What the Government’s Recommendations for Stablecoins Got Wrong, and How to Do Better

About the author: Jan van Eck is CEO of VanEck Funds and founded its ETF business in 2006.

Sometimes the amazing technological innovations occurring in crypto are obscured by meme-coin mania and


wars. But while it might be OK if your distant relatives are confused and dismissive at the holiday table, it’s disconcerting when regulators can’t find an obvious home for a new crypto invention. Stablecoins are one of those inventions. They are obviously close to mutual funds, but policymakers are having trouble seeing all the similarities.

Stablecoins are digital assets that track another asset, often the U.S. dollar. They trade on cryptocurrency exchanges and facilitate instant and final transactions. Stablecoins were created because movements in and out of bank accounts were too slow for traders and investors in volatile crypto markets. So when crypto investors go to cash, they park their money in a stablecoin. Today, there are about $150 billion in stablecoins. Usage is growing fast. 

Stablecoins that track the U.S. dollar invest their inflows into fixed-income securities with low risk, like money market mutual funds. They issue shares as money comes in, and reduce shares if there are outflows, just like open-ended mutual funds and ETFs. Like funds, there are no operations other than the investment of securities.

The largest stablecoin, Tether, operates like an ETF. Only registered firms can buy and sell the shares in large, fixed amounts. Because they trade 24/7, stablecoins do not typically issue small numbers of shares, unlike mutual funds that only trade once a day. Like ETFs, market makers ensure that the stablecoins trade at $1, and, like ETFs, the prices may deviate from $1 based on market conditions.

In a slight difference from mutual funds and ETFs, most stablecoin issuers keep the income generated from the assets in the stablecoin. Thus, even though interest rates are low, stablecoins are accumulating assets that are growing above the $1 dollar price they promise to maintain. In response, some stablecoins now assign a part of their investment gains to holders. I believe these income-distributing stablecoins will likely proliferate.  

But even though stablecoins strongly resemble funds, there is no regulatory consensus to treat them as funds. A stablecoin paper issued by the U.S. government’s President’s Working Group On Financial Markets in November reflected the regulatory confusion and made some odd recommendations.

First, the PWG had trouble defining a stablecoin. The report said that “stablecoins, or certain parts of stablecoin arrangements, may be securities, commodities and/or derivatives.” Clear?

The PWG then issued a number of recommendations.

Despite the similarity that stablecoins have with money market funds, the PWG suggested that stablecoin issuers be “insured depository institutions.” Stablecoins invest in securities; they don’t lend like banks do.  Why should a bank have to be the stablecoin sponsor when almost anyone can sponsor a money market fund—all you need is $100,000 in seed capital!  

The PWG also recommended that stablecoin issuers comply with activities’ restrictions that limit affiliation with commercial entities. This seems like an unnecessary additional burden with no obvious benefit. Money market mutual funds are affiliated with brokers, banks, and mutual fund giants, yet have no conflict-of-interest operating restrictions beyond existing regulations. They must follow money market fund regulations, which are significant enough.  

I would like to propose a clearer, more elegant and forward-thinking regulatory approach to stablecoins.  

First, allow a stablecoin to voluntarily subject itself to Securities and Exchange Commission oversight—similar to that of a fund operating under the Investment Company Act of 1940. This would mean that the SEC would oversee the safekeeping and valuation of a stablecoin’s assets. In practice, those who register would closely resemble conservative income ETFs. Treating them like ETFs addresses the regulatory concern that they may be considered bank accounts in disguise with a need to be bailed out in financial crises.

There could be an opt-in approach for a trial period of, perhaps, four years; it would not force all stablecoins to be regulated. Non-U.S. stablecoins would be allowed to operate in the United States during this trial period. Stablecoins operated from non-US jurisdictions would continue to operate as they have.

Hence, the second recommendation: Do not force tax withholding on stablecoins. Most stablecoins currently don’t pay dividends. We need, however, to imagine a day when stablecoins pay interest and plan technologically and regulatorily for that day.

U.S. mutual funds and ETFs withhold income from non-U.S. residents. This annual calculation is impractical in a world where stablecoins trade 24/7, off-shore and on-shore, on multiple platforms, and are being used for payments. European mutual funds generally do not have this tax withholding requirement which is why they dominate in non-U.S. jurisdictions like Latin America and Asia. So, in order to give stablecoins an opportunity to prove their value proposition, and to increase the attractiveness of the U.S. as the premier stablecoin regulatory regime, I suggest that stablecoins not be forced to create a tax-withholding methodology. Of course, US taxpayers would still be required to pay taxes on their income from stablecoins.   

It is an understandable concern in the crypto space that digital assets (tokens) can move quickly between safe institutions with anti-money laundering protections and the unregulated offshore world. But adding the PWG’s regulatory burden of bank regulation will not solve this problem; it will just deepen the divide between the regulated and the off-shore worlds. It seems much more prudent to have stablecoins widely available where the assets are verified, audited and regulated (but available offshore) than a bifurcated market where some stablecoins are regulated and others are offshore (with no regulatory oversight of assets). 

The primary systemic risk associated with stablecoins is the worthiness of the underlying securities, similar to assets within money market funds that collapsed during the 2007-2008 global financial crisis. Stablecoin regulation shouldn’t be asked to solve both soundness and money laundering concerns at the same time. Money laundering protections are best applied to banks and brokers, as they currently are, rather than on the vehicles, like funds, that are traded. Even regulated U.S. funds aren’t directly subjected to U.S. money laundering regulations, because they often don’t know the names of their underlying owners. In sum, offshore stablecoins will continue to thrive, resulting in market fragmentation.

It is possible that no stablecoin issuers will opt into this better designed regulatory model where they are subject to SEC oversight but not tax withholding. And regulation carries expenses; the average money market fund charges a little over 0.2%. But my proposal would allow the market to determine the value of this additional oversight. And it is better than creating regulatory requirements that treat them like banks when they aren’t.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.

Read More: What the Government’s Recommendations for Stablecoins Got Wrong, and How to Do Better

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