The US Treasury Department doesn’t want government-regulated stablecoins or e-money – Ledger Insights

Last week, US Treasury Undersecretary Nellie Liang gave a speech in which she argued that non-bank payment providers should be regulated at the federal level, not the state level. It included all money transmitters, e-money companies and stablecoin issuers. Today, the New York State Department of Financial Services (NYDFS) is the regulator for the largest stablecoin issuers.

The Treasury has already raised this point as part of its 2022 Future of Payments paper, where it looked at a potential CBDC. The question is whether this proposal will generate as much backlash as the retail CBDC.

Ms. Liang made some strong arguments. She argued that the idea of ​​regulating money transmitters at the state level was based on physical cash, where someone would go to a local money changer to send cash to someone in another state. An important point is that the money transmitter would not keep the money for very long.

Now that we have digital apps, we store money in these apps, which means that these money transmitters or e-money providers are responsible for large amounts of cash. This is especially true for stablecoins. However, laws regarding how the money transmitter can invest these funds vary significantly between states.

Therefore, she argues that if the nature of what is regulated has changed, one should reconsider how these activities are regulated.

Perhaps as an incentive, she noted that government regulation of these companies means they don’t have access to FedACH or FedNow.

From an issuer perspective, they must manage multiple state licenses with different requirements and high compliance costs. This probably increases the barriers to entry.

“The existing regulatory patchwork is burdensome and inefficient, while failing to adequately take risks into account,” she said.

Federal stablecoin, electronic money regulation proposals

We thought the proposal could be national rules with local oversight. However, Ms. Liang believes there is also a need for national oversight.

The standards would cover financial resources, risk management, oversight and activities. Electronic money issuers would be limited to payment-related activities, otherwise they would be similar to banks. They would also consider whether subsidiaries of electronic money issuers might face similar restrictions to the requirement that banks not be involved in trading to prevent antitrust problems.

In her conclusion, she said: “We have long recognized that stablecoins involve payments and risks similar to those posed by electronic money issuers today.” At the same time, stablecoins pose some unique risks because they are based on distributed ledger technology and therefore may involve a different set of intermediaries and can be transmitted peer-to-peer. We continue to support Congressional efforts to create such a framework.”

On the broader topic of federal payment regulation, she invited stakeholders to continue the conversation.

To take a step back, it is worth comparing this payment proposal with the concept of state-chartered banks. State banks make sense because they are often community-oriented. A locally focused payment app is conceivable, but far less likely. One of the biggest questions is whether federal licenses would mean fewer licensed businesses. Because that wouldn’t be good for competition.

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