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- The range of stablecoin issuers could widen if the SEC becomes regulator, despite its tough stance on the cryptos.
- A fight is brewing between the SEC and the Federal Reserve over which will oversee stablecoins, a senior Cowen analyst said.
- If the Fed wins, big banks will have an advantage in stablecoin issuance, Jaret Seiberg said in a note.
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The Securities and Exchange Commission is taking a hard line on stablecoins right now – but if it ends up regulating the asset-backed cryptocurrencies, that could mean a far greater range of these coins on offer.
That's the view of Jaret Seiberg, a DC-based financial services policy analyst at Cowen, who noted the government agency has a tough rival for the oversight role.
"We see a fight brewing between the Federal Reserve and SEC over which will regulate stablecoins," Seiberg said in a note this week.
The boom in crypto assets' popularity over the past year has regulators training their sights on potential risks to investors and to the financial system.
Gary Gensler, chairman of the SEC, has likened stablecoins to "poker chips" at the casino in the "Wild West" crypto market. Stablecoins are cryptocurrencies backed by fiat money such as the US dollar, or by traditional assets with stable value.
Tether and Circle, the two biggest stablecoins by market capitalization, have taken regulatory heat recently, with the SEC issuing an investigative subpoena to Circle this summer.
Gensler and Fed Chair Jerome Powell were among top officials - including Treasury Secretary Janet Yellen - who hinted at tightening the rules around stablecoins when they met to discuss tether in July.
The SEC boss has said some stablecoins may well be securities. Meanwhile, the Fed chief has said stablecoins are like money market funds, or bank deposits.
If the SEC wins the fight for oversight, it would treat stablecoins like prime money market mutual funds, or MMMFs, which come with liquidity requirements and redemption limits, according to Cowen.
"We believe there will be a greater diversity of stable coin issuers if the SEC prevails. Many entities from asset managers, to banks to securities firms could be issuers," Seiberg said.
The Fed will take a bank-regulatory approach, according to Cowen. Stablecoins would become another deposit product, with the usual bank rules and Community Reinvestment Act obligations.
"If the Federal Reserve wins this fight, then we expect big banks to have the advantage when it comes to stable coin issuance," Seiberg said.
The Biden administration appears to support the Fed's approach, as it has been pushing Congress to create a bank-like charter for stablecoins. It has urged the Financial Stability Oversight Council to look into stablecoin-related risks to the financial system.
Cowen expects the FSOC to deem stablecoins "systemically important," paving the way for the Fed to oversee them like banks. The central bank has a key ally in Yellen, a former Fed boss who now chairs the FSOC.
"This is not the first power struggle between the two. They fought in the 1990s to be the umbrella regulator of financial firms. The Fed won that battle," Seiberg said.
Cowen believes the SEC has the edge because the markets regulator is seen as having the simplest path to bringing in a regulatory regime.
"The FSOC process has been cumbersome, and Congress rarely acts," Seiberg said about the Fed's path.
By contrast, the SEC may be able to treat stablecoins as securities, clearing the way for rules like those for money market mutual funds.
Whichever way it goes, there's little real difference for stablecoins between the two regulatory regimes, according to Cowen. Either would boost confidence.
"To us, both options should reassure investors that stablecoins are fully backed by US dollars. That should limit the risk of a run," Seiberg said