On February 15, 2022, House Financial Services Committee member Rep. Josh Gottheimer (D-NJ) released a discussion draft of a bill (the “bill”) that would create bank-like regulation for stablecoin issuers. (We covered an earlier draft of this bill in our recent post.)
Rep. Gottheimer said the bill, titled the Stablecoin Innovation and Protection Act of 2022, is designed to encourage innovation in cryptocurrency, provide “direction and certainty to the marketplace” and protect Americans from “bad actors like predatory entities and terrorists.” Rep. Gottheimer’s press release also said the bill would help reduce systemic risk in the financial system. (Similar concerns have been discussed in recent congressional hearings—for example, see our post on the recent House Financial Services hearing.)
More Refined Definition of Stablecoin
As described in the press release, the new version of the bill distinguishes certain “qualified stablecoins” from “more volatile cryptocurrencies.” The bill defines “qualified stablecoin” as a stablecoin that is “redeemable, on demand, on a one-to-one basis” for U.S. dollars and is issued by an insured depository institution or a “nonbank qualified stablecoin issuer.”
Whereas the prior definition of “stablecoin” would have included any cryptocurrency or other privately-issued digital financial instrument that is “collateralized” on a one-to-one basis by U.S. dollars,[1] the revised definition is a more nuanced definition that recognizes that stablecoins need not contemplate formal “collateralization” arrangements.
New Opt-In Approach
As under the prior version of the bill, qualified stablecoins would be deemed not to be securities or commodities for purposes of state and federal securities and commodities laws. But whereas the earlier draft of the bill would have made it unlawful for any person to issue a stablecoin unless that person was an insured depository institution or nonbank qualified stablecoin issuer, the new version of the bill would appear to allow nonbank stablecoin issuers to elect to be regulated under a new regulatory framework for nonbank qualified stablecoin issuers.[2]
An opt-in approach raises new questions, particularly when read in conjunction with the revised definition of “qualified stablecoin,” which refers to any “privately-issued digital financial instrument.” Although the prior version of the bill clearly was not intended to alter the regulatory landscape for money market mutual funds, a broad reading of the phrase “privately-issued digital financial instrument”[3] could be read to allow issuers of such funds to opt-in to an alternative regulatory regime that would benefit from a federal safety net (in the form of the Qualified Stablecoin Insurance Fund).
Requirements for Nonbank Issuers
As under the prior version of the bill, nonbank qualified stablecoin issuers would be required to meet certain conditions, including a requirement to hold collateral in U.S. dollars[4] or in federal government securities (or other assets to be determined), in each case equaling 100% or more of the value of the stablecoins the nonbank has issued. The bill also would create a new Qualified Stablecoin Insurance Fund administered by the Federal Deposit Insurance Corporation that would parallel deposit insurance for insured depository institutions, and in which nonbank qualified stablecoin issuers would be required to participate (including by paying assessments).[5]
Nonbank stablecoin issuers also would be subject to leverage ratio, auditing, redemption and liability management regulations to be drafted by the Comptroller of the Currency, as well as standards that are new to the current draft of the bill regarding investor disclosures, Bank Secrecy Act compliance (including its beneficial ownership identification and verification requirements), and standards regarding an orderly liquidation process in lieu of bankruptcy.
Notably, in a change from the earlier draft of the bill, the Comptroller of the Currency (the head of an independent branch of the U.S. Department of the Treasury that regulates national banks and federal savings associations), not the “Treasury Department” generally, would supervise and examine nonbank qualified stablecoin issuers.
Finally, the bill would require the Comptroller of the Currency to issue a rule that establishes interoperability requirements for qualified stablecoins (the prior draft of the bill had this section reserved).
For additional background, see:
- House Financial Services Hearing Regarding the PWG Report on Stablecoins
- More Policymakers Encourage Bank-Like Stablecoin Regulation
- What the Stablecoin Industry Can Expect From Congress In 2022
- President’s Working Group on Financial Markets and Federal Banking Regulators Issue Report on Stablecoins
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[1] Although this prior definition could be read to require that reserves backing stablecoin be in the form of U.S. dollars, the collateralization requirements under Section 3(b)(2) of the prior version (which include reserve assets beyond just cash) suggest that this was a typo.
[2] A nonbank stablecoin issuer that did not make such an election presumably would be subject to the existing framework, and would have to consider whether any stablecoins that it issued would be securities/commodities and whether the issuer would be an investment company etc.
[3] Particularly in contrast to the definition of “cryptocurrency,” which refers specifically to distributed ledger or similar technology, the term could be construed to include securities and other instruments whose ownership is recorded on a traditional, centralized ledger so long as the ledger were digital, as most such ledgers are in the internet age.
[4] Section 4(b)(3) of the bill clarifies that “U.S. dollars” refers to commercial bank money, which carries credit and liquidity risks, rather than central bank money, which otherwise would have required granting a larger range of nonbanks access to Federal Reserve master accounts.
[5] Although Section 4 of the bill would appear to require all nonbank qualified stablecoin issuers to participate in the Qualified Stablecoin Insurance Fund, Section 5 requires only those issuers that intend to hold collateral in an insured depository institution in United States dollars to participate. This could be a holdover, as the drafters revised the bill to provide for an opt-in approach, which inherently alleviates some of the extraterritorial jurisdictional concerns.
