How to weigh the pros and cons? Interpretation of the latest US stablecoin regulation bill

U.S. lawmakers have proposed a new bill called the Stablecoin Network Sharing and Bank Charter Enforcement Act, which would require stablecoin issuers to obtain a banking charter and obtain regulatory approval before issuing stablecoins.

The bill was introduced by U.S. Representatives Rashida Tlaib (Michigan), Jesús “Chuy” García (Illinois) and Stephen Lynch (Maryland), who noted that the bill would focus on regulating stablecoins, especially the Facebook-led Libra stablecoin project (now renamed Diem), and proposed a number of regulatory requirements, including:

1. Stablecoin issuers must obtain a banking license;

2. Stablecoin issuers must obtain approval from the Federal Reserve, the Federal Deposit Insurance Corporation, and banking regulators before issuing stablecoins;

3. Stablecoin issuers must conduct continuous analysis of all systemic risks;

4. Stablecoin issuers must purchase insurance from the U.S. Federal Deposit Insurance Corporation and maintain sufficient reserves to easily exchange for U.S. dollars.

The 18-page Stablecoin Network Sharing and Banking License Enforcement Act states:

“The permanent anchoring (or stabilization) of digital currency prices to traditional fiat currencies such as the U.S. dollar will present new challenges in terms of regulation and will also lead to increased market, liquidity and credit risks.”

It is reported that the bill applies to stablecoins that are pegged to the national currency (US dollar) and the currencies of other countries.

Rohan Grey, assistant professor at Willamette University School of Law, believes that the Stablecoin Network Sharing and Banking License Enforcement Act actually defines deposits "based on digital currency forms". In his view, stablecoins are actually a form of deposits native to the Internet. Rohan Grey explained:

“Any service provider or entity that wants to issue money or deposits, etc., should be regulated in the same way as a financial institution that provides deposit services.”

It is worth mentioning that the sponsors and co-sponsors had previously sent a letter to Brian Brooks, acting director of the U.S. Office of the Comptroller of the Currency, questioning the regulator's focus on the digital asset field. Lawmakers then sent an explanatory letter to banks that provide custody services for stablecoin issuers and other cryptocurrencies.

In July, the U.S. Office of the Comptroller of the Currency opened the door for federal savings associations and national savings banks that want to hold cryptocurrencies on behalf of their clients. The regulator issued a notice on July 22, allowing national banks and federal savings associations of all sizes to custody cryptocurrencies, stating that such custody services are a "modern form" of traditional banking activities related to custody services.

What impact will the new bill have on the cryptocurrency industry?

Rashida Tlaib said that the main reason for introducing this bill is to prevent cryptocurrency service providers from committing crimes against low- and middle-income residents and to better protect individual investors. So far, many stablecoin issuers in the United States have not obtained banking licenses, such as the CENTER consortium formed by Circle and Coinbase, Gemini Exchange and Paxos, as well as algorithmic stablecoins such as Basis.Cash, and collateralized stablecoins such as DAI.

However, the cryptocurrency industry does not seem to support the new bill. For example, Circle CEO Jeremy Allaire said that if the bill is passed, it will limit innovation and cause the cryptocurrency industry to take a big step backward. He explained:

“Non-bank fintech companies have provided a huge boost to many underfunded small businesses, but the new bill will force cryptocurrency companies, fintech companies, and blockchain companies to bear the huge regulatory burden of the Federal Reserve and the Federal Deposit Insurance Corporation. This is inconsistent with our goal of financial innovation. In stablecoins and stablecoin-based payment methods, we hope to support innovation in a fair and inclusive manner. More effective stablecoin regulatory methods may come from other types of regulation.”

Kristin Smith, executive director of the Blockchain Association, is also very opposed to the new bill. He said:

“While we have had ongoing and constructive discussions with Representative Rashida Tlaib’s office on stablecoins, we disagree with the legislation and oppose it because it would continue to strengthen the position of large financial institutions while ignoring two core promises of decentralized networks: 1. Putting more power in the hands of individual consumers; 2. Fostering innovation in payments and other financial services.”

In contrast, Christine Smith believes that the stablecoin guidance of the U.S. Office of the Comptroller of the Currency is an "example of progress." According to Jonathan Gould, senior deputy comptroller and chief counsel of the U.S. Office of the Comptroller of the Currency, the regulator has actually been studying the cryptocurrency industry since 2018 (or even earlier). In addition to allowing banks to directly provide custody services for cryptocurrencies, they have also opened the door to crypto companies to provide services, but banks are unlikely to start providing these two services immediately because banks still need to ensure that they have appropriate risk management practices, otherwise they must ensure that they are legally prepared before they can actually provide these services.

The Office of the Comptroller of the Currency of the United States believes that institutions that have long been engaged in safe deposit and custody activities can provide cryptocurrency custody services, which is a form of authorization that allows national banks to perform traditional banking business electronically, including both fiduciary and non-fiduciary capabilities. Banks that provide cryptocurrency custody in a non-fiduciary capacity are essentially providing management for cryptographic keys to control and transfer customer cryptocurrencies.

The Office of the Comptroller of the Currency oversees nearly 1,200 U.S. banks, U.S. federal savings associations, and branches of overseas banks in the United States, which operate up to 70% of banking business in the United States. The agency's positive attitude towards the cryptocurrency industry is very important for market development, mainly in two aspects:

First, the Office of the Comptroller of the Currency is actually signaling to banks that stablecoin activities are legal and that reserve accounts will receive the same federal protection as any other account. This may encourage banks to actively seek stablecoin business and thereby expand their customer base and their share of the crypto market.

Second, since one of the main use cases for stablecoins right now is to earn returns from decentralized financial platforms, this may be the incentive that traditional finance needs to start looking at the innovations that are taking place in blockchain financial applications with an open mind. New savings products can attract new customers, which in turn can accelerate the transformation of the traditional banking industry, which may also encourage new stablecoin issuers to innovate further.

The current U.S. congressional session will end in a few weeks. At present, it seems that the Stablecoin Network Sharing and Banking License Enforcement Act is likely to be re-proposed at the beginning of next year. As for what further developments will occur in this matter, let us wait and see.

Part of this article is compiled from Yahoo Finance