What Stablecoins Could Become | Nasdaq
IIdentifying the ideal path to regulatory compliance for a stablecoin has been difficult. US regulators have taken a much more active interest in the industry, although it’s not entirely clear what they will want the stablecoins to be.
US Treasury Secretary Janet Yellen has warned of the risks that stablecoins pose to the financial system and national security.
“Depending on its design and other factors, a stable coin may constitute a security, commodity or derivative subject to U.S. federal securities, commodities and / or derivatives laws,” she said in a statement. press release which certainly leaves a certain ambiguity. But regulators should however clarify their intentions in the coming months.
Bennett Tomlin, in his personal time, is a blogger and podcaster interested in stablecoins. This editorial is part of CoinDesk Policy Week, a forum to discuss how regulators count with crypto (and vice versa).
Opinions on the appropriate regulatory response to stablecoins vary from integrating these fiat-anchored digital assets into a money-transmission framework to treating issuers as banks. Some regulators think there shouldn’t be a place for stablecoins. Despite the disagreement and uncertainty around stablecoins, it’s clear that the $ 130 billion market has caught the attention of powerful people.
The chairman of the United States Securities and Exchange Commission, Gary Gensler, has suggested that “coins of stable value” could be securities. It seems clear that he is trying to tie them to stable value funds, a fund design over which the SEC already claims jurisdiction. If stablecoins, or at least stablecoins backed by non-monetary assets, are securities, they will no longer be useful for the things they are now. It seems unlikely that they will be able to continue to move and trade unhindered through global networks resistant to censorship.
Some cryptocurrency companies have taken a proactive approach to finding existing regulations that they believe more adequately cover what their stablecoin would do. Avanti – a special-purpose depository institution, which is a bank with only a state charter, a classification that was created under new Wyoming law – appears to believe that the Uniform Commercial Code, which dictates (in part ) standards for tickets, would allow for the issuance of a “digital ticket”. If its token is considered a banknote, then it will be exempt from the regulations as collateral. It may also be part of the reason why digital asset company Paxos has a banking charter and payments company Circle wants one.
The Office of the Currency Controller has issued guidelines that make it clear that banks are allowed to use stablecoins in the course of their normal business, including payments, and that they may hold stablecoins reserves. This suggests that stablecoin issuers may look like banks.
However, it can be difficult for deposit-taking institutions like Avanti to access the Federal Reserve’s main accounts. Narrow Bank, a previously proposed bank that would have parked its funds at the Federal Reserve and then passed higher interest rates on to depositors, has not been able to gain such access so far. Avanti and the Kraken crypto exchange have both requested access to the Federal Reserve and so far neither has been accepted. Lack of access to the Federal Reserve’s payment rails would make it more difficult to run a stablecoin or force Avanti and Kraken to rely on other service providers who have access to the Fed through banks federally chartered.
A new piece of legislation known as the STABLE Act would create a framework for stablecoins and other money transmitters where they would be required to keep all of their reserves at the Federal Reserve. In a framework like the STABLE Act, there is a much better path to a narrower stablecoin issued by a bank.
There may still be significant legislative, regulatory and policy obstacles associated with the effective creation of a new type of bank. Furthermore, the STABLE Law is not limited to what cryptocurrency circles consider stablecoins, but would likely involve a wide range of money transmitters and could even make a difference for companies like PayPal.
But it’s not just issuers who see the banking system as a model. Federal Reserve officials, such as Fed attorney Jeffery Zhang in his article “Taming Wildcat Stablecoins,” have proposed integrating stablecoin issuers into the broader banking regulatory framework. While the Federal Deposit Insurance Corp. (FDIC) is reportedly studying how to extend deposit insurance to stable coins to help protect users. Meanwhile, the Biden administration has said it believes the stablecoin issuer is at least “bank type”.
The Digital Asset Market Structure and Investor Protection Act outlines a process in which every stablecoin issuer must apply to the Treasury, in which case the Treasury checks with the Federal Reserve, SEC, Commodity Futures. Trading Commission and banks and decides whether or not to approve the stablecoin.
If this legislation is passed (it is now in committee in Congress), then any unapproved stablecoin – including any digital asset indexed or significantly guaranteed by fiat currency – would then be illegal. The bill, however, provides a path for approved stablecoins to avoid being viewed as security.
It’s hard to say exactly how all of this will play out. My hunch is that a new type of banking charter will be created that will allow stablecoin issuers to access the Fed’s main accounts and stablecoins will be expected to maintain their reserves there. It also seems reasonably likely that the Treasury will get what it wants and stablecoin issuers will need to register with the Treasury. I expect securities regulation to be part of the club that will be used to ensure that the only stablecoins are “approved” stablecoins.
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The end result of this will likely be that any stablecoin issuer that wishes to continue operating would have to become a bank and have much less flexibility with what it can do with its reserves. Those who choose not to register or are not approved are likely to have difficulty accessing the US banking system. They may struggle to manage buybacks and may even be aggressively pursued by regulators.
The effect on the average crypto user is likely a degradation of their experience using stablecoins. However, there will be much greater certainty in the support and security of the token, and regulators will no longer have to worry that this is an existential financial risk. Indeed, the government can take the private money that are stablecoins and integrate it into banking regulations so that it can be guaranteed by the state.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.