Spooky Stablecoins

FATF Guidance, SEC vs CFTC, and the President's Working Group on Financial Markets' Stablecoin Report

Nov 2, 2021

It’s been a busy week in crypto policy and politics. Keep reading to get caught up, but one thing is clear (if it wasn’t already): both international and domestic regulators are focused on crypto.

However, the week’s major story lines detailed below share a theme: Congress has a role in deciding how crypto-related policy is handled in the United States. As we experienced with the Infrastructure Bill fiasco, impactful legislation can be snuck under our noses at any time. That’s why we need HODLpac.

HODLpac @HODLpac

+1 However, it’s important for the crypto community in the United States to turbocharge our efforts to win over Congress so that if/when action is taken we don’t end up with another Infrastructure Bill situation.

Jake Chervinsky @jchervinsky

We'll have plenty of time to pick apart the new stablecoin report. For now, the highlight in my mind is the recommendation that "Congress act promptly to enact legislation...." Prompt action from this Congress on *anything* is unlikely, let alone on something like stablecoins.

For the average citizen, the clearest path to have a say in the regulatory and policy-making process is to engage with our representatives in Congress. It’s time for the US crypto community to organize ourselves and speak as one with our votes and our dollars (and, of course, cryptoassets).

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The Week in Crypto Policy

Coverage of the major story lines from the past week in crypto-related policy and politics:

Financial Action Task Force Guidance

On October 28th, the FATF - an inter-governmental body focused on coordinating policy related to anti-money laundering and counter-terrorist financing - released its latest report on “virtual assets” and “virtual asset service providers.”

FATF - October 2021

As usual, the lawyers and policy folks on crypto Twitter unpacked the report and its implications. Jake Chervinsky did us all a favor and created a fantastic thread of threads:

Jake Chervinsky @jchervinsky

FATF published its updated crypto AML guidance today. It's marginally better than the March draft. As often happens, industry explained why the draft made no sense, & FATF's reaction was just to make it more vague. No answers here. The saga continues. 🧵 of threads & writeups:

As Jake mentions in the tweet above, FATF released a draft of this most recent report in March/April for public feedback.

The response from the crypto industry was forceful, arguing that FATF’s recommendations would effectively outlaw decentralized finance and hamper the development of crypto technology. Check out the following from March/April 2021:

“FATF Must Consider New Approach to Accomplish AML/CFT Goals,” Blockchain Association
“FATF Takes A Big Shot,” TRM Labs
“Comments to the Financial Action Task Force on the March 2021 Draft Guidance,” Coin Center

So what about this latest (non-draft) guidance?

The consensus is that, while there improvements on the edges, DeFi is still under threat (if this guidance were to translate into law in FATF member countries).

Specifically, the latest FATF guidance lacks a coherent treatment of several kinds of participants in the decentralized finance ecosystem, including: protocol developers, wallet providers, and governance token holders.

Recommended reading:

“The good, bad, and ugly of the FATF crypto guidance,” Peter Van Valkenburgh, Coin Center
“Response to FATF Guidance,” Blockchain Association
“DeFi: A Path Forward,” Lewis Cohen and Alex Lipton, IFLR

SEC vs CFTC

Financial regulation in the United States is administered by an alphabet soup of different agencies and departments.

Some cryptoeconomy stakeholders, like Coinbase, think we should dedicate one regulatory agency to cover “digital assets.” But, for now, since crypto technology touches and challenges so many existing areas of the law, multiple regulators want their say.

One storyline to watch is the jockeying for position between the SEC and the CFTC for authority over certain kinds of cryptoassets and markets.

Some resources to get caught up on the situation:

Nikhilesh De @nikhileshde

Yesterday, @CFTCbehnam said 60% of the $2.7T crypto market cap is commodities, and @GaryGensler has said in the past that most of the 5-6k cryptos he's seen are securities. They're not mutually exclusive statements — just measuring different things.

CFTC Should Be Crypto’s ‘Primary Cop,’ Acting Chairman SaysRostin Behnam points to enforcement actions the agency has already taken.coindesk.com

Nikhilesh De @nikhileshde

.@SenStabenow opens @CFTCbehnam's confirmation hearing by asking how the @CFTC is overseeing crypto and whether it needs additional authority to regulate the sector

“CFTC and SEC Are Vying for Crypto Regulation Control,” Jeff Benson, Decrypt

Stablecoins Report

First things first, a good reminder from everyone’s favorite DC insider anon account:

Gyges Lydias @mud2monarch

1/ As you read the #PWG #stablecoin report, it will be important to occupy the headspace of the authors. A 🧵 from someone who does or did work for a federal financial regulator 👇👇 *These are my independent thoughts and do not necessarily represent the views of my employer.*

And, everyone’s favorite DC insider non-anon account:

Neeraj K. Agrawal @NeerajKA

centralized stablecoins are not decentralized cryptocurrencies

Yesterday, on November 1st, a long-awaited report on stablecoins from the President’s Working Group on Financial Markets was released.

Report on Stablecoins

The report acknolwedges stablecoins as an impactful financial innovation that, in the future “may be widely used by households and businesses as a means of payment” and, thus, have implications for the finanical

It also - as mentioned in this newsletter’s intro - acknowledges that financial regulators (the aforementioned alphabet soup) lack the authority to implement all of its recommendations and, therefore, Congress has a role to weigh in.

To address prudential risks associated with the use of stablecoins as a means of payment, the agencies recommend that Congress act promptly to ensure that payment stablecoins are subject to appropriate federal prudential oversight on a consistent and comprehensive basis.

More resources:

Kristin Smith @KMSmithDC

1/ The long awaited President’s Working Group (PWG) report on stablecoins was released this afternoon Here’s the full report:

Jerry Brito @jerrybrito

1/ Stablecoin report from the President's Working Group on Financial Markets is out now. Here are some quick thoughts.

Tiger Hill Partners @tigerhillDC

Today, the President’s Working Group on Financial Markets released their long-awaited report on #stablecoins. Full report: home.treasury.gov/system/files/1… And a quick thread with our takeaways:

🐦 Tweets

RYAN SΞAN ADAMS - rsa.eth 🦇🔊 @RyanSAdams

You misunderstand. I'm not worried bad U.S. regulation will kill crypto. I'm worried bad U.S. regulation will kill the U.S.

Brandon Ferrick @BrandonFerrick

FATF guidance notes that NFTs are generally not virtual assets, but can be if used for payment/investment purposes (substance over form). Combined with a prohibition on self-regulatory bodies, FATF is setting central regulators up for failure. 1/5

Warren Davidson @WarrenDavidson

The #crypto industry deserves regulatory clarity when it comes to yield products and #stablecoins. I’m glad to be joined by @RepTomEmmer, @RepTedBudd, @RepAGonzalez & @RepTrey in requesting this clarity from SEC so that innovation can thrive in the USA.

📚 Good Reads

“Crypto Dad: ‘Money Is Too Important To Be Left To Central Bankers’,” Steve Erlich, Forbes
“The great American cryptocurrency opportunity,” Rep. Ted Budd, Washington Times
“A Crypto Whisperer on How Regulators Toss Retail Into the Deep End,” Will Gottsegen, CoinDesk
“America’s Crypto Conundrum,” Justin Muzinich, Foreign Affairs
“The geopolitics of money is shifting up a gear,” The Economist
“Context on stablecoin regulation,” FTX Research
“Miners Are The Optimal Buyers: The Data Behind Bitcoin-Led Decarbonization In Texas,” Nic Carter and Shaun Connell, Bitcoin Magazine

🎙️ Listen/Watch

“The Infrastructure Bill - Part 2,” Jerry Brito, Peter Van Valkenburgh, and Robin Weisman, Coin Center’s Tangents Podcast
“Digital Currency: Public or Private?,” Chris Giancarlo, Dante Disparte, and George Selgin, Cato Institute Center for Monetary and Financial Alternatives

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