Report Says Stablecoin Issuers Should be Regulated as Banks

The President’s Working Group on Financial Markets (PWG), which includes the SEC, Treasury, and Federal Reserve, released its much-anticipated stablecoin report on November 1, 2021. The report touched on risks inherent to stablecoins and put forth recommendations on how to address them. Per our analysis, the report seemed well researched and thoughtful, and the recommendations presented seemed in line with expectations of the crypto market. Chiefly, the report calls for implementing legislation that would allow regulators to manage potential risks from the rapid growth and evolution of stablecoins. It calls on Congress to enact this legislation, but in absence of this, recommends the Financial Stability Oversight Council (FSOC) consider taking action to address the risks.

Stablecoin Risks

The report states that stablecoins used to facilitate speculative digital asset trading lead to market integrity and investor protections risks, specifically possible fraud and misconduct, market manipulation, insider trading, front running, and a lack of trading or price transparency. Other risks posed by stablecoins include illicit finance, such as AML and terrorism financing.

Stablecoin runs could occur when users lose confidence in a stablecoin issuer’s ability or intent to honor redemption requests, which could reverberate to the broader financial system. Specifically, a situation in which users lose confidence in a stablecoin could lead to fire sales of reserve assets, which the report says “could disrupt critical funding markets”.

Moreover, if stablecoins are used as payments, there is risk stemming from any potential disruptions to the system (blockchains) they are present on. There is operational risk present as well as transaction validation and settlement risk on the blockchains they are on.

The report also mentioned systemic risk and concentration of economic power. A stablecoin that becomes very large could pose systemic risk from the failure of one of the participants involved in the stablecoin arrangement. Further, there could be too much economic power concentrated with a stablecoin issuer if it is also a commercial firm. There could also be possible anti-competitive effects if a stablecoin becomes a leading method of payment.


Key recommendations from the report include the following:

  • Legislation to require stablecoin issuers to be insured depository institutions.
  • Legislation to require custodial wallet providers to be subject to appropriate federal oversight, given their role in a stablecoin arrangement.
  • Legislation that would allow regulators authority to ensure entities critical to the functioning of a stablecoin meet appropriate risk-management standards.
  • Legislation that would require stablecoin issuers limit affiliation with commercial entities.


If the recommended legislation is enacted, current stablecoin issuers such as Circle and Tether would essentially need to become banks, likely through creating or acquiring banking units, to continue offering their stablecoins. Being under federal oversight, insured, and subject to risk-management requirements would make stablecoins potentially far more transparent and help eliminate the risk of a stablecoin run scenario. The legislation would also position big banks to issue their own stablecoin or facilitate a digital dollar.

However, it is unclear whether such regulations would have much impact on algorithmic stablecoins, such as DAI and UST, which have continued to grow in light of potential regulatory scrutiny, just as their centralized stablecoin peers. It could lead to these seeing less demand, marked as “gray” stablecoins, or being relegated to use exclusively in DeFi, which is outside the banking system in its current state.

Legislation that would require stablecoin issuers to not be affiliated with commercial entities will restrict the abilities of companies like Facebook to launch their own stablecoins. It seems that such measures are aimed keeping the power of stablecoin issuance within the government and regulated entities.

It is important to note that such legislation is just recommendations and that without action from Congress, these may well remain just that, given how divided Congress has been. While the report suggests the FSOC, which is comprised of the members of the PWG, step in if there is no Congressional action, this group has been reported as moving slowly in the past but could move to designate certain activities conducted within a stablecoin arrangement as systemically important, which could allow regulators authority to further intervene.


The research team may own the cryptocurrencies mentioned in this report, and as such this should be seen as a disclosure of any potential conflict of interest. This report belongs to CrossTower and represents the opinions of its research team.

This report does not provide legal advice. This report is not an analysis of whether a digital asset is a security or commodity. There may be restrictions in the United States as to whether entities who offer tokens should obtain licenses and registrations. People should do their own research as to whether the entity that they are utilizing for purchases or sale has appropriate licenses and registrations.  In general, people should consult their tax, legal and other advisers as to the risks involved in investing in digital assets.

Nothing herein is tax advice. You should consult your own tax professionals in order to understand the risks of investing.

CrossTower is not a FINRA registered broker dealer or investment adviser and does not provide investment banking services. This report is not investment advice, it is strictly informational. Do not trade or invest in any tokens, companies or entities based solely upon this information. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential for complete loss of principal.

Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on topics discussed in this document and develop a standalone judgment of the relevant markets prior to making any investment decision.

CrossTower does not receive compensation from the companies, entities, or protocols they write about. Compensation is not received on any basis contingent upon communicating a positive opinion in this report. The authors were not hired by the covered entity to prepare this report. CrossTower did not receive compensation from the entities covered in this report for non-report services, such as presenting at author sponsored investor conferences, distributing press releases or other ancillary services. The entities covered in this report have not previously paid the author in cash or in stock for any research reports or other services. The covered entities in this report are not required to engage with CrossTower.

The research team has obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented “as is”, without warranty of any kind whether expressed or implied. All market prices, data and other information are not warranted as to completeness or accuracy, are based upon selected public market data, reflect prevailing conditions, and the research team’s views as of this date, all of which are accordingly subject to change without notice. CrossTower has no obligation to continue offering reports regarding this topic.

Reports are prepared as of the date(s) indicated and may become unreliable because of subsequent market or economic circumstances. The graphs, charts and other visual aids are provided for informational purposes only. None of these graphs, charts or visual aids can and of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

The information contained in this document may include, or incorporate by reference, forward looking statements, which would include any statements that are not statements of historical fact. No representations or warranties are made as to the accuracy of such forward looking statements. Any projections, forecasts and estimates contained in this document are necessarily speculative in nature and are based upon certain assumptions. These forward-looking statements may turn out to be wrong and can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond control. It can be expected that some or all of such forward looking assumptions will not materialize or will vary significantly from actual results.

About the Author

Martin Gaspar Headshot
Martin Gaspar
Research Analyst

Martin is a research analyst at CrossTower. Martin has several years of experience in conducting fundamental research and cryptocurrency analysis. Prior to joining CrossTower, Martin was a fixed income research analyst at Wells Fargo Securities, where he helped support traders, salespeople, and buy-side clients through his actionable investment recommendations. He has a passion for crypto and has followed the space extensively since 2012. Martin holds a BA from Colorado College, where he graduated with Distinction in Economics.