Opinion: this column reflects the author’s own analysis and argued position.
The Federal Reserve’s new stablecoin proposal is strongest where it is easiest to write: reserves and capital. It is weakest on the point that decides whether those rules ever get enforced. I think the anti-money laundering threshold Governor Michael Barr flagged should not survive into the final rule.
What the Fed proposed
On Sept. 24 the Federal Reserve Board requested public comment on two proposals under the GENIUS Act for Board-supervised payment stablecoin issuers. The first would require issuers to fully back their stablecoins with permissible reserve assets, such as short-term Treasury bills and certain other high-quality, liquid assets. It would also set standardized capital requirements, risk management standards and rules for firms that safekeep the backing assets. The second would create an application process for Board-supervised banks that want to issue payment stablecoins, including a business plan, financial information, and a process for appeals, hearings and final determinations. Comments are due 60 days after publication in the Federal Register.
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Those provisions are sensible. Reserve rules and capital rules are also the parts of any stablecoin framework that are easiest to check against a balance sheet.
The sentence that matters
Governor Barr supported the proposal in a statement, and then named the problem. He wrote that he wants any final stablecoin rule to address “the standard that would prevent the Board from undertaking a supervisory or enforcement action related to an anti-money laundering deficiency unless the issue identified is a ‘significant or systemic’ issue.” He added that, as with the Board’s July proposal on bank anti-money laundering programs, he is concerned that the standard may have unknown effects on the Board’s ability to effectively substantiate that an institution maintains compliant programs.
My position is that a supervisor should not have to wait for an anti-money laundering failure to become systemic before it can act on it. By the time a deficiency is systemic, the harm is already done, and the remedy is a clean-up rather than a correction.
The strongest counter-argument
The best defence of the threshold is about attention. Supervisors have limited resources. A rule that reserves formal action for significant problems keeps examiners away from paperwork slips and lets them concentrate on real risk. That argument has force, and if the threshold only screened out trivia I would have no objection.
It does not only screen out trivia. Barr’s own reading is that the standard may limit the Board’s ability to substantiate whether a program is compliant in the first place. A screen that makes it harder to build the case is a different thing from a screen that ranks cases by size.
Why this connects to redemption
Barr’s opening principle is where the argument turns. In his words, “Stablecoins will only be stable if they can be reliably and promptly redeemed at par in a range of conditions.” He specifies that this includes market stress and “episodes of strain on the individual issuer or its related entities.”
An anti-money laundering action against an issuer is exactly that kind of episode. If the supervisor’s hands are tied until a problem is significant or systemic, then the first public sign of trouble may arrive together with redemption pressure, not ahead of it. Reserve and capital rules protect holders after the strain begins. Early enforcement is what would help prevent it. FinTech made the related case that bank AML systems were never built for stablecoins, and the regulatory picture keeps filling in one agency at a time, as our tracker of stablecoin rules shows.
What I would change
Barr is asking for clarity on universal redemption rights in the final rule, and I would ask for the same treatment of the enforcement standard. Specifically:
- Drop the significant-or-systemic gate for stablecoin issuers, or define it so that a supervisor can act on a deficiency that could impair redemption.
- Keep reserve-asset limits and standardized capital requirements as proposed, since Barr said he is encouraged by both.
- Make the redemption right explicit and universal, so holders can see it in the rule and not infer it.
What it means for the finance leader
Banks weighing a stablecoin subsidiary should read the second proposal alongside the first, because the application process asks for a business plan and financial information before any of the reserve rules apply. Compliance leaders should file comments on the enforcement threshold, since the 60-day window is the only point at which it can change cheaply. Treasurers who might hold or accept payment stablecoins should ask issuers how they would evidence redemption at par under stress. None of this is investment advice; it is one writer’s reading of a proposal that is still open for comment.
Source: Federal Reserve Board
