The Financial Stability Oversight Council will meet Thursday to get an update on the President’s Working Group’s pending white paper on stablecoins. This will be behind closed doors. We could see the reporting calling for stablecoins to either be deemed MMMFs (money market mutual funds) or issued by existing banks. We could see more headlines in the coming week.
Thursday’s meeting of the Financial Stability Oversight Council, has stable coin policy on the agenda. The US Treasury secretary chairs FSOC, which consists of all the top financial regulators. Stablecoins are cryptocurrencies which are pegged to another asset, for example the US Dollar or the gold price. They are more favoured for practical uses like buying goods and lack the volatility of even mainstream cryptocurrencies like bitcoin.
Some market pundits see the stablecoin market as the holy grail of digital currencies.
FSOC will get a briefing from the President’s Working Group on its pending report on stablecoins. This is one of three government white papers on crypto that are expected in the coming months. The other two are from the Federal Reserve and focus on the digital dollar.
This briefing will occur behind closed doors. As a result, one cannot watch the session. According to a research note circulated to hedge funds yesterday by Cowen Washington Research Group, it is not expected that FSOC will release a summary or copy of the presentation.
The Cowen Washington Research Group is part of Cowen’s wider research and advisory business, advising hedge funds, banks and other institutional market participants on developments in Washington DC which could impact markets.
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The President’s Working Group consists of the Federal Reserve, the SEC, the CFTC and Treasury. That gives it a broad view of the crypto sector.
“We expect the report will conclude that existing stablecoins are securities that should be registered as prime money market mutual funds,” said Cowen in the policy note, seen by The Armchair Trader.
“It also is likely to open the door for banks to issue stablecoins as a new form of deposits,” Cowen added. “That means there could be a discussion of whether FDIC insurance will back these stable coin deposits.”
How can the government secure stablecoins against redemption risk?
Both options will be designed to counter what Cowen expects the report will identify as the biggest risk, which is a redemption surge. It also is likely to tackle how to ensure stable coins are actually backed dollar for dollar with reserves. The report will only be a recommendation. The issue will be how to translate it into actual policy. It is possible that will be part of the confidential discussion on Thursday.
Cowen told hedge funds to expect to start seeing media previews of the report in the days or weeks after the meeting. It is rare for the US government to release a major financial policy report without first previewing parts of the study to select media outlets.
There is a public session of Thursday’s meeting. That is devoted to climate change risk. It is possible there could be a brief mention of stablecoins though there are not expected to be any specifics.
“We believe this is a regime that could start to take effect next year,” said Jaret Seiberg, Managing Director at Cowen in Washington DC “We see regulators already having the power to act, though this could get delayed if legislation is required.”