One of the catalysts behind crypto's impressive surge in the past week emerged last Friday, when the WSJ reported that the Biden admin was seeking to regulate stablecoin issuers as banks and was "considering ways to impose bank-like regulation on the cryptocurrency companies that issue stablecoins, including prodding the firms to register as banks." Coming at the same time as both Jerome Powell and Gary Gensler said they did not seek to bank crypto, the news was confirmation that the regulatory apparatus was seeking to integrate the crypto space within the confines of the state - especially since taxes on cryptos are expected to generate tens of billions in government revenues to the Democrats "deficit neutral" multi-trillion spending plan. In short, this was very good news for digital tokens as it eliminated the worst possible outcome: a China-style terminal crackdown on the sector.
Today, we got more good news when Cointelegraph reported that an official from the Office of the Attorney General said the United States government is going to take a more active role in enforcement action against actors using cryptocurrencies for money laundering and other cybercrimes. In effect, the DOJ is already policing cryptos as if they were securities, providing an implicit security to investors even though the formal regulatory treatment of cryptos remains nebulous.
Speaking at the Aspen Institute Cyber Summit on Wednesday, Deputy Attorney General Lisa Monaco said the Justice Department had launched the National Cryptocurrency Enforcement Team, who aim is to target platforms “that help criminals launder or hide their criminal proceeds.” Monaco cited her office’s work against Darknet-based Bitcoin (BTC) mixing service Helix in August but said the U.S. government should be doing more.
“We want to strengthen our capacity to dismantle the financial ecosystem that enables these criminal actors to flourish and — quite frankly — to profit from what they’re doing,” said Monaco. “We’re going to do that by drawing on our cyber experts and cyber prosecutors and money-laundering experts.”
Monaco, who has often been a central figure in the U.S. government’s response to major ransomware and cyberattacks involving cryptocurrency payments, added that “cryptocurrency exchanges want to be the banks of the future. We need to make sure that folks can have confidence when they’re using these systems, and we need to make sure we’re poised to root out abuse that can take hold on them.” She should know: she was part of a task force that “found and recaptured” millions of dollars worth of Bitcoin paid to the allegedly Russia-based DarkSide hackers following an attack on the Colonial Pipeline system in May.
What Monaco didn't say is that by accelerating enforcement actions, the DOJ was in effect providing confidence to millions of retail investors that someone was looking after their interest in a market which the government had for years depicted as the "wild wild west." Needless to say, such as intervention will only increase retail participation.
Meanwhile, in a clear indication that the government is already planning how to capitalize, and not penalize, the incipient stablecoin industry, the Federal Deposit Insurance Corp, or FDIC, a key U.S. banking regulator, is reportedly studying whether certain stablecoins might be eligible for its coverage, Coindesk reported citing five people familiar with the agency’s thinking said.
The agency is trying to analyze what so-called pass-through FDIC insurance might look like for the reserves that stablecoin issuers hold at banks, the sources said. Such coverage would insure holders of the tokens against losses up to $250,000 if the bank holding the collateral were to fail.
The FDIC is also looking at what regular, direct deposit insurance might look like for banks that want to issue stablecoins, people familiar with the discussions said.
“This is all part of a process by which they are trying to bring stablecoins into the banking system in a responsible manner,” one insider said. “It depends on what’s backing the stablecoins. If it’s backed by reserves at the Fed[eral Reserve] for cash then I think you just make the argument that it’s a deposit. If it’s backed by Treasurys, I think you’ll have a hard time treating it as a deposit.”
That all may be, but once again it misses the forest for the trees, namely that the government is taking increasingly permissive steps to give new investors some implicit comfort that the government is watching out for their interests and, in the case of stablecoins, that they may even be insured from total losses should the stablecoin issuer collapse.
That said, it wasn't exactly clear how an FDIC backstop would work for stablecoins: if the FDIC went ahead and provided deposit insurance for stablecoins, it would apply only if a bank that was banking a stablecoin issuer or that was issuing a stablecoin itself went into receivership. Even in this scenario, it’s rare that FDIC insurance would enter into the picture because the agency generally takes a failed bank’s assets and deposits and sells them to a healthy bank.
“The FDIC is probably looking at whether stablecoins can count as deposits or whether someone’s ownership of a stablecoin is a deposit at the stablecoin issuer,” said Todd Phillips, a former FDIC lawyer who is now the director of financial regulation and corporate governance at the Center for American Progress, a Washington think tank.
The coverage could present challenges for issuers. Typically, these companies identify customers when they deposit cash for stablecoins or redeem the tokens for cash. But since stablecoins run on open, public blockchain networks (usually Ethereum), theoretically anyone with a crypto wallet that hasn’t been blacklisted can receive stablecoins from and send them to other wallets.
“One thing to remember is that each person has insurance of only up to $250,000,” said Phillips. “So, the stablecoin issuer would need to keep track of who is the current holder of their stablecoin, and how many they own.” Whatever the FDIC insures has to not compromise the rest of the agency’s mission, he said.
How the agency proceeds could potentially help protect consumers, Phillips added.
“The FDIC basically has one overriding mission which is to ensure the safety of the Deposit Insurance Fund, the DIF,” Phillips said. “If the FDIC were to insure a stablecoin, that insurance would come out of the DIF and the FDIC will want to be very sure that they are on legal footing and that whatever they do doesn’t risk the DIF.”
“The FDIC has strict rules as to which institutions may call themselves FDIC-insured or use the FDIC logo for advertising,” he said. “Just as how the FDIC’s logo on a bank’s website allows savers to be confident that the bank is a safe, insurance of particular stablecoins and permission to use the FDIC logo would provide clarity about which stablecoins, up to the insurance limit, will not lose value.”
It’s likely that the agency will ask for public comment from the industry before any actual policy change is taken, Phillips said.
“I also imagine there are conversations going on between the four FDIC directors, since you need a majority of them to approve a new regulation,” he said.