Proposed regulation could change the stablecoin ecosystem at a fundamental level, so it is worth taking a look at what exactly this proposed legislation includes.
As 2020 concludes, there is a piece of proposed legislation that – if introduced as currently written – could alter and potentially curtail the rapidly growing and developing stablecoin sector. Introduced by several lawmakers, the STABLE Act was, according to the lead supporters of the legislation, written with the intent to prevent abuse, opacity, and the potential rise of a stablecoin-based shadow-banking system. These are certainly worthy objectives, but the specifics of how these objectives would be achieved – via the specific clauses in the Act – almost immediately generated protests from the broader blockchain and crypto community.
Taking a look at the proposed Act itself, the specific obligations that stablecoins issuers would have to abide by in order to avoid violating the law include the following.
Firstly, any stablecoin issuer would need to obtain a federal banking charter, going above and beyond compliance with state regulations and/or money transmitter laws. Secondly, any issuer would have to be in full compliance and fulfillment of existing banking regulations. These regulations exist for a reason, but the cost and complexity of these regulations might tend to favor incumbents versus new entrants. In addition, any stablecoin issuers would be required to obtain the approval of both the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) six months before issuance. Lastly, the stablecoin issuers themselves – as opposed to working with financial institutions who have FDIC coverage – would either need to obtain FDIC insurance, or deposit dollar reserves directly at the Federal Reserve.
Some of the commentary and feedback around this proposed legislation centers around two primary points. Firstly, is that this act seemed explicitly to focus on non-incumbent and start-up institutions, as opposed to larger players that have recently begun accepting and using stablecoins as a medium of exchange. Specifically, the bill does not seem to focus on non-bank dollar liabilities in general, but only liabilities that are defined as stablecoins. Second, the complexity, cost, and time required to be in full compliance with these additional rules – above and beyond the money transmitter and other state specific legislation already being enforced – could serve as a significant headwind to future stablecoin development.
Especially as the stablecoin sector continues to grow so rapidly, and so globally, the risk that other jurisdictions might enact more crypto friendly legislation to take advantage of this fast growing marketplace is very real.
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With all of that said, there are a few things to keep in mind as the debate around the STABLE Act continues.
The legislation is pending. Some would argue that even having this legislation being proposed is a negative trend, but instead this should be seen as a sign of the maturation of the cryptoasset sector. It is worth remembering that while nearly 30 blockchain and crypto bills were proposed and/or debated by the U.S. Congress during 2020, no substantive legislation has passed as of this writing. For better or worse, the passage of blockchain or cryptoasset legislation does not seem to be a priority for federal lawmakers.
That said, engaging with lawmakers and the policy making process is an imperative for all major stablecoin players, and it is encouraging to see that many of the larger organizations in the space have been more engaged in the law making process since 2017.
The STABLE Act highlights CBDCs. Although not explicitly stated anywhere in the proposed legislation, the end effect of this legislation would be – in essence – the gradual phasing in of central bank digital currencies (CBDCs) versus purely private options. The shift and development toward more centralized cryptocurrency options is already well underway, and legislation of this type will only accelerate this pivot. Some argue that that a CBDC – being issued and governed by a central government of central – does not represent true cryptocurrency, but ignoring this trend is an overly simplistic approach.
No development happens overnight, and stablecoin organizations – in whatever capacity – will have an integral role to play in the further maturation of cryptoassets.
Price should not be the focus. The writing of this legislation, at least to some extent, was in part driven by the rapid increase in crypto prices that has occurred in 2020. Especially in the current environment, with economic and societal inequalities already being widened due to COVID-19, focusing on price increases may not always be conducive to wider acceptance and understanding. Instead, focusing on and highlighting the benefits achievable by all users of cryptocurrencies in terms of lower costs, faster transactions processing, and more transparency overall, should be the focus of crypto advocates.
Encouragingly, these seem to be the very areas that the respondents to the STABLE Act have been focusing on so far.
Regulation and legislation is never perfect at first, just like no idea arrives fully formed and ready for implementation. That said, the writing and proposing of this legislation should serve as a wake up call to stablecoin issuers and the cryptoasset sector at large. Working with, collaborating with, and educating lawmakers and the business community at large are shaping up to be a central theme of 2021 for blockchain and crypto sector advocates.