomberg | Getty Images

Stablecoins, a popular type of digital asset tied to traditional currencies, could transform the way Americans pay for everything from cell phones and gasoline to haircuts and cups of coffee, according to a long-awaited report from the Biden government .

If regulated, stablecoins could “support faster, more efficient, and more inclusive payment options,” said the president’s working group on financial markets, which includes several of President Joe Biden’s top economic advisors.

“Also,” the report said, “the transition to wider use of stablecoins as a means of payment could be quick due to network effects or relationships between stablecoins and existing user bases or platforms.”

Still, Biden’s economic advisors said Congress needs to put in place regulatory oversight and a formal market structure as soon as possible to protect and inform investors, issuers and exchanges.

In particular, the Biden team recommended that Congress pass a law restricting the issuance of stablecoins to insured banks, a move that would give regulators far greater authority over the industry.

Senior government officials told CNBC that their report focuses on risk, but that the country’s top regulators believe stablecoins offer a compelling digital payment option that requires far more oversight from lawmakers.

Unlike their volatile crypto cousins, the $ 130 billion stablecoin market is valued in large part thanks to the stablecoins’ stable valuation and connection to national currencies. That persistence has made them a growing source of liquidity in cryptocurrency markets around the world. They are used by traders and investors to buy and sell other assets or as a safe place to park assets.

In this sense, stablecoins are more of a medium of exchange and store of value like a traditional fiat currency. It also sets them apart from cryptocurrencies like Bitcoin, which investors often see as a source of capital appreciation and potential market returns.

Like other digital assets, stablecoins must be monitored to make sure they are not funding criminal activity, Securities and Exchange Commission chairman Gary Gensler said in a press release on Monday. Gensler is a member of the President’s Working Group on Financial Markets.

“The use of stablecoins presents a number of public policy challenges in terms of protecting investors,” he said. “Stablecoins can also support those trying to circumvent a variety of public goals related to our traditional banking and financial system: anti-money laundering, tax compliance, sanctions and other safeguards against illegal activity.”

The government said it spoke to several key players in the crypto industry, including payment platforms Visa, Mastercard and Square, as well as the Coinbase, Gemini and Kraken exchanges, while preparing its analysis.

Of paramount concern to the working group was what they termed “regulatory” risk. Regulatory risks include a run on stablecoins, the inability of issuers to honor redemption requests, or market concentration.

The report’s authors recommended that “Congress should legislate immediately to ensure that payment stablecoins and payment stablecoin arrangements are consistently and comprehensively subject to a federal regulatory framework.”

To address these general concerns, the report recommended that lawmakers limit stablecoin issuance to insured banks.

Classifying stablecoin issuers as banks would help government agencies – including the Federal Deposit Insurance Corp.

Regulators could impose capital and liquidity standards to keep financial institutions safe and ensure that issuers can honor redemptions of coins.

In particular, this recommendation met with opposition from some, including GOP Sen. Cynthia Lummis of Wyoming, who said the requirement goes too far and puts smaller start-ups at a disadvantage.

“I agree with many of the recommendations, including the need for Congressional legislation and prudential risk management, that the proposal that only insured custodians be allowed to issue a stablecoin is misguided and false,” she said in prepared notes. “We should all agree that startups should have the same opportunities as Wall Street institutions. However, as the report clearly states, Congress will have the final say.”

Government officials also noted that talks with Capitol Hill are still in their infancy.

While lawmakers on both sides of the aisle are likely to be in favor of better regulation, it’s unclear whether Democrats in Congress will have time to pass both a $ 1 trillion bipartisan infrastructure bill and its roughly $ 1.75 trillion. Dollar expensive poverty and climate package to be adopted before the end of the year.

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The White House has been engaging its top economic advisors in discussions about introducing regulations on stablecoins and similar assets for months.

These discussions were based on input from a panel of high-level regulators tasked with identifying risks to the financial system, forming the Biden Working Group. Regular members include Gensler, Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and FDIC Chairwoman Jelena McWilliams.

Senator Sherrod Brown, an Ohio Democrat and chairman of the Senate Banking Committee, welcomed the working group’s recommendations.

“Today’s report from the Presidential Working Group highlights the risks that the rapid growth of stablecoins poses to families and the economy,” he said in a press release. “We need to ensure that all new financial technologies are subject to all laws and regulations that protect investors, consumers and markets, and that they compete on an equal footing with traditional financial institutions.”

The relative calm and potential use of stablecoins has drawn Capitol Hill and financial regulators alike attention. The Fed, for example, has been investigating the possibility of a US stablecoin or a digital central bank coin for months.

When asked in September about the Fed’s plans for a US digital currency, Powell acknowledged that CBDCs have both advantages and disadvantages.

“We think it is very important that the central bank maintains a stable currency and payments system for the public good. That is one of our tasks,” said Powell at the time.

The Federal Reserve Bank of Boston, which led the central bank’s research efforts on stablecoins, said in August that sanctioning a CBDC would help the US keep up with countries like China and Sweden.

Proponents of stablecoin and CBDC argue that a secure digital currency pegged to the dollar could help deliver payments to the public in times of crisis and provide financial services to unbanked communities.

Fed Governor Lael Brainard, a key deputy of Powell, is a staunch supporter of the central bank’s research.

“Given the important role of the dollar, it is important that the Federal Reserve remains at the forefront of research and policy development related to CBDC,” she said in the summer. Wall Street largely expects Biden to be promoting Brainard in the coming weeks.

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