Legislation is “urgently needed” on the dollar-backed stablecoins central to the US$2 trillion cryptocurrencies market, and operators of the digital tokens should essentially be treated as banks, says a group of regulators.

The report from the President’s Working Group on Financial Markets – made up of the secretary of the Treasury and the heads of the major US financial regulators – recommends that stablecoin issuers should become “insured depository institutions”, similat to banks that offer saving accounts for customers.

The proposal echoes the Stable Act, a legislative proposal presented to the US Congress at the end of 2020 that would require stablecoin operators to obtain full banking licences.

Rapid growth

If enacted, the move would mean a significantly increased level of supervision for issuers of stablecoins, which have so far worked on the fringes of the financial system, subjecting the industry to strict regulation in return for access to emergency liquidity from regulators in times of stress. The deposits of customers at insured financial institutions are also backstopped by the US government up to a certain dollar amount.

“The rapid growth of stablecoins increases the urgency of this work,” states the report. “Failure to act risks growth of payment stablecoins without adequate protection for users, the financial system, and the broader economy.”

On a more positive note the group believes that, when regulated, stablecoins could “support faster, more efficient, and more inclusive payments options.

“Moreover, the transition to broader use of stablecoins as a means of payment could occur rapidly due to network effects or relationships between stablecoins and existing user bases or platforms.”

Preferred over bitcoin

In comparison to bitcoin and other cryptocurrencies, the US$130 billion stablecoin market is regarded as much less volatile by many regulators thanks to stablecoins’ steady valuation and link to national currencies. This steadiness has made them a popular source of liquidity in cryptocurrency markets worldwide, with stablecoins used by traders and investors to buy and sell other assets or as a safe place to deposit wealth.

In that sense, stablecoins are more a medium of exchange and store of value like a traditional fiat currency. It also sets them apart from crypto securities, which many investors regard as a source of capital appreciation and potential market returns.

Like other digital assets, stablecoins should be monitored to prevent the risk of them bankrolling criminal activities, Securities and Exchange Commission Chairman Gary Gensler said in a press release Monday. Gensler is a member of the President’s Working Group on Financial Markets.

Among other proposals made by Gensler and other group members in the  report are increased federal oversight of wallet providers — groups that offer products that allow users to hold their crypto tokens — and stablecoin issuers being required to limit their affiliation with commercial entities.