Comment Letter to the U.S. Treasury Department regarding the Risks of Stablecoins

This letter responds to the U.S. Treasury Department’s request for public comments on President Biden’s Executive Order No. 14067, “Ensuring Responsible Development of Digital Assets” (Mar. 9, 2022). This letter contends that (1) digital stablecoins currently pose significant risks to U.S. financial markets and investors, (2) stablecoins will create great dangers for our financial system, economy, and society if they become a widely-accepted form of payment for consumer and commercial transactions, and (3) allowing Big Tech firms and other commercial enterprises to issue and distribute stablecoins would seriously undermine our nation’s longstanding policy of separating banking and commerce. In view of the foregoing hazards, Congress and federal agencies should designate stablecoins as deposits and require all issuers and distributors of stablecoins to be chartered as FDIC-insured banks. Congress and federal agencies should also reject proposals that would (i) allow uninsured banks to issue or distribute stablecoins, or (ii) regulate stablecoin providers in the same manner as money market funds, or (iii) provide pass-through federal deposit insurance coverage to customers of nonbank stablecoin providers. This comment letter is also available at https://www.regulations.gov/comment/TREAS- DO-2022-0014-0203

What Regulatory Problems Arise When Fintech Lending Expands into Fledgling Credit Markets?

This article argues that when moving into fledgling credit markets – namely communities in which a significant portion of the population has never had access to formal consumer loans – fintech lending can cause significant adverse economic consequences to the public and create significant regulatory gaps that require addressing. These economic consequences include inaccurate risk-pricing as firms determine how to accurately process and use the range of information at their disposal, as well as, potential behavioral problems leading to widespread default as members of low-income communities, particularly those without a bank account (the so-called ‘unbanked’), access formal credit for the first time. Regulatory gaps emerge because intellectual silos continue to focus on consumer credit emerging from the banking sector, not fintech. This article focuses on the spread of fintech lending in Kenya since 2012 as a case study for its broader argument and examines potential starting points for developing regulatory frameworks for fintech lending

No Fare: Remedying the Member Business Loan Loophole

The member business loan exemption of the Federal Credit Union Act was the driving force behind the New York City taxi medallion loan crisis that led to over 950 bankrupt taxi drivers and eight suicides. This Note analyzes the exemption as the legislature’s balancing act to reconcile two competing policy aims: keeping lenders safe while encouraging them to lend to risky borrowers. Viewed through the lens of the taxi medallion crisis, this Note demonstrates the severe harm that this loophole creates. Exempting credit unions from regulatory limits has left vulnerable borrowers subject to the adverse designs of powerful actors. Ultimately, this Note proposes statutory loan protections with severe penalties for the exempt institutions to keep the credit unions and borrowers financially safe and sound

The Shocking Impact of Corporate Scandal on Directors\u27 and Officers\u27 Liability

Directors and officers liability (hereinafter D&O) serves as a deterrent to corporate wrongdoing. Recent cycles of corporate scandal have impacted the tools used to manage the risk that D&O liability creates. The impact of these scandals is a shock, which is a sudden event that alters the market profoundly. Market alteration has counter intuitively resulted in increased availability of D&O insurance at a lower price, despite an increase in D&O liability. With increased D&O coverage offerings at lower costs, the market has become soft, making coverage readily available. Carriers are competing for insureds and there is now a risk of undermining the deterrent effect that D&O liability provides. This paper explores whether D&O liability\u27s deterrent effect has been jeopardized in this soft D&O insurance marke

It\u27s Time to Regulate Stablecoins as Deposits and Require Their Issuers to Be FDIC-Insured Banks

In November 2021, the President’s Working Group on Financial Markets (PWG) issued a report analyzing the rapid expansion and growing risks of the stablecoin market. PWG’s report determined that stablecoins pose a wide range of potential hazards, including the risks of inflicting large losses on investors, destabilizing financial markets and the payments system, supporting money laundering, tax evasion, and other forms of illicit finance, and promoting dangerous concentrations of economic and financial power. PWG called on Congress to pass legislation that would require all issuers of stablecoins to be banks that are insured by the Federal Deposit Insurance Corporation (FDIC). PWG also recommended that federal agencies and the Financial Stability Oversight Council should use their “existing authorities” to “address risks associated with payment stablecoin arrangements . . . to the extent possible.” At present, stablecoins are used mainly to make payments for trades in cryptocurrency markets and to provide collateral for derivatives and lending transactions involving cryptocurrencies. However, technology companies are exploring a much broader range of potential uses for stablecoins. In October 2021, Facebook launched a “pilot” of its Novi “digital currency wallet,” which uses the Pax Dollar stablecoin as its first digital currency and allows customers to make person-to-person payments within and across national borders. The launch of Novi indicates that stablecoins could potentially become a form of “private money” that is widely used in consumer and commercial transactions. PWG’s report calls on federal agencies and Congress to take immediate steps to establish a federal oversight regime that could respond effectively to the dangers created by stablecoins. This paper strongly supports three regulatory approaches recommended in PWG’s report. First, the Securities and Exchange Commission (SEC) should use its available powers to regulate stablecoins as “securities” and protect investors and securities markets. However, the scope of the SEC’s authority to regulate stablecoins is not clear, and federal securities laws do not provide adequate safeguards to control the systemic threats that stablecoins pose to financial stability and the payments system. Second, the Department of Justice (DOJ) should designate stablecoins as “deposits” and should bring enforcement actions to prevent issuers and distributors of stablecoins from unlawfully receiving “deposits” in violation of Section 21(a) of the Glass-Steagall Act. Section 21(a) offers a promising avenue for regulatory action, but its provisions contain uncertainties and gaps and do not provide a complete remedy for the hazards created by stablecoins. The most significant gap in Section 21(a) allows state (and possibly federal) banking authorities to charter special-purpose depository institutions that could issue and distribute stablecoins without obtaining deposit insurance from the FDIC. Third, Congress should adopt legislation mandating that all issuers and distributors of stablecoins must be FDIC-insured banks. That requirement would compel all stablecoin issuers and distributors and their parent companies to comply with federal laws that protect the safety, soundness, and stability of our banking system and obligate banks to operate in a manner consistent with the public interest. Requiring stablecoin issuers and distributors to be FDIC- insured banks would also maintain the longstanding U.S. policy of separating banking and commerce. It would prevent Facebook and other Big Tech firms from using stablecoin ventures as building blocks for “shadow banking” empires that would erode consumer protections, impair competition, subvert the effectiveness of financial regulation, and potentially unleash systemic crises across our financial and commercial sectors during severe economic downturns and financial disruptions