The United States Congress has proposed a new draft bill for stablecoins. The bill sets out a framework for the regulation of non-bank stablecoin issuers. Two of the biggest companies that will be affected by the bill are Tether and Circle. The draft gives the Federal Reserve the responsibility for overseeing such issuers and makes it mandatory for stablecoin issuers to register. Moreover, failure to register could lead to imprisonment for up to five years and a fine of $1 million.
For your information, stablecoins are cryptocurrencies designed to offer investors price stability. These coins are pegged to fiat currencies such as the US Dollar. However, there are some stablecoins that are stabilized through algorithms – algorithmic stablecoins. The new bill would require insured depository institutions seeking to issue stablecoins to come under the supervision of the appropriate federal banking agency. Additionally, it would make non-bank institutions subject to Federal Reserve oversight.
Because of the lack of regulations, the draft bill also proposes a two-year ban on stablecoin issuing activity. This includes issuing, creating, or originating stablecoins that are not backed by tangible assets. If the bill passes, the U.S. Department of the Treasury will be responsible for conducting a study on “endogenously collateralized stablecoins” that rely on the value of another cryptocurrency. For this study, the cryptocurrency involved must be created or maintained by the same originator to maintain the fixed price.
Stablecoin Bill Calls For Technical Expertise And Established Governance
Moving on, the new proposed bill calls for issuers to provide technical expertise for the issued stablecoins. Moreover, they need to establish governance as well as the benefits of offering financial inclusion for everyone. Every issuer should, in one way or the other, provide a demonstration of why the issued stablecoin is innovative as well.
Among the main factors for approval is the ability of the applicant to maintain reserves backing the stablecoins. The applicant must back the stablecoin with:
- U.S. dollars
- Federal Reserve notes
- Treasury bills (maturity of 90 days or less)
- Repurchase agreements (maturity of seven days or less backed by Treasury bills with a maturity of 90 days or less)
- Central Bank Reserve Deposits
While these requirements might seem harsh, they look reasonable from a financial point of view. We have seen how big of a problem insolvency is, especially in the crypto sector. However, these requirements are prone to minor or major changes as the bill matures and evolves until it is potentially passed.
Circle’s CEO Supports The New US Stablecoin Bill
Jeremy Allaire, the CEO of Circle, a stablecoin issuer in the United States, has expressed support for the bill. He stated that it is extremely important that the “digital dollars” issued through crypto are safely issued, operated, and most importantly, backed. Circle’s CEO expressed some interesting opinions back in January 2023, when he stated that the SEC is not the right institution to oversee and regulate stablecoins. Most of the crypto community agreed with him, however.
On the other hand, Tether, the issuer of USD Tether (USDT), the biggest stablecoin in the market, has yet to officially comment on the proposed legislation.
The draft bill also mentioned interoperability standards. If this bill passes, the U.S. would establish standards for interoperability between USD stablecoins. This would require the U.S. government to work on its issue of the official digital dollar. Moreover, the digital dollar is likely to be issued and operate as a central bank digital currency (CBDC).