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CONTENTS

Executive Summary................................................................ 1

I. Background ..................................................................... 4
Creation and Redemption of the Stablecoin..................................................... 4
Transfer and Storage of the Stablecoin............................................................ 5
Activities and Participants in Stablecoin Arrangements .................................. 6
Use of Stablecoins........................................................................................... 7
Digital Asset Trading Platforms and DeFi.......................................................... 8

II. Risks and Regulatory Gaps .............................................. 12

Loss of Value: Risks to Stablecoin Users and Stablecoin Runs........................... 12
Payment System Risks .................................................................................... 12
Risks of Scale: Systemic Risk and Concentration of Economic Power............... 14
Regulatory Gaps.............................................................................................. 14

III. Recommendations............................................................ 15
Legislation........................................................................................................ 16
Interim Measures.............................................................................................. 18

Illicit Finance Risk.................................................................... 19

International Standards............................................................ 22

Annex: List of Outreach Participants...................................... 23

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INTERAGENCY REPORT ON STABLECOINS

Executive Summary
Stablecoins are digital assets that are designed to maintain a stable value relative to a national
currency or other reference assets. Today, stablecoins are primarily used in the United States to
facilitate trading, lending, or borrowing of other digital assets, predominantly on or through digital
asset trading platforms. Proponents believe stablecoins could become widely used by households
and businesses as a means of payment. If well-designed and appropriately regulated, stablecoins
could support faster, more efficient, and more inclusive payments options. Moreover, the transition
to broader use of stablecoins as a means of payment could occur rapidly due to network effects or
relationships between stablecoins and existing user bases or platforms.

Stablecoins and stablecoin-related activities present a variety of risks. Speculative digital asset
trading1, which may involve the use of stablecoins to move easily between digital asset platforms or
in decentralized finance (DeFi) arrangements, presents risks related to market integrity and investor
protection. These market integrity and investor protection risks encompass possible fraud and
misconduct in digital asset trading, including market manipulation, insider trading, and front running,
as well as a lack of trading or price transparency. Where these activities involve complex relationships
or significant amounts of leverage, there may also be risks to the broader financial system. In addition,
digital asset trading platforms and other market participants play a key role in providing access to
stablecoins and liquidity in the market for stablecoins. To the extent activity related to digital assets
falls under the jurisdiction of the Securities and Exchange Commission (SEC) and Commodity Futures
Trading Commission (CFTC), the SEC and CFTC have broad enforcement, rulemaking, and oversight
authorities that may address certain of these concerns (for more detail, see Digital Asset Trading
Platforms and DeFi).

Stablecoins also pose illicit finance concerns and risks to financial integrity, including concerns related
to compliance with rules governing anti-money laundering (AML) and countering the financing of
terrorism and proliferation (CFT). To prevent misuse of stablecoins and other digital assets by illicit
actors, Treasury will continue leading efforts at the Financial Action Task Force (FATF) to encourage
countries to implement international AML/CFT standards and pursue additional resources to support
supervision of domestic AML/CFT regulations. Illicit finance concerns, and recommendations to
mitigate illicit finance risks, are discussed in more detail in Illicit Finance Risk.

In addition to market integrity, investor protection, and illicit finance concerns, the potential for the
increased use of stablecoins as a means of payment raises a range of prudential concerns. If stablecoin
issuers do not honor a request to redeem a stablecoin, or if users lose confidence in a stablecoin
issuer’s ability to honor such a request, runs on the arrangement could occur that may result in
harm to users and the broader financial system. Further, to the extent stablecoins are widely used to
facilitate payments, disruptions to the payment chain that allows stablecoins to be transferred among
users could lead to a loss of payments efficiency and safety and undermine the functioning of the

1 In general, references in this document to “digital asset trading” include trading, lending, or borrowing transactions that involve digital assets.

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broader economy. The potential for stablecoin arrangements to scale rapidly raises additional issues
related to systemic risk and concentration of economic power.

There are key gaps in prudential authority over stablecoins used for payments purposes. This report
focuses on analyzing prudential risks posed by stablecoins used as a means of payment and provides
recommendations for addressing these gaps.2 These prudential recommendations apply to “payment
stablecoins,” defined as those stablecoins that are designed to maintain a stable value relative to
a fiat currency and, therefore, have the potential to be used as a widespread means of payment.
These stablecoins are often, although not always, characterized by a promise or expectation that the
stablecoin can be redeemed on a one-to-one basis for fiat currency.

To address the prudential risks of payment stablecoins, the President’s Working Group on Financial
Markets (PWG),3 along with the Federal Deposit Insurance Corporation (FDIC) and the Office of the
Comptroller of the Currency (OCC) (together, the agencies) recommend that Congress act promptly
to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements
are subject to a federal prudential framework on a consistent and comprehensive basis. Because
payment stablecoins are an emerging and rapidly developing type of financial instrument, legislation
should provide regulators flexibility to respond to future developments and adequately address risks
across a variety of organizational structures. Such legislation would complement existing authorities
with respect to market integrity, investor protection and illicit finance, and would address key
prudential concerns:

• To address risks to stablecoin users and guard against stablecoin runs, legislation should
require stablecoin issuers to be insured depository institutions, which are subject to appropriate
supervision and regulation, at the depository institution and the holding company level.

• To address concerns about payment system risk, in addition to the requirements for stablecoin
issuers, legislation should require custodial wallet providers4 to be subject to appropriate federal
oversight. Congress should also provide the federal supervisor of a stablecoin issuer with the
authority to require any entity that performs activities that are critical to the functioning of the
stablecoin arrangement to meet appropriate risk-management standards.

2 Stablecoins are being used for trading, lending, borrowing and, in the future, may also be widely used by households and businesses as a
means of payment. This report does not provide recommendations regarding issues or risks under the federal securities laws or the Commodity
Exchange Act (CEA) as they pertain to any digital assets, digital asset trading platforms, DeFi, stablecoin or stablecoin arrangements, and the
prudential framework recommendations are not intended to affect any analysis under the federal securities laws or the CEA.
3 Executive Order 12631 of March 18, 1988 (Working Group on Financial Markets) established the President’s Working Group on Financial
Markets, which is chaired by the Secretary of the Treasury, or their designee, and includes the Chair of the Board of Governors of the
Federal Reserve System, the Chair of the Securities and Exchange Commission, and the Chair of the Commodity Futures Trading
Commission, or their designees. The OCC and the FDIC also joined in this report.
4 Digital “wallets” provide a variety of services to users, including facilitating the transfer of stablecoins between users. A “custodial wallet
provider” is a wallet provider that users may rely on to hold stablecoins on their behalf.

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• To address additional concerns about systemic risk and concentration of economic power,
legislation should require stablecoin issuers to comply with activities restrictions that limit
affiliation with commercial entities. Supervisors should have authority to implement standards
to promote interoperability among stablecoins. In addition, Congress may wish to consider other
standards for custodial wallet providers, such as limits on affiliation with commercial entities or on
use of users’ transaction data.

In the immediate term, the agencies are committed to taking action to address risks falling within
each agency’s jurisdiction, including efforts to ensure that stablecoins and related activity comply with
existing legal obligations, as well as continued coordination and collaboration on issues of common
interest. 

In addition, in the absence of Congressional action, which is urgently needed to address the prudential
risks inherent in payment stablecoins, the agencies recommend that the Financial Stability Oversight
Council (Council) consider steps available to it to address the risks outlined in this report. Such steps
may include designation of certain activities conducted within a stablecoin arrangement as, or as likely
to become, systemically important payment, clearing, and settlement activities. 

The rapid growth of stablecoins increases the urgency of this work. Failure to act risks growth of
payment stablecoins without adequate protection for users, the financial system, and the broader
economy. In contrast, a regulatory framework that supports confidence in payment stablecoins,
in normal times and in periods of stress, could increase the likelihood of stablecoins supporting
beneficial payments options. The recommendations in this report build on the work of international
forums, including the Financial Stability Board, on stablecoin arrangements. See International
Standards for more detail.

While the scope of this report is limited to stablecoins, work on digital assets and other innovations
related to cryptographic and distributed ledger technology is ongoing throughout the Administration.
The Administration and the financial regulatory agencies will continue to collaborate closely on ways
to foster responsible financial innovation, promote consistent regulatory approaches, and identify and
address potential risks that arise from such innovation.

The remainder of this report is organized as follows: Part I provides background on stablecoins,
focusing on the mechanisms that support the creation and redemption of stablecoins, the transfer
and storage of stablecoins, and the activities and participants necessary to support a stablecoin
arrangement; Part II of the report describes key prudential risks, and prudential regulatory gaps,
attendant to the use of stablecoins as a means of payment; and Part III describes the agencies’
recommendations for addressing prudential risks.

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I. Background
Creation and Redemption of the Stablecoin
Stablecoins are generally created, or “minted,” in exchange for fiat currency that an issuer receives
from a user or third-party. To maintain a stable value relative to fiat currency, many stablecoins offer
a promise or expectation that the coin can be redeemed at par upon request. These stablecoins are
often advertised as being supported or backed by a variety of “reserve assets.” 5 However, there are no
standards regarding the composition of stablecoin reserve assets, and the information made publicly
available regarding the issuer’s reserve assets is not consistent across stablecoin arrangements as to
either its content or the frequency of its release. Based on information available, stablecoins differ in
the riskiness of their reserve assets, with some stablecoin arrangements reportedly holding virtually
all reserve assets in deposits at insured depository institutions6 or in U.S. Treasury bills, and others
reportedly holding riskier reserve assets, including commercial paper, corporate and municipal bonds,
and other digital assets.

Stablecoin redemption rights can also vary considerably, in terms of both who may present a
stablecoin to an issuer for redemption and whether there are any limits on the quantity of coins that
may be redeemed.7 Some issuers are permitted under the terms of the arrangement to postpone
redemption payments for seven days, or even to suspend redemptions at any time, giving rise to
considerable uncertainty about the timing of redemptions. As a further point of variation, stablecoins
also differ in the nature of the claim provided to the user, with some providing a claim on the issuer
and others providing no direct redemption rights to users.8 Moreover, users’ ability to redeem their
stablecoin may be affected by other aspects of the stablecoin arrangement, including the ability to
transfer the proceeds of any redemption into the banking system.

By comparison, a demand deposit held at an insured depository institution is a claim on the issuing
bank that provides the depositor with the right to receive U.S. dollars upon request. The value of
this claim is insured up to certain amounts and entitled to depositor preference in resolution. In
addition, the issuing institution may access emergency liquidity, and is subject on an ongoing basis to
supervision and regulation designed to limit the riskiness of the issuer’s balance sheet and operations.

5 Stablecoins that are purportedly convertible for an underlying fiat currency are distinct from a smaller subset of stablecoin arrangements
that use other means to attempt to stabilize the price of the instrument (sometimes referred to as “synthetic” or “algorithmic” stablecoins)
or are convertible for other assets. Because of their more widespread adoption, this discussion focuses on stablecoins that are convertible
for fiat currency.
6 In some stablecoin arrangements, reserve assets include deposits at insured depository institutions; however, this feature does not mean
that deposit insurance extends to the stablecoin user. If the stablecoin issuer deposits fiat currency reserves at an FDIC-insured bank and
does so in a manner that meets all the requirements for “pass-through” deposit insurance coverage, the deposit would generally only
be insured to each stablecoin holder individually for up to $250,000. Without pass-through coverage, the deposit at the bank would be
insured only to the stablecoin issuer itself, up to $250,000. See 12 C.F.R. § 330.5.
7 For example, some existing stablecoin issuers purport to place no limitations on the amount of stablecoins a holder (whether an end user
or a digital asset platform) may redeem for a fiat currency, while others set minimum redemption amounts that must be met before the
issuer will process a redemption request. In some cases, these minimum redemption amounts may be considerably greater than the value
of stablecoins held by a typical user.
8 In addition, even if the purported value of stablecoins in circulation is equal to the value of the reserve assets, other creditors may have a
claim on the reserve assets that competes with that of stablecoin holders.

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Transfer and Storage of the Stablecoin

To become useful as a means of payment, a stablecoin also must be readily transferrable with a
reliable and accurate mechanism for transferring ownership. Stablecoin arrangements typically
facilitate the transfer of coins between or among users of the stablecoin arrangement, by having
issuers and other participants record the transfer either “on the books” of the wallet provider (for
transactions between users of the same wallet provider9) or on the distributed ledger (for transactions
involving users of different wallets).10 In this sense, they can facilitate the transfer of value as in
payment systems.11 More specifically, the payment processes underlying both distributed ledger and
traditional payment systems share similarities, in that they each rely on the following conceptual
steps: (1) initiation of payment, typically through a message to the payment network, (2) validation
or verification of the integrity of the message and the conditions for settlement (e.g., sufficient funds),
and (3) settlement of the transaction, in which value is transferred and the obligation is discharged.

Many of the stablecoins currently in circulation are underpinned by “public blockchain” networks.12
Potential benefits and drawbacks inherent with any distributed network technology are present
in these types of stablecoin arrangements, such as transparency provided by a public ledger. In
particular, the process for public blockchains to come to agreement over updates to the ledger
typically involves the node operators communicating and validating transactions and then agreeing
to a new version of the ledger (often referred to as consensus).13 Compared to a traditional centralized
system, certain public blockchain networks are designed to require greater computational resources
to achieve consensus, which in turn constrains the network’s capacity for transaction throughput
(i.e., maximum number of transactions capable of being processed per second) and may be more
expensive and energy intensive than traditional payment systems.14 In contrast to public blockchains,
“permissioned blockchains” do not allow such open and direct access to the distributed ledger.15
Compared to public blockchains, permissioned blockchains may offer more certainty as to who is
responsible for monitoring the network and complying with the rules of the network (e.g., processing
only valid transactions) and thus faster and more predictable settlement. Depending on design,
however, they may also offer less transparency and security.

9 Transactions recorded on the books of a wallet provider or other holder of digital asset rather than on the distributed ledger are
sometimes referred to as “off-chain” transactions.
10 Participants in stablecoin arrangements may be able to process stablecoin transfers internally. For example, a wallet provider could hold
stablecoins on behalf of customers and allow its customers to send or receive stablecoins without interacting with the distributed ledger.
Stablecoin arrangements may establish rules for how participants should conduct such internal transfers.
11 At various stages of the transfer process, the successful transfer of stablecoins might depend on wallet providers, node operators, and
various other intermediaries and technologies.
12 In these types of arrangements, as a general matter, anyone can become a “node operator” responsible for one or both of the following
functions: (1) communicating transactions to other participants, or (2) participating in the settlement and processing stablecoin
transactions. In a public blockchain network, by design, no prior approval is needed for parties to participate in these activities; in
principle, the arrangement’s integrity is guaranteed by the underlying consensus mechanism (e.g., proof-of-work or proof-of-stake).
13 See “Payment System Risks,” in Part II below, for more information on consensus-based settlement mechanisms.
14 While these issues are not the focus of this report, Treasury and the Council are actively engaged in addressing climate-related financial
risks through a number of different initiatives. See e.g., Financial Stability Oversight Council, Report on Climate-Related Financial Risk,
(October 2021), https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf
15 The term “permissioned blockchains” refers to blockchain networks that require participants to obtain permission to access the
blockchain, thereby creating a control layer on top of the blockchain to govern the actions performed by the allowed participants.

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As a further point of variation among stablecoins, in some stablecoin arrangements, individual users
can directly hold and spend the stablecoins they own without relying on a third-party custodian or
custodial wallet provider.16 In these cases, stablecoins are akin to bearer assets that can be transferred
in a peer-to-peer fashion among those who maintain an address on the appropriate blockchain
network. In contrast, other types of stablecoin arrangements can only be accessed by having an
account with a wallet provider. In these arrangements, a limited group of participants are responsible
for transferring assets on behalf of account holders.

Unlike most stablecoins, the traditional retail non-cash payments systems—that is, check, automated
clearing house (ACH), and credit, debit, or prepaid card transactions—all rely on financial institutions
for one or more parts of this process, and each financial institution maintains its own ledger of
transactions that is compared to ledgers held at other institutions and intermediaries. Together, these
systems process over 600 million transactions per day.17 In 2018, the number of non-cash payments
by consumers and businesses reached 174.2 billion, and the value of these payments totaled
$97.04 trillion.18 Risk of fraud or instances of error are governed by state and federal laws, and within
the boundaries of these laws, transparent rules governing participation in the payment network may
provide for allocation of loss more generally with respect to participating financial institutions.19 For
example, such payment network rules govern the order in which transactions are processed and limit
customer liability for unauthorized transactions.

Activities and Participants in Stablecoin Arrangements

The key functions performed by a stablecoin arrangement—as described above, (1) creation and
redemption of the stablecoin, (2) its transfer between parties, and (3) storage of the stablecoin by
users—typically entail a range of different activities. While there is some variation among stablecoin
arrangements, these key functions are generally supported by the following activities:

• Governance – Governance functions include defining and ensuring compliance with standards
related to the purchasing, redeeming, holding, and transferring of stablecoins.
• Management of Reserve Assets – Stablecoin arrangements that are supported by reserve assets
typically define the standards for the composition of those assets and purport to ensure a one-to-
one ratio between reserve assets and the par value of stablecoins outstanding. Management of the
reserve assets involves making investment decisions with respect to the reserve, including with
respect to the riskiness of the assets.
• Custody of Reserve Assets – Stablecoins that are supported by reserve assets typically require
a custodian or trust to acquire and hold the assets and execute transactions to facilitate
management of reserve assets, in adherence with standards for reserve assets described above.
16 Despite this capability, many users voluntarily rely on such custodians.
17 See Mills, David et al., Distributed ledger technology in payments, clearing, and settlement, (Board of Governors of the Federal Reserve System,
Finance and Economics Discussion Series 2016-095, December 2016), https://doi.org/10.17016/FEDS.2016.095
18 This amount includes prepaid and non-prepaid debit cards, credit cards, ACH credit and debit transfers, and checks, which comprise a
set of noncash payment types commonly used today by consumers and businesses in the United States. See Board of Governors of the
Federal Reserve System, 2019 Federal Reserve Payments Study, (December 2019), https://www.federalreserve.gov/newsevents/pressreleases/
files/2019-payments-study-20191219.pdf
19 See, e.g., U.C.C. Article 4, 12 C.F.R. § 1005 (Reg. E), 12 C.F.R. § 226 (Reg. Z), National Automated Clearing House Association (NACHA)
Operating Rules.

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• Settlement – Transfers of digital assets such as stablecoins on a distributed ledger require other
parties to process stablecoin transactions (e.g., to engage in authentication and validation) and, for
on-chain transactions, to update the ledger in accordance with the underlying protocol.
• Distribution – Distribution of the stablecoin to users, such as consumers and businesses, involves
providing access channels and other services that allow users to obtain, hold, and transact in the
stablecoin.
These activities may be conducted by one or more parties and may be highly distributed and complex.
For example, one party (or set of parties) may be responsible for aspects of governance, another for the
minting and burning of coins, another for distributed ledger operation, validation, or settlement, another
for reserve management, and others for interfacing with users of the coin. While many of these activities
are generally carried out by a stablecoin issuer and its agents, others may be performed by third parties.
For example, with respect to distribution, stablecoin users may choose to rely on wallet providers or
exchanges to facilitate their stablecoin holding and trading activities, such as communicating stablecoin
transactions to the distributed ledger. In particular, users may choose to rely on custodial wallet
providers to hold and facilitate the transfer of stablecoins on their behalf. Depending on the arrangement
and its terms, users of a payment stablecoin may have only limited rights, if any, that they can assert
against the stablecoin issuer; their recourse could be limited to their custodial wallet provider.

Use of Stablecoins
The market capitalization of stablecoins issued by the largest stablecoin issuers exceeded $127 billion
as of October 2021. This amount reflects a nearly 500 percent increase over the preceding twelve
months.20 The current market largely consists of a few large U.S. dollar-pegged stablecoins.

Chart 1: Top Stablecoins by Market Capitalization (in billions)

20 Stablecoin supply grew from $22 billion on October 19, 2020 to $128 billion as of October 18, 2021, representing an increase of
approximately 495 percent. See Total Stablecoin Supply, The Block, (October 18, 2021), https://www.theblockcrypto.com/data/
decentralized-finance/stablecoins/total-stablecoin-supply-daily

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At the time of publication of this report, stablecoins are predominantly used in the United States
to facilitate trading, lending, and borrowing of other digital assets. For example, stablecoins allow
market participants to engage in speculative digital asset trading and to move easily between digital
asset platforms and applications, reducing the need for fiat currencies and traditional financial
institutions. Stablecoins also allow users to store and transfer value associated with digital asset
trading, lending, and borrowing within the distributed ledger environment, also reducing the need for
fiat currencies and traditional financial institutions. Currently, digital asset trading platforms and other
intermediaries also play a key role in providing access to and enabling trading of stablecoins, as well as
in the stabilization mechanisms of stablecoin arrangements. See Digital Asset Trading Platforms and
DeFi Section.

Beyond digital asset trading, several existing stablecoin issuers and entities with stablecoin projects
under development have the stated ambition for the stablecoins they create to be used widely by retail
users to pay for goods and services, by corporations in the context of supply chain payments, and in the
context of international remittances. The extent to which stablecoins will be used for these purposes is
difficult to predict and is likely to depend on the convenience of service options, the competitiveness
of stablecoin transaction costs, and users’ confidence in the stablecoin issuer, including confidence in
the issuer’s ability to maintain a stable value and facilitate redemption. However, the transition to more
widespread use could occur quickly – for example, due to network effects or the ability of stablecoins to
expand through relationships with existing user bases or platforms.

Digital Asset Trading Platforms and DeFi

This section focuses on the activities and related risks of digital asset trading platforms and
DeFi, and on the interactions between stablecoins and digital asset trading platforms and DeFi.
Digital asset trading platforms and DeFi depend on stablecoins to facilitate borrowing, lending,
and trading. At the same time, digital asset trading platforms and DeFi also play an important
role in the current functioning of stablecoins. Digital asset trading platforms and DeFi also raise
broader questions about digital asset market regulation, supervision, and enforcement. These
questions are under active consideration by the CFTC and SEC but are not the subject of the
recommendations in this report.

Background

Stablecoins facilitate a large and growing volume of digital asset trading by allowing market
participants to quickly convert volatile digital assets into a digital asset with more perceived
stability, and vice versa; providing a digital asset with more perceived stability to transfer across
platforms without the use of national currencies and reducing the need for traditional financial
institutions; and serving as a source of collateral against which market participants can borrow
to fund additional activity, sometimes using extremely high leverage. Market participants also
use stablecoins to earn yield by transferring stablecoins into digital asset trading platforms,
or by using stablecoins to serve as collateral for loans and margined transactions, in exchange
for interest or returns. As evidence of the importance of stablecoins to the digital asset market,
stablecoins are reportedly among the most highly traded assets as a percentage of total volume
on several large venues that enable the trading of digital assets.

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Stablecoins issued by a private entity and used for trading, lending, or borrowing purposes have
unique risks associated with secondary market activity and market participants beyond the
stablecoin issuer itself. Stablecoin arrangements generally require a mechanism for distribution
to end-users and a mechanism for repurchase or conversion of the stablecoins into national
currency. These activities are often undertaken by market participants other than the stablecoin
issuer. For example, rather than mint or redeem stablecoins through the issuer, most market
participants rely on digital asset trading platforms to exchange stablecoins with national
currencies (or even other stablecoins).

Key to some national currency-based stablecoin arrangements are the arbitrage activities of
market participants. The active trading of stablecoins between parties is part of the essential
stabilization mechanism to keep the price of the stablecoin close to or at the pegged value.

Digital asset trading platforms typically hold stablecoins for their customers in non-segregated
omnibus custodial wallets and reflect trades on internal records (off-chain). These platforms
and their affiliates can also have significant holdings of stablecoins, which may be co-mingled
with their customers’ stablecoins. The platform or its affiliates may also engage in active trading,
on a principal basis, of the stablecoins that they distribute and as market makers, without any
disclosure or oversight of, or constraint on, these proprietary trading activities. 

DeFi
Stablecoins also play a central role in facilitating trading, lending, and borrowing activity in DeFi.
“DeFi” broadly refers to a variety of financial products, services, activities, and arrangements
supported by smart contract-enabled distributed ledger technology. This technology can reduce
the use of traditional financial intermediaries and centralized institutions to perform certain
functions, although the degree of decentralization across DeFi differs widely. In some cases,
despite claims of decentralization, operations and activities within DeFi are highly concentrated
in and, governed or administered by, a small group of developers and/or investors. Despite
some asserted distinctions from more traditional or centralized financial products, services, and
activities, DeFi arrangements often offer the same or similar products, services, and activities, and
raise similar investor and consumer protection, market integrity, and policy concerns.

Stablecoins are central to the functioning of DeFi, as they are often used in DeFi arrangements
to facilitate trading or as collateral for lending and borrowing. For example, stablecoins often
are one asset in a pair of digital assets used in a so-called “automated market maker” or “AMM”
arrangements. The AMM is a mechanism designed to create liquidity for others seeking to
effectuate trades. As another example, stablecoins are frequently “locked” in DeFi arrangements
to garner yield from interest payments paid by others borrowing those stablecoins from the
arrangement for leveraged trading or other activities.

Industry measures for the size of DeFi participation, although unverified, include the percentage of
stablecoins that are “locked” in Ethereum smart contracts. Ethereum currently is the predominant
blockchain on which DeFi protocols and applications function. The chart below includes the type
of national-currency referenced stablecoins discussed in this report (USDC and USDT), as well as a
algorithmic stablecoin (DAI).

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Chart 2: Percentage of Stablecoin Supplies Locked in Ethereum 

Smart Contracts

Risks

Digital asset trading platforms and DeFi arrangements present risks of particular focus to the
agencies, and most notably to the SEC and CFTC. Among others, these risks include:

• Risks of fraud, misappropriation, and conflicts of interest, including those arising from misleading
disclosures to the market, misuse of inside information, and manipulative trading activities;
• Reliance of stablecoin arrangements on digital asset trading platforms (e.g., for distribution,
to enable customers to convert stablecoins into national currency, and to facilitate arbitrage
mechanisms), such that a failure or disruption to the digital asset trading platform could
threaten the stablecoin;
• Reliance of digital asset trading platforms on stablecoins (e.g., to facilitate transactions
occurring on the platform, or as a means of storing platform reserves), such that a failure or
disruption of the stablecoin could threaten the digital asset trading platform;
• Money laundering and terrorist financing risks;
• Excessive leverage facilitated by use of stablecoins as collateral on unregulated or non-
compliant trading platforms;
• Risks as a result of digital asset trading platforms’ non-compliance with applicable regulations;
• Interlinkages between digital asset trading platforms and stablecoins, including in platforms’
ownership of stablecoins (and potential co-mingling with customer funds);
• Information asymmetries and market abuse as a result of inaccurate, limited or non-standard
trade and price reporting from certain platforms related to stablecoin and other digital asset
transactions that could adversely affect users of the stablecoin and the trading platforms;

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• Market integrity risks as a result of manipulative or deceptive trading activity on unsupervised

trading venues;
• Risks resulting from unique aspects of distributed ledger-based arrangements, including
governance issues, interoperability, scalability, protocol and smart contract vulnerabilities,
cybersecurity, and other operational issues; and,
• Risks resulting from novel custody and settlement processes that lack standardization and
quality control.

SEC and CFTC Regulatory Authority

In addition to existing AML/CFT regulations, stablecoin arrangements and activities may
implicate the jurisdiction of the SEC and/or CFTC. As an initial matter, and depending on
their structure, stablecoins, or certain parts of stablecoin arrangements, may be securities,
commodities, and/or derivatives. Moreover, much of the trading, lending, and borrowing activity
currently fueled by stablecoins on digital asset trading platforms and within DeFi similarly may
constitute securities and/or derivatives transactions that must be conducted in compliance with
federal securities laws and the CEA, including applicable regulations. To the extent that a given
stablecoin activity falls within the jurisdiction of the SEC and/or CFTC, it must be conducted in
compliance with applicable provisions of the federal securities laws and/or the CEA.

For digital assets, including stablecoins, that are securities within the SEC’s jurisdiction, the federal
securities laws cover, for example, digital asset offers, sales and promotions; investment company
activities where the stablecoin issuer or platforms holding stablecoins are engaging in the business
of investing in securities and meet the definition of “investment company;” investment adviser
activities where entities provide advice on securities (such as in connection with the investment of
stablecoin proceeds); and activities of intermediaries and trading platforms.

For digital assets, including stablecoins, that are, or incorporate, commodity futures, options,
and swaps within the CFTC’s jurisdiction, the CEA provides the CFTC with regulatory authority
over all persons engaged in relevant transactions. For example, the CFTC’s regulatory authority
covers intermediaries and exchanges offering or engaged in commodity futures, options, and
swaps, as well as certain leveraged retail transactions. In addition, the CFTC maintains certain
antifraud and anti-manipulation authority over commodity transactions in interstate commerce,
which includes digital assets that are commodities as defined by the CEA.

As markets for digital assets and DeFi grow, it is essential to address the significant investor and
market risks that could threaten end users and other participants in stablecoin arrangements and
secondary market activity. This may be accomplished through promotion of investor and market
protection measures, such as requiring clear and complete disclosures and protecting against
fraud, manipulation, and other risks. Regulatory oversight of digital asset trading platforms and
intermediaries promotes important investor and market protections by providing for, among
other things, appropriate rulemaking, examination, supervision, and enforcement authorities.
Oversight also provides, among other things, trading and price transparency, and protections
against fraud and misconduct, including market manipulation, insider trading, and front running. 

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II. Risks and Regulatory Gaps

Loss of Value: Risks to Stablecoin Users and Stablecoin Runs
An instrument can serve as a reliable means of payment or store of value only when there is confidence
in its value, particularly in periods of stress. For stablecoins, this confidence could arise in part from its
redeemability, and the belief that such redeemability is supported by a stabilization mechanism that
will function effectively both during normal conditions and during periods of stress. Confidence in a
stablecoin may be undermined by factors including: (1) use of reserve assets that could fall in price or
become illiquid;21 (2) a failure to appropriately safeguard reserve assets; (3) a lack of clarity regarding
the redemption rights of stablecoin holders;22 and (4) operational risks related to cybersecurity and the
collecting, storing, and safeguarding of data.

Failure of a stablecoin to perform according to expectations would harm users of that stablecoin and
could pose systemic risk. The mere prospect of a stablecoin not performing as expected could result in
a “run” on that stablecoin – i.e., a self-reinforcing cycle of redemptions and fire sales of reserve assets.
Fire sales of reserve assets could disrupt critical funding markets, depending on the type and volume
of reserve assets involved. Runs could spread contagiously from one stablecoin to another, or to other
types of financial institutions that are believed to have a similar risk profile. Risks to the broader financial
system could rapidly increase as well, especially in the absence of prudential standards. The internal
dynamics of a stablecoin run, as well as the potential implications of such a run for the financial system
and broader economy, would likely depend on the volume and liquidity characteristics of reserve assets
sold,23 as well as on broader economic and financial conditions. Some stablecoin arrangements are
already sizable, and many stablecoins are growing. A run occurring under strained market conditions
may have the potential to amplify a shock to the economy and the financial system.

Payment System Risks

Stablecoin arrangements’ transfer mechanisms (and potentially other aspects of the arrangements’
activities) between issuance and redemption can provide opportunities for efficient payment
processing but also can pose risks to their participants and the broader financial system. Payment
stablecoins face many of the same basic risks as traditional payment systems, including credit risk,
liquidity risk, operational risk, risks arising from improper or ineffective system governance, and
settlement risk.24 When not managed comprehensively, these risks can make payment systems less
available and less reliable for users, and they can create financial shocks or operate as a channel
through which financial shocks spread.

21 These risks may be amplified by a lack of transparency with respect to the composition of reserve assets, as well as a lack of controls on
conflicts of interest between stablecoin issuers and stablecoin holders regarding permissible reserve asset investments.
22 For example, there may be a lack of clarity as to whether stablecoin holders have a direct claim on reserve assets or whether there are
creditors with a competing claim on such assets.
23 The financial stability risks of a stablecoin run would be greater in the context of stablecoins backed by potentially volatile and illiquid
assets than in the context of stablecoins backed one-for-one by high quality liquid assets.
24 See Committee on Payment and Settlement Systems and the Technical Committee of the International Organizations of Securities
Commissions, Principles for financial market infrastructures, (Bank for International Settlements, April 2012), at p. 174 (Annex H),
https://www.bis.org/cpmi/publ/d101a.pdf

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These risks have the potential to manifest in novel ways as a result of a stablecoin arrangement’s use
of different technologies, transaction processes, and governance structures, among other factors.
For example, unlike traditional payment systems where risk is managed centrally by the payment
system operator, some stablecoin arrangements feature decentralized decision-making and complex
operations where no single organization is responsible or accountable for risk management and
resilient operation of the entire arrangement.
“Operational risk” is the risk that deficiencies in information systems or internal processes, human errors,
management failures, or disruptions from external events will result in the reduction, deterioration, or
breakdown of services. Operational issues in a payment system can disrupt the ability of users to make
payments, which can in turn disrupt economic activity. If an operational problem results in a payment
error or enables fraudulent payments, users could lose their money. Stablecoin arrangements face
many of the same types of operational risks as existing payment systems but could have the potential
to be more operationally resilient in some respects. However, they can also face novel operational risks
related to the validation and confirmation of stablecoin transactions and the management and integrity
of the distributed ledger. For example, incentives to validate transactions may not adequately motivate
participants to respond to demand for processing transactions, resulting in network congestion.
Operational risks may also be more difficult to manage or supervise in a stablecoin arrangement,
especially when the supporting infrastructure is beyond the control of any one organization (including
the entities involved in the stablecoin arrangement) and there is no clear entity to regulate. 
“Settlement risk” is the risk that settlement in a payment system will not take place as expected.
Well-designed and well-operated payment systems ensure transactions settle reliably, giving users
confidence that their funds settlement is certain and final at a given time. Stablecoin arrangements
that do not clearly define the point at which settlement is final in their rules and procedures can pose
heightened uncertainty and create credit and liquidity pressures for arrangement participants. For
example, many distributed ledger networks are permissionless, requiring no prior approval for new
users to participate in network activities. When open network access is combined with consensus-
based settlement mechanisms, technical settlement may be subject to uncertainty for longer periods,
with no single party accountable for defining or ensuring legal settlement finality, creating questions
about the reliability and finality of payments.
In addition, “liquidity risk” can arise in a stablecoin arrangement from misalignment of the settlement
timing and processes between stablecoin arrangements and other systems (e.g., if a stablecoin
arrangement operates 24/7, but the payment system used for funding stablecoin issuance and
returning fiat currency upon stablecoin redemption has regular business hours), causing temporary
shortages in the quantity of stablecoins available to make payments.
These risks may remain inadequately addressed for stablecoin arrangements due to the lack of
consistent risk-management standards among arrangements, the number of different key parties that
may be involved in an arrangement, and the operational complexity of an arrangement.25 Moreover,
if many entities are involved in operating the infrastructure where transfers take place, it may be
challenging for the supervisor of the issuer to require that the arrangement’s rules support effective
risk management and governance across the entire arrangement. 

25 Wallet providers themselves may, as to certain of their activities, be subject to varying levels of regulation and supervision by the states in
which they operate, depending on the services provided and the laws and regulations of each state.

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Risks of Scale: Systemic Risk and Concentration of Economic Power

While small in comparison to traditional forms of private and public money, stablecoins have grown
rapidly in the last year and may continue to grow rapidly at both an individual and aggregate level.
For individual stablecoins, the potential for rapid growth may reflect economies of scale and scope;
network effects that cause demand for a specific stablecoin to increase as more firms and consumers
use the stablecoin; and first-mover advantages. In some cases, rapid scaling may be supported by
access to existing customer bases and further enabled by access to end-users’ data.
The potential for an individual stablecoin to scale rapidly raises three sets of policy concerns. First, a
stablecoin issuer or a key participant in a stablecoin arrangement (e.g., a custodial wallet provider)
could pose systemic risk – meaning that the failure or distress of that entity could adversely affect
financial stability and the real economy.26 Second, the combination of a stablecoin issuer or wallet
provider and a commercial firm could lead to an excessive concentration of economic power.
These policy concerns are analogous to those traditionally associated with the mixing of banking
and commerce, such as advantages in accessing credit or using data to market or restrict access
to products. This combination could have detrimental effects on competition and lead to market
concentration in sectors of the real economy. Third, a stablecoin that becomes widely adopted as
a means of payment could present concerns about anti-competitive effects, for example, if users of
that stablecoin face undue frictions or costs in the event they choose to switch to other payment
products or services. Concerns about anti-competitive effects are thus likely to be greater absent
interoperability standards for stablecoins and stablecoin arrangements.
In addition to the potential for individual stablecoins to scale rapidly, the aggregate growth of
stablecoins could also have important implications for the financial system and the macroeconomy.
If insured depository institutions lose retail deposits to stablecoins, and the reserve assets that
back stablecoins do not support credit creation, the aggregate growth of stablecoins could increase
borrowing costs and impair credit availability in the real economy. The perception of the safety of
insured depository institutions relative to stablecoins could also shift during times of stress, with large
and sudden inflows or outflows of deposits possible.
Regulatory Gaps
Today, stablecoin arrangements are not subject to a consistent set of prudential regulatory standards
that address the risks discussed above. Moreover, the number of different key parties that may be
involved in an arrangement, and the operational complexity of these arrangements, pose challenges
for supervisory oversight. For example, even if a given issuer of stablecoin is a bank, insight into
the activities of key entities in the arrangement depends on the structure of the relationship and

26 These risks may be exacerbated by a lack of adequate recovery and resolution planning. While the recovery and resolution implications for
stablecoin arrangements may vary based on their structures, many would likely be subject to the provisions of Chapter 7 and/or 11 of the
Bankruptcy Code. Several other resolution schemes could also be involved, and non-US and cross-border issues could also arise.

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the nature of the services, if any, provided to the issuer bank as client.27 To address these gaps, a
consistent and comprehensive regulatory framework is needed both to increase transparency into key
aspects of stablecoin arrangements and to ensure that stablecoins function in both normal times and
in stressed market conditions.

III. Recommendations

As discussed above, stablecoins have multiple uses involving different types of participants
and arrangements, which implicate a range of regulatory concerns. Stablecoins and stablecoin
arrangements raise significant concerns from an investor protection and market integrity
perspective. Stablecoin arrangements and digital asset trading activities may implicate the jurisdiction
of the SEC and/or CFTC. Depending on the facts and circumstances, a stablecoin may constitute a
security, commodity, and/or derivative implicating the jurisdiction of the SEC, and be subject to the
U.S. federal securities laws, or implicating the jurisdiction of the CFTC, and be subject to the CEA. The
federal securities laws and/or the CEA may apply to the stablecoin, the stablecoin arrangement,
transactions in, and/or participants involved in, the stablecoin or stablecoin arrangement, and/
or derivatives of any of the foregoing instruments. The SEC and CFTC have broad enforcement,
rulemaking, and oversight authorities over transactions and participants falling within their respective
jurisdictions to address the investor protection and market integrity risks discussed above. To the
extent within the jurisdiction of the SEC or the CFTC, trading, lending, borrowing, and other activity
involving stablecoins must be conducted in compliance with applicable provisions of the federal
securities laws and the CEA, as well as applicable regulations (See Digital Asset Trading Platforms and
DeFi).

Stablecoins also present important prudential concerns, as discussed in Part II. These prudential
concerns relate to the potential for stablecoin runs, payment system risks, and the possibility that
some stablecoins may rapidly scale. Because responsibilities within many of these arrangements
are widely distributed, and currently fall within the jurisdiction of different regulatory agencies, or
outside of the regulatory perimeter altogether, there is a risk of incomplete or fragmented oversight.
Stablecoin arrangements have grown, and may continue to grow, rapidly. And as these arrangements
grow, so may the risks associated with them. The recommendations presented below are focused on
the prudential risks identified with respect to payment stablecoins.28

27 See 12 U.S.C. § 1867(c); see generally 12 U.S.C. §§ 1861-1867. Section 7 of the Bank Service Company Act (BSCA) provides the Federal
Reserve, FDIC and OCC with the authority to regulate and examine the performance of certain services by a third-party service provider for
a depository institution “to the same extent as if such [banking-related] services were being performed by the depository institution itself
on its own premises.” See also 12 U.S.C. § 1464(d)(7). In addition to the BSCA, the agencies have other authorities that support examination
and oversight of services provided by third-party service providers. For example, the Home Owners’ Loan Act (HOLA), reiterates this
authority for services provided to savings associations. Other statutory authorities may also be relevant in specific situations. In the context
of stablecoins, the ability to apply existing authority to regulate and examine stablecoin-related services provided by non-bank service
providers might be dependent on the structure of the relationship and the nature of the services provided to the individual client banks.
28 See supra note 3.

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Legislation
To address prudential risks associated with the use of stablecoins as a means of payment, the
agencies recommend that Congress act promptly to ensure that payment stablecoins are subject to
appropriate federal prudential oversight on a consistent and comprehensive basis. Because payment
stablecoins are an emerging and rapidly developing type of financial asset, legislation should provide
regulators flexibility to respond to future developments and adequately address risks across a variety
of organizational structures.

Legislation should address the risks outlined in this report by establishing an appropriate federal
prudential framework for payment stablecoin arrangements.29 In particular, with respect to stablecoin
issuers, legislation should provide for supervision on a consolidated basis; prudential standards;
and, potentially, access to appropriate components of the federal safety net. To accomplish these
objectives, legislation should limit stablecoin issuance, and related activities of redemption and
maintenance of reserve assets, to entities that are insured depository institutions. The legislation
would prohibit other entities from issuing payment stablecoins. Legislation should also ensure that
supervisors have authority to implement standards to promote interoperability among stablecoins.

Insured depository institutions include both state and federally chartered banks and savings
associations, the deposits of which are covered, subject to legal limits, by deposit insurance, and
which have access to emergency liquidity and Federal Reserve services.30 Like other insured depository
institutions, insured depository institutions that issue stablecoins would be subject to supervision and
regulation at the depository institution level by a federal banking agency and consolidated supervision
and regulation by the Federal Reserve at the holding company level.31 The standards to which these
institutions are subject include capital and liquidity standards that are designed to address safety and
soundness and, for the largest banking organizations, also include enhanced prudential standards
that address financial stability concerns. Under the Federal Deposit Insurance Act, insured depository
institutions also are subject to a special resolution regime that enables the orderly resolution of failed
insured depository institutions by, among other mechanisms, protecting customers’ insured deposits,
and according priority to deposit claims over those of general creditors, and limits any potential
negative systemic impacts in the event of bank failure.

As discussed above, apart from a stablecoin issuer, other key entities in the stablecoin arrangement
may be critical to a stablecoin’s ability to function as a means of payment and may help a stablecoin
to scale (See Part I, Activities and Participants in Stablecoin Arrangements). As noted above, the
core functions of a stablecoin arrangement – (1) creation of the stablecoin, (2) its transfer between
parties, and (3) storage of the stablecoin by end users, as described in Part I (See Part I, Creation of
Stablecoins, and Transfer and Storage of Stablecoin) – can be carried out by the activities of separate
entities, within an arrangement that may be highly distributed and complex. Because the activities
and functions in a stablecoin arrangement may be distributed across different parties, a prudential

29 Given the global nature of stablecoins and other digital assets, legislation should apply to stablecoin issuers, custodial wallet providers,
and other key entities that are domiciled in the United States, offer products that are accessible to U.S. persons, or that otherwise have a
significant U.S. nexus.
30 The term “insured depository institution” is defined in the Federal Deposit Insurance Act. See 12 U.S.C. § 1813(c)(2).
31 See 12 U.S.C. § 1841, et seq.

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framework that is exclusively focused on stablecoin issuers is likely to leave certain payment system
risks inadequately or inconsistently addressed.

Given the central role that custodial wallet providers play within a stablecoin arrangement, and the
risks attendant to the relationship between custodial wallet providers and stablecoin users, Congress
should require custodial wallet providers to be subject to appropriate federal oversight. Such oversight
should include authority to restrict these service providers from lending customer stablecoins, and
to require compliance with appropriate risk-management, liquidity, and capital requirements. In
addition, to address concerns about concentration of economic power, Congress should consider
other standards for custodial wallet providers, such as limits on affiliation with commercial entities or
on use of users’ transaction data.

In addition to stablecoin issuers and custodial wallet providers, other entities may perform
activities that are critical to the functioning of the stablecoin arrangement (See Part I, Activities and
Participants in Stablecoin Arrangements). To ensure that stablecoin arrangements are subject to a
comprehensive regulatory framework, Congress should provide the federal supervisor of a stablecoin
issuer with the authority to require any entity that performs activities critical to the functioning of
the stablecoin arrangement to meet appropriate risk-management standards, such as the Principles
for Financial Market Infrastructures32 as adapted to stablecoin arrangements.33 Legislation should
also provide appropriate agencies with examination and enforcement authority with respect to the
stablecoin activities of these entities. Finally, supervisors should have the ability to adopt standards to
promote interoperability among stablecoins, or between stablecoins and other payment instruments.

Taken together, legislation along these lines would address the prudential risks described in Part II of
this report on a comprehensive and consistent basis:

• User Protection and Run Risk: Require stablecoin issuers to be insured depository institutions,
which are subject to appropriate supervision and regulation, at the depository institution and the
holding company level.
• Payment System Risk: Require custodial wallet providers to be subject to appropriate federal
oversight. In addition, provide the supervisor of a stablecoin issuer with authority to require any
entity that performs activities critical to the functioning of the stablecoin arrangement to meet
appropriate risk-management standards.
• Systemic Risk and Concentration of Economic Power: Require stablecoin issuers to comply with
activities restrictions that limit affiliation with commercial entities. Supervisors also should have
the authority to implement standards to promote interoperability among stablecoins. Limits on
custodial wallet providers’ affiliation with commercial entities or on custodial wallet providers use
of user transaction data may also help address these issues.

32 Committee on Payment and Settlement Systems and the Technical Committee of the International Organizations of Securities
Commissions, see supra note 24.
33 The authority to establish risk-management standards for entities that perform activities that are critical to the functioning of the
stablecoin arrangement is in addition to, and does not affect, other existing regulatory or supervisory authorities that may apply to these
entities.

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Interim Measures
The agencies believe that legislation is urgently needed to comprehensively address the prudential
risks posed by payment stablecoin arrangements. While Congress considers how to address risks
associated with payment stablecoin arrangements, the agencies will continue to use their existing
authorities to address these prudential risks to the extent possible. In the absence of Congressional
action, the Council may consider steps available to it to address the risks outlined in this report.

A. Regulatory Agencies
Given the significant and growing risks posed by stablecoins, the agencies are committed to taking
action to address risks falling within each agency’s jurisdiction and to continued coordination and
collaboration on issues of common interest across the federal financial agencies. For example, in
evaluating a charter application, the banking agencies will seek to ensure that applicants address
the risks outlined by this report, including risks associated with stablecoin issuance and other related
services conducted by the banking organization or third-party service providers. In the context of those
stablecoins that are securities, commodities, and/or derivatives, application of the federal securities
laws and/or the CEA would provide important investor and market protections, as well as transparency
benefits. Relevant authorities, including the Department of Justice, may consider whether or how
section 21(a)(2) of the Glass-Steagall Act may apply to certain stablecoin arrangements.34 In addition,
the Consumer Financial Protection Bureau (CFPB) and consumer financial protection laws also
provide a number of safeguards in the payments sector, including but not limited to the Electronic
Fund Transfer Act, the Gramm-Leach-Bliley Act, and the Consumer Financial Protection Act.35 Finally,
a stablecoin arrangement may also offer “money transmission services,” triggering federal AML/
CFT obligations under the Bank Secrecy Act (BSA), supervised and enforced by the Financial Crimes
Enforcement Network (FinCEN).

B. Council
In the absence of Congressional action, the agencies recommend that the Council consider steps
available to it to address the risks outlined in this report. Such steps may include the designation of
certain activities conducted within stablecoin arrangements as, or as likely to become, systemically
important payment, clearing, and settlement (PCS) activities.36 Designation would permit the
appropriate agency to establish risk-management standards for financial institutions that engage
in designated PCS activities, including requirements in relation to the assets backing the stablecoin,
requirements related to the operation of the stablecoin arrangement, and other prudential
standards.37 Financial institutions that engage in designated PCS activities also would be subject to an
examination and enforcement framework. Any designation would follow a transparent process.
34 12 U.S.C. § 378(a)(2).
35 See, e.g., 15 U.S.C. § 1693 et seq., Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999); Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
36 In addition, the Council potentially could address stablecoin arrangements using its authority to designate systemically important
financial market utilities (FMUs), subjecting those arrangements to consolidated supervision. See 12 U.S.C. §§ 5462, 5463. The council also
has authority to designate nonbank financial institutions as “systemically important financial institutions” (SIFIs), pursuant to its authority
in Title I of the Dodd-Frank Act. See 12 U.S.C. § 5323. PCS activities may be designated to the extent that such activities do not involve the
offer or sale of a security or any quotation, order entry, negotiation, or other pre-trade activity or execution activity.
37 The financial stability risks of a stablecoin run would be greater in the context of stablecoins coins backed by potentially volatile and
illiquid assets than in the context of stablecoins backed one-for-one by high quality liquid assets, see supra note 24.

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Illicit Finance Risk

As with all digital assets, stablecoins can present money laundering and terrorist financing (ML/
TF) risks. The magnitude of these risks depends on various factors, including the application of
anti-money laundering and countering the financing of terrorism (AML/CFT) controls, the degree
to which it is adopted by the public, and the design of the stablecoin arrangement. To further
prevent misuse of stablecoins and other digital assets by illicit actors, Treasury will continue
leading efforts at the Financial Action Task Force (FATF) to encourage countries to implement
international AML/CFT standards and pursue additional resources to support supervision of
domestic AML/CFT regulations. Treasury will also continue to assess the illicit financing risks
to the United States associated with stablecoins and other digital assets, including through
the forthcoming National Risk Assessments on Money Laundering, Terrorist Financing, and
Proliferation Financing, and Illicit Finance Strategy.

A critical factor for illicit finance risk mitigation, regardless of the features of a stablecoin’s design,
is that international standards for the regulation and supervision of service providers associated
with stablecoins and other digital assets are effectively implemented worldwide. Stablecoins
and other digital assets can be used to transfer large amounts of value across borders very
quickly. A rapid increase in cross-border payments could amplify ML/TF risks due to the uneven
implementation of global international AML/CFT standards developed by the FATF.38 While the
United States regulates and enforces AML/CFT obligations for covered service providers, most
countries have either not put these standards into their regulatory frameworks or are failing
to supervise them, leading to gaps in AML/CFT regulation and supervision for stablecoins and
other digital assets. Illicit actors can exploit these gaps by using services in countries with weak
regulatory and supervisory regimes to launder funds, store proceeds of crime, or evade sanctions
in stablecoins or other digital assets.

The promise of a stable value can, particularly when paired with the reach of commercial firms
such as telecommunications or technology providers, increase the potential that stablecoins
scale rapidly. Criminals often use the most common and liquid forms of value for ML and TF, and
mass-adopted stablecoins or other digital assets may be attractive to illicit actors, which could
heighten ML/TF risks. Conversely, mass adoption of a well-regulated and supervised stablecoin with
strong AML/CFT protections built into the stablecoin could provide greater transparency into illicit
financial activity and could mitigate ML/TF risks, especially if the stablecoin takes market share
away from riskier alternatives.

Like other digital assets, stablecoins may be used to transact pseudonymously, depending on the
underlying architecture.39 However, in certain instances, stablecoin addresses and transactions
on public blockchains can be paired with information, if available, that can enable regulators and

38 The FATF in June 2019 revised its standards to cover virtual assets, including stablecoins, and service providers.
39 The majority of the stablecoin market currently operates on public blockchains where transactions may be pseudonymous, meaning the
identity of the sender or the receiver of a transaction is unknown, but other transactional information is available (e.g., the amount, the
time, the value, etc.). 

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law enforcement to identify address owners.40 Users of some stablecoins can transact without
the involvement of financial institutions subject to AML/CFT obligations, thus limiting collection
of and access to investigative information and preventative measures used to identify illicit
financial activity.

To encourage international implementation of AML/CFT standards, Treasury will continue to

engage with the FATF to encourage countries to effectively implement the FATF standards for
virtual assets. On October 28, 2021, the FATF published updated guidance on the implementation
of the FATF standards for virtual assets and virtual asset service providers, which describes how
the standards apply to digital assets and help countries and the private sector better understand
how to effectively implement standards. As a result of the publication of the FATF standards, the
FATF will now redouble its efforts on effective implementation of the standards on digital assets
by member countries, and the United States will continue to support these efforts at the FATF
and engage bilaterally to encourage countries to meet these standards.

In the United States, most stablecoins are considered “convertible virtual currency” (CVC) and
treated as “value that substitutes for currency” under FinCEN’s regulations.41 All CVC financial
service providers engaged in money transmission, which can include stablecoin administrators
and other participants in stablecoin arrangements, must register as money services businesses
(MSBs) with FinCEN. As such, they must comply with FinCEN’s regulations, issued pursuant
to authority under the BSA, which require that MSBs maintain AML programs, report cash
transactions of $10,000 or more, file suspicious activity reports (SARs) on certain suspected illegal
activity, and comply with various other obligations.42 Current BSA regulations require the transfer
of certain specific information well beyond what can be inferred from the blockchain resulting in
non-compliance. While the Office of Foreign Assets Control (OFAC) has provided guidance on how
the virtual currency industry can build a risk-based sanctions compliance program that includes
internal controls like transaction screening and know your customer procedures, there may be
some instances where U.S. sanctions compliance requirements (i.e., rejecting transactions) could
be difficult to comply with under blockchain protocols.

While regulations are broadly sufficient to cover stablecoin administrators and other participants
in stablecoin arrangements, Treasury will pursue additional resources, which could enable FinCEN,
the IRS, and federal functional regulators to increase supervision of these regulations. This could
result in better private sector compliance and, where it does not, could lead to enforcement actions
for non-compliance. Enforcement activity would signal to stablecoin administrators and other
financial institutions in the stablecoin industry that they will be held accountable for failing to meet
AML/CFT and sanctions obligations, will incentivize compliance, and may enhance pressure

40 While stablecoins, like other digital assets, can be used with mixers or tumblers, which de-link the transaction trail and make it difficult to
determine the address, sender identity, or original sum involved in the transaction, the use of these tools with stablecoins is uncommon.
41 See 31 C.F.R. § 1010.100(ff)(5)(i)(A) (definition of “money transmitter” includes a person who accepts and transmits, inter alia, “value that
substitutes for currency”). See also Joint Statement by Heath Tarbert, Kenneth Blanco, and Jay Clayton on Activities Involving Digital
Assets, October 11, 2019, https://www.fincen.gov/sites/default/files/2019-10/CVC%20Joint%20Policy%20Statement_508%20FINAL_0.pdf
42 See generally 31 C.F.R. § 1022. FinCEN uses the term MSB to refer to several categories of business models to which FinCEN’s regulations
apply. One type of MSB is money transmitters, the category into which most exchanges, administrators, and other persons engaged in
activity involving CVC—other than traditional institutions such as banks and broker dealers—fall.

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on some foreign jurisdictions to follow suit. To that end, FinCEN’s delegated examiners, the IRS,
have been conducting compliance examinations on CVC administrators and exchangers, including
administrators of stablecoin arrangements and the exchanges on which they are offered, since
2014. These examinations have also included foreign-located MSBs doing business in the United
States in whole or substantial part.43

FinCEN has taken decisive action when it identifies financial institutions that fail to comply with
these obligations. For example, in 2017 FinCEN assessed a $110 million civil money penalty
against the foreign-located CVC exchanger BTC-e for failure to comply with the BSA’s registration,
AML program, reporting, and recordkeeping requirements.44 More recently, FinCEN assessed a
$100 million civil money penalty against the foreign-located, non-compliant futures commission
merchant BitMEX for failing to maintain an AML Program and a Customer Identification Program,
and failure to file suspicious activity reports.45 That penalty was concurrent with the CFTC’s $100
million civil money penalty.46

Treasury in January will report to Congress the National Money Laundering and Terrorist
Financing Risk Assessments, which assess the illicit financing risk landscape for digital assets,
among other financial products and activities. The Risk Assessments are developed with input
from U.S. government stakeholders, including law enforcement, the federal functional regulators,
and the intelligence community, and use public or adjudicated case studies to demonstrate
how illicit actors are misusing financial assets. The Risk Assessments inform the Illicit Finance
Strategy, which is designed to identify goals, objectives, and priorities for disrupting and
preventing illicit finance activities within and transiting the U.S. financial system.

43 31 C.F.R. § 1010.100(ff).
44 Assessment of Civil Money Penalty, Financial Crimes Enforcement Network, No. 2017-03, July 27, 2017, https://www.fincen.gov/sites/default/
files/enforcement_action/2020-05-21/Assessment%20for%20BTCeVinnik%20FINAL2.pdf
45 Assessment of Civil Money Penalty, Financial Crimes Enforcement Network, No. 2021-02, August 10, 2021, https://www.fincen.gov/sites/
default/files/enforcement_action/2021-08-10/Assessment_BITMEX_508_FINAL.pdf
46 Commodity Futures Trading Commission v. HDR Global Trading Limited, et.al., 1:20-cv-08132, (S.D. NY, Aug. 10, 2021).

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International Standards
This report considers and builds on the work of international forums, including work
that has led to recommendations, standards, principles, and guidance that may apply to
stablecoin arrangements. The Financial Stability Board in October 2020 set out ten high-level
recommendations that seek to promote coordinated and effective regulation, supervision, and
oversight of Global Stablecoin (GSC) arrangements to address the financial stability risks posed
by GSCs, both at the domestic and international level, while supporting responsible innovation
and providing sufficient flexibility for jurisdictions to implement domestic approaches.

International standard-setting bodies are also pursuing work to examine the application of
international standards, principles, and guidance to stablecoin arrangements. For example, the
Committee on Payments and Market Infrastructures (CPMI) and the International Organization
of Securities Commissions (IOSCO) published a consultative report on the application of the
PFMIs to stablecoin arrangements. With respect to illicit finance, the FATF in June 2019 revised its
standards to cover digital assets, including stablecoins and service providers, and is working on
updated guidance for how to implement these standards.

The agencies are committed to continuing engagement at the FSB and the standard-setting
bodies to ensure comprehensive oversight of stablecoin arrangements, further common
regulatory outcomes across jurisdictions, and reduce opportunities for regulatory arbitrage.

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Annex: List of Outreach Participants

To inform the work for this report, the staff of the agencies held discussions with the stakeholders listed
below. While the staff considered input received, the agencies do not endorse any particular project,
viewpoint, product, or service.

Market Participants

Anchorage Digital Fnality International

BlockFi Gemini
Circle Kraken
Coin Center Mastercard
Coinbase Paxos
Cumberland DRW LLC Square
Diem Association Stripe
FIS Tether
Fiserv Visa

Trade Associations

Bank Policy Independent Community

Institute Bankers of America
Blockchain National Association of
Association Federally-Insured Credit Union
Electronic Transactions
Association

Experts and Advocates

AFL-CIO Howell E. Jackson, Harvard Law School

AID-Tech Law and Political Economy Project
Americans for Financial Reform Markus Brunnermeier, Princeton University
Better Markets Morgan Ricks, Vanderbilt University Law School
Center for Responsible Lending National Community Reinvestment Coalition
Dan Awrey, Cornell Law School National Consumer Law Center
Darrell Duffie, Stanford University Graduate
Open Markets Institute
School of Business
FinRegLab Stellar Development Foundation
Gary Gorton,
Yale School of Management

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