Weekly Crypto Policy Roundup January 14 2022

Senator Toomey grills Fed Chair Powell on Stablecoins

In the Senate Banking Committee on 11 January 2022, Senator Pat Toomey questioned Federal Reserve Chair Jerome Powell on the Fed’s issuance of its report on a CBDC and whether he saw the potential for privately issued stablecoins to coexist with a ‘digital dollar’ or ‘Fedcoin’.

When asked by Senator Toomey if a CBDC would exclude the formation of a ‘well regulated, privately issued stablecoin” Chair Powell responded, “No, not at all.”

This may have taken some observers by surprise as at a hearing before the Senate Banking Committee in July 2021, Chair Powell had said: “You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency”.

Indeed the Federal Reserve had previously warned that stablecoins require more stringent
regulation and should only be issued by licensed entities such as banks.

Senator Toomey is open to approving a US CBDC provided that privately issued stablecoins can also be allowed to exist, however, the details of the interaction between a US CBDC and private stablecoins remain unclear at present.

The President’s Working Group on Financial Markets (PWG) has stated that sufficient regulation of stablecoins is required to manage their risks and made a number of high-level considerations for legislators in Congress to consider including that stablecoin issuers be insured depository institutions: 

Separately, at the 11 January 2022 hearing Chair Powell was asked about the status of the Federal Reserve’s report on its work on a CBDC to which he wasn’t able to give a definitive date but stated that it would be published “in coming weeks”.

Hong Kong Monetary Authority issues a discussion paper on crypto-assets and stablecoins

On 12 January 2022 Hong Kong Monetary Authority (HKMA) issued a discussion paper to invite views from the industry and the public on its regulatory approach to crypto-assets and payment-related stablecoins.

The discussion paper is worth reading for its concise summary of the current state of play of crypto-asset regulation in major jurisdictions (including the sometimes inscrutable position of Mainland China).

Section 3 of the discussion paper is an overview of the crypto-asset regulatory landscape of major jurisdictions and the recommendations of international organizations. Section 4 contains an overview of current crypto-asset and stablecoin regulation in Hong Kong including the proposed licensing regime for virtual asset service providers.

Section 5 sets out the HFMA’s thinking on the risks posed by stablecoins and puts forwards the HKMA’s thoughts on a suitable regulatory framework.

Section 5.1 contains the HKMA’s of the principal risks posed by payment-related stablecoins.

Section 5.3 poses questions that the HKMA is seeking submissions on as follows:

Discussion question 1: Should we regulate activities relating to all types of stablecoins or give priority to those payment-related stablecoins that pose higher risks to the monetary and financial systems, while providing flexibility in the regime to make adjustments to the scope of stablecoins that may be subject to regulation as needed in the future?

Discussion question 2: What types of stablecoin-related activities should fall under the regulatory ambit, e.g. issuance and redemption, custody and administration, reserves management?

Discussion question 3: What kind of authorization and regulatory requirements would be envisaged for those entities subject to the new licensing regime?

Discussion question 4: What is the intended coverage as to who needs a license under the intended regulatory regime?

Discussion question 5: When will this new, risk-based regime on stablecoins be established, and would there be regulatory overlap with other financial regulatory regimes in Hong Kong, including but not limited to the SFC’s VASP regime, and the SVE licensing regime of the PSSVFO?

Discussion question 6: Stablecoins could be subject to run and become potential substitutes for bank deposits. Should the HKMA require stablecoin issuers to be AIs under the Banking Ordinance, similar to the recommendations in the Report on Stablecoins issued by the US President’s Working Group on Financial Markets?

Discussion question 7: Would the HKMA also have plan to regulate unbacked crypto-assets given their growing linkage with the mainstream financial system and risk to financial stability?

Discussion question 8: For current or prospective parties and entities in the stablecoin ecosystem, what should they do before the HKMA’s regulatory regime is introduced?

The discussion paper is to be commended for its clarity and brevity in cutting right to the issues the HKMA is seeking submission on. Submissions are requested on or before 31 March 2022.

Swiss Central Bank Tests Wholesale CBDC

On 13 January 2022, the Swiss National Bank announced that it, in collaboration with the Bank of International Settlements and five Swiss commercial banks, had successfully completed payments by linking a prototype wholesale central bank digital currency
(CBDC) to the current payment system.

Benoît Cœuré, head of the BIS Innovation Hub, said “We have demonstrated that innovation can be harnessed to preserve the best elements of the current financial system, including settlement in central bank money, while also potentially unlocking new benefits.”

The test involved the issuance and redemption of wholesale CBDCs as well as using them for payments and for the settlement of securities purchases in Switzerland as well as cross-border transactions.

Visa and ConSensys partner on CBDCs

Visa announced on 13 January 2022 that it is partnering with blockchain software company ConSensys to build an on-ramp for central bank digital currencies (CBDCs). The partnership would offer central banks the ability to design their CBDC on ConSensys, Quorum, and use Visa’s infrastructure to distribute it via commercial banks.