Pending Legislation Provides Hopeful Signs for a Stablecoin Regulatory Regime
It has been a truism for years that the current U.S. regulatory framework is ill-equipped to deal with cryptocurrency and other digital assets, and Congress has been awash in potential cryptocurrency bills of all kinds. Although any major regulatory overhaul is unlikely in an election year, there are promising signs that legislation may soon provide certainty, at least in one specific arena in significant need of reform—stablecoins.
The Financial Stability Oversight Council and the President's Working Group on financial markets have identified the need for stablecoin legislation to close a regulatory gap, a course of action supported by both Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen. The existence of such a gap was further illustrated by the District of D.C.'s decision in June that BUSD, a Binance-offered stablecoin redeemable on a one-to-one basis for U.S. dollars, is not an "investment contract" under the controlling Howey test, because purchasers would not expect to share in investment returns. S.E.C. v. Binance Holdings Ltd., 2024 WL 3225974, at *25 (D.D.C. June 28, 2024); see S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298 (1946).
The House of Representatives' attempt to close this gap comes in the form of H.R. 4766, the Republican-backed Clarity for Payment Stablecoins Act of 2023, sponsored by Rep. Patrick McHenry [R-NC]. It passed the House Financial Services Committee on July 27, 2023. That passage was contentious, as McHenry and the committee's ranking Democrat, Rep. Maxine Waters [D-CA] blamed each other for a negotiation stalemate, and the bill has not progressed to a full House vote. Forward progress has resumed, however, with the bipartisan Senate Lummis-Gillibrand Payment Stablecoin Act, S. 4155, introduced April 17, 2024. The two bills share some fundamental premises; first, that stablecoins must be backed by a reserve, and second, that any stablecoins must be issued by a licensed and regulated custodian.
The Lummis-Gillibrand bill entirely prohibits (and the House bill would place a two-year moratorium on) so-called algorithmic stablecoins, which use an algorithm to manipulate the supply and demand of digital assets in an attempt to maintain the stablecoin's value, without the need for a reserve of non-digital assets. The necessity of this provision was illustrated by the collapse of algorithmic stablecoin TerraUSD in May 2022, causing contagion across the cryptocurrency industry. Both pending bills reject this algorithmic approach and instead require stablecoins to be backed on a one-to-one basis by acceptable non-digital reserves (such as U.S. currency, Treasury bills, or deposits at an insured depository institution). Both bills further require strict segregation of those reserves and prohibit pledging or rehypothecating them.
The Lummis-Gillibrand bill attempts to resolve the partisan dispute over the interaction between state and federal regulation which tripped up the House Financial Services Committee, preserving the dual banking system and providing a role for both levels of regulation. Stablecoins may be issued by state non-depository trust companies (i.e., non-banks), up to a value of $10 billion, to be adjusted for inflation. Such trust companies must use a depository institution to hold their reserves and must register with the Federal Reserve, which is directed to consult with state bank supervisors for rulemaking around registration. The Federal Reserve and state would be required to act jointly to bring an enforcement action against a trust company. Alternatively, a bank may charter a subsidiary depository institution to act as a stablecoin issuer, without the $10 billion cap. Either the Federal Reserve or the state could take enforcement action against the depository institution. In all cases, the FDIC would oversee receivership.
Finally, both the House and Senate bills provide that digital assets held in a custodial account should be held off-balance-sheet, another provision with general bipartisan agreement. Issues remain to be resolved, in particular, details around Anti-Money Laundering provisions. However, this most recent pair of bills seems to indicate that Congress is converging on both the need for and general parameters of bipartisan stablecoin legislation.
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