The introduction of a bill to regulate stablecoin issuers (November 30) may be too early and risks hindering innovation, experts have warned.
Last week, Democratic lawmakers Rashida Tlaib (D-MI), Jesús “Chuy” García (D-IL) and Stephen Lynch (D-MA) introduced the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act in the House of Representatives.
The bill requires stablecoin issuers to obtain a banking charter, comply with appropriate banking regulations and maintain an ongoing analysis of potential systemic impacts and risks.
It also requires stablecoin issuers to notify and obtain prior approval from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the appropriate banking agency. The FDIC insurance and reserves at the Federal Reserve would ensure “that all stablecoins can be readily converted into United States dollars, on demand.”
The proposal aims to address risks posed by emerging digital payment instruments such as Facebook’s Libra, recently rebranded as Diem, the lawmakers said in an accompanying press release.
Although the bill aims to address systematic risk, “holding aside Tether, the market caps of most stablecoins are very modest,” said Lewis Cohen from DLx Law, adding that “they do not present systemic risks to the wider banking system or general public that merit this type of approach.”
“Relatively heavy-handed regulation like the proposed STABLE Act would hinder innovation much more than it would promote safety and soundness at this time, especially for those coins like USDC and PAX that are 100 percent collateralised by deposits at major US banking institutions,” Cohen warned.
Revisiting a potential stablecoin regulation would be more appropriate “if one or more stablecoins started to become significant in scale such that a failure could have systemic implications,” he concluded.
He added that another alternative would be the inclusion of “a safe harbor threshold that would allow most major stablecoins currently trading to continue to operate in the way they currently do and provide head room for growth, while ensuring that unregulated stablecoins do not get so large as to potentially pose a threat to our financial system.”
“The push to require a bank charter (and all of the related provisions that entails) for stablecoins seems more of an attempt to control the issuers and issuance of stable coins rather than to achieve particular prudential or consumer protection objectives,” said Jean Desgagne, chief executive of Stablecorp, the company that issues QCAD, the Canadian dollar-pegged stablecoin.
“Other potential objectives of this bill could be to give regulators tools to control supply, give them better access to data concerning users and effectively eliminate any potential anonymity,…and provide more tools for them to use control of these technologies in furtherance of unrelated policy or other objectives” Desgagne continued.
Experts are also concerned that the proposed legislation would favour other industry participants to the detriment of stablecoin suppliers.
“Leaving unlicensed stablecoins as a fringe financial product, offered in other jurisdictions unlisted or on minor exchanges that can survive not being able to interact with the U.S. legal system accomplishes the goal” Nisa Amoils, lawyer and investor at A100x told VIXIO.
“This will protect the banks, while hurting projects like Tether and Diem,” she continued.
“The proposals do not seem to provide for a level playing field — it is not clear that the same rules would apply to payment and money transfer technologies, gift cards that store value, etc.” Desgagne argued.
“Forcing stablecoins under banking regulation is overkill in that regard, and is not appropriate as traditional banking rules are not ‘fit for purpose’ for those objectives,” Desgagne added.
The bill’s effort to regulate stablecoin issuers “seems to run counter” to the efforts of the Office of the Comptroller of the Currency (OCC), Amoils said.
The OCC recently clarified that banks can hold reserves for certain stablecoin service providers, thus encouraging the banking sector to collaborate with stablecoin issuers.
In November, the STABLE Act’s co-sponsors rebuked the acting comptroller of the currency for taking unilateral decisions that “have the potential to adversely affect banking and financial activities well beyond [his] jurisdiction.” The representatives asked the OCC to collaborate with the Congress and answer a list of questions related to his stablecoin approach by mid-December.
“From the OCC to the Federal Reserve to those peddling stablecoins, the protections the STABLE Act would make possible are more needed than ever amid a pandemic that will breed riskier financial decisions out of necessity because our federal government continues to fail us all by not providing adequate relief legislation,” Tlaib argued in the press release.
Also commenting on the proposed bill, Deputy Comptroller of the Currency Bryan Hubbard told VIXIO that “while there are flaws that could adversely affect the market and innovation more generally, we appreciate that Congress recognises the importance of this issue and calling for federal clarity.”
Hubbard added that they “look forward to working with the Congresswoman to help her refine policy in this area.”