US Turns Attention to Stablecoin Regulation

With the White House at the forefront of cryptocurrency regulation thanks to the efforts of Senator Patrick Toomey, the U.S. continues to be a global leader in the cryptocurrency industry. Last year, U.S. President Joe Biden signed a $1.2 trillion bipartisan infrastructure bill that included some new legislation affecting the crypto industry. Most recently, the U.S. president announced a “whole-of-government” approach to regulating cryptocurrencies in a sweeping executive order, ordering multiple government agencies to answer specific questions about cryptocurrencies. Over the past year, the U.S. has apparently been seeking help to make the cryptocurrency industry more sustainable, which would greatly simplify the operations of cryptocurrency platforms.

The Stablecoin Reserve Transparency and Uniform Secure Transactions Act of 2022 (the Stablecoin Trust Act for short) makes the U.S. likely the only country, or at least the only one, to fully regulate and accept stablecoins as an official part of the financial and banking system of Western countries.

The Stablecoin Trust Act, introduced by Senator Patrick Toomey, the ranking member of the Senate Banking Committee, would force stablecoin issuers to abide by certain rules. The bill sets sweeping rules and clarifies that payment stablecoins are not securities, which is a good thing for the industry. The bill also refers to stablecoins as “payment stablecoins” — digital assets that are “directly convertible by the issuer into fiat currency” and that are “stable in value relative to fiat or other currencies.”

Stablecoin issuers will have to choose between obtaining an Office of the Comptroller of the Currency (OCC) license, a state currency issue agency or similar license, or a traditional banking license. Issuers of stablecoins operating in the U.S. would be subject to a disclosure regime that would require them to conduct periodic audits, detail clear redemption policies, and specify what equivalents are actually backing the stablecoins they issue.

Does the U.S. Need a Central Bank Digital Currency?

As the discussion draft of the bill circulates in Congress and gets feedback, I pose a question: If the bill becomes law, will the U.S. government still need to develop a central bank digital currency (CBDC), or a so-called “digital dollar”?

If private stablecoin issuers are recognized by the wider financial system, it seems unnecessary for the United States to develop a digital dollar. Does the government need to have both private and public digital dollars, one issued by the provider and the other issued by the federal government? The answers to these questions will become clearer in the coming months as U.S. regulators continue to address them.

But apparently, parts of Biden's executive order include "urgency for research and development of a potential U.S. CBDC that should be deemed to be in the national interest," according to an accompanying briefing note released by the White House.

For the first time in history, a country will allow both privately-issued and government-issued stablecoins to operate in the same market. Some countries have banned private stablecoins because they want to promote their own CBDCs, but the US has taken a different route that could spur major innovation in the stablecoin industry and, of course, make it more transparent and sustainable. But there are also many problems, which may have serious consequences.

Rates to be capped – expect consolidation

The Stablecoin Trust Act dictates which assets can back dollar-pegged stablecoins, namely cash with incredibly low interest rates, and Treasury bills with not much better interest rates. This creates a major problem for both current stablecoin issuers and future participants, as they cannot earn higher interest on riskier assets.

Currently, certain stablecoin issuers back most tokens by paying higher commercial paper, which cannot be valued without greater transparency and auditing. According to data from USDT stablecoin issuer Tether on March 31, 2021, more than 65% of its reserves are backed by commercial paper, only about 4% are backed by cash, and about 3% are backed by short-term government bonds. Therefore, if the Stablecoin Trust Act becomes law, Tether and other stablecoin providers will have to completely change the composition of their reserves to comply with the Act.

Competition in the stablecoin industry may slow down and we may see some consolidation. Since stablecoin issuers will not be able to use higher paying assets to generate high interest, they will have a hard time achieving profitability while managing compliance risk, HR taxes, and general administrative costs.

Larger players will likely find a way to gain a foothold, but smaller stablecoin issuers will find it difficult to turn a profit if the bill becomes law.

Let's Pass the Stablecoin Trust Act

While the Stablecoin Trust Act may present some hurdles for new players in the stablecoin industry, I believe it will make the stablecoin industry more transparent and sustainable. Mandatory disclosure and redemption requirements for USD stablecoins will make them more secure and transparent in the future.

The biggest advantage of the Stablecoin Trust Act is that it really brings stablecoins into the traditional U.S. financial system. Issuers licensed by the OCC will have access to the Fed's master account system, which will allow them to leverage the broader financial system and greater liquidity in their transactions. It will be a while before the Stablecoin Trust Act becomes law, let's work together to make sure it becomes law.

Cointelegraph Chinese is a blockchain news information platform, and the information provided only represents the author's personal opinion, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. Readers are requested to establish correct currency concepts and investment concepts, and earnestly raise risk awareness.