Cash: Instant Payments, Stablecoins top the list

After six months of work, the US Treasury Department has released a trio of reports on cryptocurrency policy, and instant payments are the order of the day.

In the first of these, “The Future of Money and Payments”, the government examined both the current state of payments and recent innovations, including real-time payment tools as the future Federal Reserve’s FedNow system and the Clearing House’s RTP network, as well as the potential innovations that cryptocurrency stablecoins could bring.

He also discussed the current international movement towards the creation of central bank digital currencies (CBDCs), taking a firm stance that amounts to “We’ll think about it”.

Although the report began by noting that “the current U.S. monetary and payments system has substantial strengths [having] backed by over a century of American economic and financial leadership” and is “capable of processing an enormous volume of transactions efficiently and reliably” while users “benefit from the protection of privacy”, he points out several shortcomings .

Specifically, these are legacy payment systems that “can be slow, difficult to adapt, and difficult to access for some consumers or businesses.” And, especially given a large underserved population, there is plenty of room to improve financial inclusion.

Instant payments

Instant payments systems like FedNow and the RTP network have several advantages, the report says, including preserving the current system while offering more efficient tools, as well as potentially improving inclusiveness.

He offered several recommendations on how to make it more effective by accelerating its adoption.

First, he suggested expanding “the range of institutions eligible to participate [and] the number of institutions that choose to participate,” noting that only depository institutions insured by the Federal Deposit Insurance Corporation are currently eligible to participate in RTP, while FedNow will be available to all depository intuitions, as well as banks companies operating in the United States – although it does not handle cross-border payments.

However, expanding the range of eligible financial institutions (FIs), as some foreign jurisdictions have done, could increase speed, efficiency and inclusiveness.

Stable Coins

The second is a cryptocurrency innovation, dollar-pegged stablecoins, which “aspire to be a new type of currency backed by new payment technology” but pose greater risks than existing instant payment systems. or incoming, as well as potential system impacts that the Treasury Department said were difficult to predict.

Besides their growing use – or at least the expected growing use – in traditional payments outside of the crypto commerce sphere, there are anti-money laundering (AML) and anti-funding issues. of terrorism (CFT), especially among global stablecoins.

Then there are the “algorithmic” stablecoins that aren’t backed by stable assets like cash or treasuries that have lost their peg to the dollar, most notably the run that led to the collapse of 48 billion dollars from the Terra/LUNA stablecoin ecosystem in May.

“Poorly designed or insufficiently regulated or supervised stablecoin arrangements – including issuers and custodial wallets – can introduce or amplify risks to the financial system, consumers and investors, and illicit finance,” the report notes. .

See also: More Stablecoin Collapses Fuel Credibility Issue

There is a broad consensus in Congress that only stablecoins that are 100% backed by cash and highly liquid reserves should be allowed.

However, the report did not include anything about stablecoins in the recommendations section.

Recommendations

On the instant payments front, the report did not suggest anything specific other than to say that the results of real-time payment systems in other countries have been encouraging and that the government should support their expansion and deployment.

Generally speaking, the Treasury Department wants a clear regulatory framework that would support innovation.

First, he called for a greater focus on financial inclusion for the unbanked and underbanked, on expanding consumer access and use of instant payments, and on the functioning of systems across borders.

Second, the government should encourage the interoperability of these systems and possibly create “public-private partnerships to explore opportunities for access to low-tech instant payment systems.” He also suggested that government agencies support the use of instant payment systems in a wide range of areas.

Third, the report states that government policy should be to encourage the “participation of non-bank payment companies”, but with a strong regulatory and supervisory regime, consumer protection and AML/CFT oversight.

One potential area of ​​conflict with Congress is the report’s recommendation for federal oversight of these nonbank payment companies, stating that “State oversight of nonbank payment providers varies widely and is generally not designed to address travel risk, payment risk or other operational risk in a consistent and comprehensive manner. »

He touted this as providing “a common floor for minimum financial resource requirements and other standards,” but nonetheless could face the kind of backlash that the department’s recommendation that only FDIC-insured institutions be authorized to issue stablecoins.

Read also: An introduction to US stablecoin regulations

Finally, he called for more emphasis on cross-border payments, but again, largely with generalities.

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