Fed’s Powell calls for stricter oversight of stablecoins

WASHINGTON — As the Federal Reserve mulls the creation of its own digital currency, the central bank also sees the benefits of stronger regulation of stablecoins offered by the private sector, Chair Jerome Powell said Wednesday.

Powell told lawmakers that stablecoins — a cryptocurrency pegged to normal currency to avoid price volatility — should be regulated to bring them more in line with standards for bank deposits and money market funds.

“It’s very simple: these are economic activities that are very similar to deposits and money market funds, and they need to be regulated in comparable ways,” Powell said during a virtual hearing of the House Financial Services Committee.

The Fed chair estimated that a much-anticipated report about central bank digital currencies will be ready for release in September. The report will mark the “beginning of … accelerating that decision process” about whether the central bank will issue a digital dollar, and the Fed will seek public comment, Powell said.

“It’s very simple: these are economic activities that are very similar to deposits and money market funds, and they need to be regulated in comparable ways,” said Fed Chair Jerome Powell.

Bloomberg News

But the report will not stop at discussing CBDCs. “We’re going to address digital payments broadly. That means stablecoins, it means crypto assets, it means CBDC,” Powell said.

On stablecoins, Powell suggested he saw a need for regulation that would parallel the framework for banks’ insured deposits or money market funds.

“We have a pretty strong regulatory framework around bank deposits, for example, or money market funds, that doesn’t exist, really, for stablecoins,” Powell said.

At the same time, Powell indicated that stablecoins were more likely to find a permanent place in the payments system than other crypto-related assets. “If they’re going to be a significant part of the payments universe, which we don’t think crypto assets will be but stable coins might be, then we need an appropriate regulatory framework, which frankly we don’t have,” Powell said.

Over the course of the hearing, Powell was quizzed by lawmakers about the Fed’s plans for a central bank digital currency. “This is not a riskless proposition. It’s a pretty bold proposition for the Federal Reserve,” said Rep. Patrick McHenry, R-N.C., the committee’s top Republican.

Rep. Stephen Lynch, D-Mass., pressed further, questioning the Fed’s “slowness” on developing the policy around CBDCs and asking if the U.S. was at risk of falling behind the efforts of other central banks’ digital currencies.

“We have a lot of work left to do on the technical side and on the policy side, but a critical part of it is just the public consultation,” Powell said.

The hearing also touched on whether the Fed could do anything to help boost supply in the housing market, which has been significantly outpaced by demand. Several lawmakers from both political parties asked Powell what the Federal Reserve could do to address sky-high demand and tight supply.

“A lack of supply and constraints around the housing stock are a factor in the recent increase in housing costs,” said House Financial Services Chair Maxine Waters, D-Calif. “If the Fed were to raise interest rates, what do you project the impact would be on addressing housing supply challenges?”

Powell argued that the Fed was not in a position to address such challenges, which he said had more to do with supply-chain difficulties. “It wouldn’t have any effect on the supply side,” Powell said in response to Waters’ question. “There are limitations around the availability of some raw materials and of labor and of zoning and things like that and nothing we can do … really affect[s] that.”

“It is true that interest rates are one factor that’s supporting demand,” Powell added, “but we really can’t do much about the supply side.”

Meanwhile, Powell demurred on whether regulators would extend the temporary regulatory relief offered to community banks for calculating their asset growth resulting from participating in the Paycheck Protection Program.

Until the end of the year, smaller banks that hit new regulatory classifications with PPP loans boosting their asset size do not need to comply with rules that kick in with the higher categories.

Rep. John Rose, R-Tenn., asked whether the relief should be extended past its current expiration date.

“I don’t know, to be perfectly honest. I’d be happy to take a look at that and get back to you,” Powell said. But he added that the Fed is mindful of how regulatory costs are affecting community banks generally.

“We are very well aware of the pressures that are added to community banks because of fixed regulatory costs. … We try hard not to be part of the problem,” Powell said. “We see community banks under pressure and we see the number diminishing. We have a whole subcommittee led here by [Fed board] Governor [Michelle] Bowman … that is designed to stop that sort of thing from happening. It’s something we work on all the time.”

A number of lawmakers expressed support for Powell having a second term as the head of the Fed.

“There is a great deal of uncertainty right now,” McHenry said in his opening remarks. “What I am certain of is this: You have earned and deserve another term as chair of the Federal Reserve.” The Biden administration has not yet indicated whether Powell will be reappointed.

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