Courtesy of PYMNTS.com
The words “systemic” and “risk” have been on everyone’s lips in the past few weeks.
And for Big Tech, at least, the regulatory gaze will only widen, eyeing the payments ambitions of the biggest platforms, and whether new payment types — stablecoins among them — might scale enough on those platforms to be a cause for vigilance.
The Consumer Financial Protection Bureau (CFPB) efforts may get renewed vigor in the wake of the fact late last month federal appeals court ruled that the CFPB’s funding via the Federal Reserve is constitutional.
And this week, appearing on Yahoo Finance Live, CFPB Director Rohit Chopra gave some insight into the areas ripe for consideration and review — and perhaps some new regulations too.
He said the Financial Stability Oversight Council has the authority to “designate certain payment activities [including] payment clearing and settlement as either systemic or likely to become systemic.”
Among the payment methods that need to be examined, per Chopra’s commentary: stablecoins, which could conceivably start “riding the rails of a Big Tech platform or a card network.”
Who’s on the Platform and Who’s Not
“There are some questions we have,” he said of the platforms, “about how do some of these services decide to kick a merchant off or kick a user off? How are they actually using all the data that they’re collecting through our phones and through what we buy?”
He noted that beyond the ability to craft targeted ads, there may be a “move to a world with personalized pricing.”
The regulators, he said, have been looking, and will continue to look, at the cloud services offered by Big Tech players — with particular concern around the risks tied to outage or attacks by fraudsters and hackers, non-state and state actors alike. The risks extend to healthcare, energy and other sectors, he said.
“It’s hard to know what specific tools we’ll use,” he told the finance site, as to what guardrails, regulations and policies may be on the horizon.
As reported by PYMNTS in recent weeks, the drumbeat for stablecoin regulation is likely to grow louder after the stablecoin USDC briefly lost its dollar peg. USDC dipped to as low as 86 cents after the issuer of the stablecoin, Circle, said that some of the funds backing the stablecoin were held at Silicon Valley Bank.
Big Tech’s financial services roadmaps may be determined in part by open banking, where as banks share account data and other details (with consumer permission), they can offer a range of financial products. There’s also, of course, the ability for Big Tech to apply for banking licenses. Apple’s latest push into buy now, pay later (BNPL), with Apple Pay Later, is but one of the more recent examples of the lines blurring between payments, providers and platforms.
(Dec. 23, 2021) Regulators should take appropriate actions within their jurisdictions to address risks associated with digital assets like stablecoins, while continuing to coordinate and collaborate on issues of common interest, the Financial Stability Oversight Council (FSOC) recommended late last week.
And if federal legislation mandating regulation of stablecoins and other digital assets is not enacted, FSOC said, regulators should be ready to take steps on their own.
In its 2021 annual report, the Financial Stability Oversight Council (FSOC) made several recommendations, including those on digital assets, transition away from the LIBOR reference rate, climate-related financial risk, and cybersecurity.
“The Financial Stability Oversight Council’s annual report analyzes past episodes of financial turmoil to understand weak points in our financial system. It also reviews the actions taken by the Council to strengthen our financial system, with one eye on the past and one on the future,” said Secretary of the Treasury Janet L. Yellen, who chairs the council made up of leaders of federal financial regulators. “In the coming year, the Council will continue to monitor threats to financial stability and take concrete action where appropriate.”
Regarding digital assets, the report recommends that member agencies consider the November-released report on stablecoins issued by the President’s Working Group on Financial Markets, in conjunction with the FDIC and the OCC.
Among other things, that report advocated requiring that stablecoins should only be issued through federally insured depository institutions (such as credit unions and banks) through an act of Congress. The report also recommended that that legislation complement existing authorities held by federal regulators meant to ensure market integrity, investor protection, and prevention of illicit finance.
“The Council recommends that federal and state regulators continue to examine risks to the financial system posed by new and emerging uses of digital assets and coordinate to address potential issues that arise from digital assets,” the report stated. It added that the FSOC will further assess and monitor the potential risks of stablecoins while recommending FSOC members consider actions to address those stablecoin risks by working together.
However, if legislation is not enacted, the FSOC said, it will be ready. “The Council will also be prepared to consider steps available to it to address risks outlined in the PWG Report in the event comprehensive legislation is not enacted,” the report states.
LINK:
Financial Stability Oversight Council Releases 2021 Annual Report
(Nov. 19, 2021) Flexibility for board meetings originally extended to FCUs during the height of the coronavirus crisis will be extended in the new year, NCUA said this week. In Letter to Federal Credit Unions (LTCU) 21-FCU-06, the agency said a federal credit union (FCU), as allowed for in March of last year, may adopt at any time by a two-thirds vote of its board of directors a bylaw amendment allowing the board to meet virtually. The provision was approved by the agency in response to person-to-person limits on meetings during the coronavirus crisis … The use of stablecoins deserves a look – and issuance should be broader than just that by banks and credit unions – Federal Reserve Board Gov. Christopher Waller said this week. Referring to a report issued Nov. 1 by the President’s Working Group on Financial Markets that advocated only federally insured financial institutions could issue the digital payments, Waller said “there may be others that better promote innovation and competition while still protecting consumers and addressing risks to financial stability.” He said he disagrees that stablecoin issuance can or should only be conducted by federally insured banks credit unions “simply because of the nature of the liability … The controversy over OCC Nominee Saule T. Omarova (who faced a confirmation hearing Thursday) was illustrated by competing headlines issued in advance by the top Democrat and Republican members of the Senate Banking Committee. The headline of the press release issued by Chairman Sherrod Brown (D-Ohio) stated “Saule Omarova is Eminently Qualified to Lead the OCC.” The headline of the release issued by Ranking Member Pat Toomey (R-Pa.) stated: “I’ve Never Seen a Nominee with More Radical Ideas.” The banking industry has also expressed skepticism about the nominee. Omarova told the panel her priorities would be helping small- to medium-sized banks invest locally.
LINKS:
Federal Credit Union Meeting Flexibility in 2022 Due to the COVID-19 Pandemic
Witness statement: Dr. Saule T. Omarova (Comptroller of the Currency Designate)
(Nov. 5, 2021) Payment stablecoins and their arrangements should be subject to a federal regulatory framework on a consistent and comprehensive basis through an act of Congress – including by requiring that stablecoins may only be issued by federally insured credit unions and banks, according to a report issued this by a presidential working group focusing on the digital currencies.
Issued by the Treasury Department’s “President’s Working Group on Financial Markets,” along with the FDIC and the OCC, the report also said that such federal legislation would complement existing authorities held by federal regulators meant to ensure market integrity, investor protection and prevention of illicit finance.
“Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options,” said Treasury Secretary Janet L. Yellen in a statement. “But the absence of appropriate oversight presents risks to users and the broader system.”
The report’s conclusions are being interpreted by some that stablecoin issuers would have to secure either a bank or credit union charter before participating with the payment method. In any event, a key recommendation is that legislation be enacted that only allows stablecoins to be issued by federally insured financial institutions.
Key concerns that should be addressed in legislation, according to the report, include:
- Risks to stablecoin users and protection against stablecoin runs, which legislation should address by requiring stablecoin issuers to be insured depository institutions, “which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.”
- Payment system risk, which legislation should address by requiring custodial wallet providers to be subject to appropriate federal oversight. “Congress should also provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards,” the report stated.
- Systemic risk and concentration of economic power, which should be addressed by legislation that requires stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. “Supervisors should have authority to implement standards to promote interoperability among stablecoins,” the report asserts. “In addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on use of users’ transaction data.”
In the meantime, the report states, the FDIC and OCC are committed to taking action to address risks falling within their jurisdictions, “including efforts to ensure that stablecoins and related activities comply with existing legal obligations, as well as to continued coordination and collaboration on issues of common interest.”
The report states that while Congressional action is “urgently needed” to address the risks inherent in payment stablecoins, “in the absence of such action, the agencies recommend that the Financial Stability Oversight Council (FSOC) consider steps available to it to address the risks outlined in this report.”
The report also notes that work on digital assets and other payment innovations related to cryptographic and distributed ledger technology is ongoing throughout the Biden Administration. “The administration and the financial regulatory agencies will continue to collaborate closely on ways to foster responsible financial innovation, promote consistent regulatory approaches, and identify and address potential risks that arise from such innovation,” the report stated.
LINK:
President’s Working Group on Financial Markets Releases Report and Recommendations on Stablecoins