October 27, 2023 at 15:19 GMTModified date: October 27, 2023 at 15:19 GMT
October 27, 2023 at 15:19 GMT

Federal Reserve official calls for regulation of stablecoins

The need for regulation of stablecoins was reiterated remarks made by Federal Reserve’s Michael S. Barr, at the Economics of Payments XII Conference on Friday.

Federal Reserve official calls for regulation of stablecoins

The need for regulation of stablecoins was reiterated in the opening remarks made by Federal Reserve’s Vice Chair for Supervision, Michael S. Barr, at the Economics of Payments XII Conference on Friday.

Acknowledging the significant experimentation with new payment technologies like stablecoins and central bank digital currencies (CBDCs), the Fed official called for a careful consideration of its benefits and risks.

According to him, stablecoins need regulation in order to ensure that they don’t threaten financial stability or the integrity of the payment system. His basis of reasoning were laid out as follows: “When an asset is pegged to a government-issued currency, it is a form of private money. When that asset is also used as a means of payment and a store of value, it borrows the trust of the central bank.”

The motivation behind Federal Reserve’s strong interest is in ensuring that any stablecoin offerings operate within an appropriate federal prudential oversight framework. The central bank has also provided guidance to banks that come under its supervision on how they should engage with their supervisors when considering use of these products.

In August, the Fed published more information and guidelines for supervised state banks looking to engage in stablecoin activity. It stated that these banks should venture into it only if they have risk management practices in place for cybersecurity, liquidity, consumer compliance and illicit finance risks.

Barr was also noted speaking on stablecoins last month when he revealed that he was “deeply concerned” about its issuance without strong federal oversight. Adding on, he said: “If non-federally regulated stablecoins were to become a widespread means of payment and store of value, they could pose significant risks to financial stability, monetary policy, and the US payments system.”

On the matter of CBDCs, the Fed has not decided on issuing it as any action would require clear support from the executive branch and legislation from Congress. However, the central bank would continue to research on them. Last year, it published a report examining the pros and cons of a potential CBDC.

Talking about it further, the official said: “The research is currently focused on end-to-end system architecture, such as how ledgers that record ownership of and transactions in digital assets are maintained, secured, and verified, as well as tokenisation and custody models.”

In his recent speech, Barr also touched upon how traditional payment methods remain vital. However, he also believes that research should continue in both emerging and established payment technologies.

In the US, a comprehensive regulatory framework for stablecoins was passed by the House Financial Services Committee in July. However, it was criticised by many in the Congress for a provision that would allow state regulators to approve stablecoin issuance without Federal Reserve’s input.

On the other side of the world, the upper house of the UK’s House of Lords passed a bill to regulate stablecoins earlier in June this year. Called the “Financial Services and Markets Bill (FSMB)” the bill also included a new set of rules for guiding crypto promotions.

Talking about its aim to empower regulators with more rule-making powers while also ensuring they remain accountable for their actions, member of the House of Lords, Baroness Joanna Penn, said: “This bill delivers the outcomes of the future regulatory framework review, giving the regulators significant new rulemaking responsibilities, whilst balancing that additional responsibility with clear accountability, appropriate democratic input, and transparent oversight.”