What’s in the House Financial Services Committee’s Stablecoin Bill?

The House Financial Services Committee has finally unveiled its stablecoin legislation, proposing a framework for stablecoin issuers like Circle and Tether to define how their offerings can be regulated by state and federal entities, while also calling for a temporary ban on algorithmic stablecoins.

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The House Financial Services Committee (finally) published a long-awaited discussion draft of the stablecoin bill. In short, the bill would create categories of stablecoin issuers, whether they are banks or non-bank entities; push for a temporary ban on algorithmic stablecoins, and call for a study of the potential impact of a central bank digital currency.

The stablecoin bill has long been rumored as a piece of bipartisan legislation with genuine support from Reps. Maxine Waters (D-Calif.) and Patrick McHenry (RN.C.), then chair and ranking member of the House Financial Services Committee (they switched titles after Republicans secured a majority in the House of Representatives). Especially after last year’s terraUSD collapse, the bill seemed to have momentum and interest while focusing on a specific sub-sector within the broader crypto industry.

The bill creates a definition for “payment stablecoin issuers,” which refers to companies behind any stablecoin that is used specifically for payments or settlements. The issuers themselves must be a state or federally licensed entity, and may either be insured depository institutions (or a subsidiary of such entity) or an approved non-bank entity. Issuers will also have to allow users to redeem their stablecoins within one day of users requesting a redemption.

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Companies hoping to obtain a license to issue stablecoins must apply to the appropriate regulator, whether at the state or federal level. The regulator will have 45 days to confirm it has everything it needs, and a further 90 days to make a decision. If the regulator does not make a decision, the application will automatically be approved. The regulator will also post the application for public comment.

One of the factors a regulatory authority must consider is “The applicant’s ability to maintain reserves that support its stablecoins on at least a one-to-one basis, with reserves consisting of – (i) United States coins and currency (including Federal Reserve notes and circulating notes of Federal Reserve banks and national banks); (ii) T-bills with a maturity of 90 days or less; (iii) repurchase agreements with a maturity of 7 days or less that are backed by T-bills with a maturity of 90 days or less; or (iv) central bank reserve deposits.”

So right out of the gate the implications are significant. As Bennett Tomlin points out that the issuer of the world’s largest stablecoin, Tether, would have trouble allowing USDT to circulate in the United States as the bill is currently drafted.

In a statement, a Tether spokesperson said: “We remain hopeful that stablecoin regulation will provide much-needed clarity for larger businesses, institutions and fintech companies looking to enter the crypto market. As financial regulators address the risks of stablecoins, they articulate the larger goal of modernizing our payments system and increasing access to the financial system. We believe greater regulatory clarity will benefit the digital token economy.”

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The next few pages of the proposed bill address various requirements that stablecoin issuers must comply with. They seem quite simple – customer protection rules, risk management, capital requirements rules, supervisory provisions.

A stablecoin issuer that does not obtain a license to operate can face fines as high as $100,000 per day.

Things get really interesting on page 64, Section 106, which calls for a two-year moratorium on “endogenously secured stablecoins” that don’t already exist, referring to stablecoins that are backed by other digital assets or use some other mechanism to maintain their value.

Under this moratorium, the Treasury Secretary, the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board must study these stable coins, with the report due within one year of the bill’s passage.

Another section calls for a study on “the potential impact” of a central bank digital currency (CBDC), or digital dollar, on the Fed’s monetary policy tools, the US financial sector, the banking sector and financial stability, as well as on payment services. The Treasury Department, along with the various regulators, must report to the Financial Services Committee, as well as the Senate Banking Committee, the results of this study within 180 days.

A spokesperson for McHenry said the version that was published is the same version that circulated internally among lawmakers last fall. That version does not appear to have been previously published.

A spokesperson for Sen. Sherrod Brown (D-Ohio), the chairman of the Senate Banking Committee, said today’s stablecoins “put people’s money and the financial system at risk” in a statement.

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“They are not used for payments – they are used for speculation. Senator Brown continues to look closely at all the different approaches his colleagues have advanced and is speaking with the regulators. He is committed to putting consumers and the safety and soundness of our financial system first,” the spokesperson said.

It’s that time of year again folks. CoinDesk’s Consensus 2023 will be held on 26-28 April in Austin, Texas. I will moderate four sessions: one-on-one discussions with Coinbase’s Paul Grewal, NYDFS’ Adrienne Harris and CFTC’s Christy Goldsmith Romero, and a panel with House Financial Services Committee Chair Rep. Patrick McHenry and Senator Cynthia Lummis. As always, I’m interested in what you’re interested in: If you have any questions for any of these speakers, email me, subject line “Consensus 2023 Questions,” and I can ask the best on stage

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