…Researched and contributed by Jack Sylva.
A new draft bill has been published on the House of Representatives’ document repository, providing a framework for stablecoins in the United States.
The draft, released a few days before a hearing on the topic on April 19, puts the Federal Reserve in charge of non-bank stablecoin issuers such as Tether and Circle, issuers of Tether (USDT) and USD Coin (USDC) respectively.
What Are Stablecoins?
Stablecoins are a class of cryptocurrencies that aim to provide investors with price stability.
This is achieved through being backed by specific assets or using algorithms to adjust their supply based on demand.
Stablecoins were introduced in 2014 with the release of the BitUSD.
Federal Reserve Oversight for Non-Bank Stablecoin Issuers
According to the document, insured depository institutions seeking to issue stablecoins would fall under the appropriate Federal banking agency supervision, while non-bank institutions would be subject to Federal Reserve oversight.
Failure to register could result in up to five years in prison and a fine of $1 million. Issuers based outside of the United States would also have to seek registration to do business in the country.
Factors for Approval
Among the factors for approval are the applicant’s ability to maintain reserves backing the stablecoins with US dollars or Federal Reserve notes, Treasury bills with a maturity of 90 days or less, repurchase agreements with a maturity of 7 days or less backed by Treasury bills with a maturity of 90 days or less, as well as central bank reserve deposits.
Issuers must also demonstrate technical expertise and established governance, as well as the benefits of offering financial inclusion and innovation through stablecoins.
Ban on Unbacked Stablecoins and Study on Endogenously Collateralized Stablecoins
The draft legislation includes a two-year ban on issuing, creating, or originating stablecoins that are not backed by real assets.
It also establishes that the Treasury Department would conduct a study regarding “endogenously collateralized stablecoins”.
As per the document definition, endogenously stablecoins “relies solely on the value of another digital asset created or maintained by the same originator to maintain the fixed price.”
Interoperability Standards and Federal Reserve’s Study on Digital Dollar
The draft also allows the US government to establish standards for interoperability between stablecoins.
It determines that the Congress and the White House would support a Federal Reserve study about the issuance of a digital dollar.
Commentary
The new draft bill published on the House of Representatives’ document repository could bring significant changes to the stablecoin landscape in the United States.
The proposed framework puts the Federal Reserve in charge of non-bank stablecoin issuers, with failure to register resulting in severe consequences.
The factors for approval, including maintaining reserves backing stablecoins with specific assets and demonstrating technical expertise, could make it more difficult for new players to enter the market.
The ban on unbacked stablecoins and the study on endogenously collateralized stablecoins could also have implications for stablecoin issuers.
The legislation’s provision for interoperability standards and the Federal Reserve study on a digital dollar further demonstrate the government’s interest in digital assets.