Yesterday, Randal Quarles, the departing Federal Reserve Governor responsible for Financial Stability, spoke about stablecoin regulation during a speech at the American Enterprise Institute. He endorsed most of the recommendations by the Presidents Working Group (PWG) stablecoin report, but not all.
Quarles’ biggest disagreement is with the notion that wallet providers should not be associated with commercial entities. That’s likely a response to Meta initiating Diem and its Novi wallet. However, the regulation was originally created to prevent commercial companies from benefiting from an unfair advantage through borrowing from a bank it owns. And that’s not the concern for stablecoins.
Talking about the commercial entity wallet exclusion, Quarles said, “It is not at all clear what regulatory interest would be furthered by such a limitation, which is much more restrictive than we require for nondigital assets.”
The departing Governor can tolerate that stablecoin issuers are restricted to regulated banks because of a clear existing regulatory framework. However, he stated, “I think that is probably overkill, as there are perfectly effective ways for nonbanks to meet our legitimate regulatory concerns.”
Two weeks ago, fellow Republican Governor Christopher Waller made similar comments on wallets and took it further regarding limiting issuance to banks. He was okay with banks issuing stablecoins, but he also wanted to see other organizations allowed to.
“It (stablecoins) serves as a viable competitor to banking organizations in their role as payment providers. The Federal Reserve and the Congress have long recognized the value in a vibrant, diverse payment system, which benefits from private-sector innovation,” said Waller.
Meanwhile, on Monday the New York Federal Reserve inaugurated its Innovation Center, which has a partnership with the Bank for International Settlements (BIS) Innovation Hub. Other BIS Innovation Hubs have been involved in central bank digital currency (CBDC) research.
The Fed’s CBDC work
The Federal Reserve Bank of Boston is exploring CBDC in conjunction with MIT, with delayed plans to issue a working paper that was due in late summer. The potential issuance of a CBDC is politically contentious, with many Republicans wanting stablecoins to fulfill a similar role. It’s unclear whether the delayed publication of the report is linked to a decision on the next Federal Reserve Chair or other reasons. President Biden nominated incumbent Jerome Powell and Dr. Lael Brainard as Vice-Chair, with confirmation hearings to be held much later this month or January.