Congress will be “starting from scratch” in attempting to establish a regulatory framework for stablecoins — an issue that many believe is the top digital asset legislative priority.
By Arthur S. Long, Parag Patel, Yvette Valdez, Pia Naib, and Deric Behar
On April 15, 2023, the US House Financial Services Committee (Committee) published a draft bill on the regulation of stablecoins in anticipation of a hearing by its Subcommittee on Digital Assets, Financial Technology and Inclusion (Subcommittee) on April 19. Government entities from the Financial Stability Oversight Council to the President’s Working Group on Financial Markets have identified stablecoins as the one type of digital asset that most demands federal regulation. In the prior Congress, leaders of the Committee, Maxine Waters and Patrick McHenry, made material progress on the now published draft bill.
Notably, the April 15 draft bill as published would establish a regulatory framework for stablecoins that would be very similar to the existing framework for banks.
For example, under the draft bill:
- Depository institutions could not issue stablecoins, but subsidiaries of those institutions that are subject to supervision and regulation by their primary federal regulator could issue stablecoins.
- Non-depository institutions could seek approval from the Federal Reserve Board (FRB) to issue stablecoins; following approval, such issuers would be subject to the FRB’s supervision and regulation.
- Alternatively, a non-depository institution issuer could elect to be licensed by a state financial regulator like the New York Department of Financial Services, but such an issuer would be required to register with the FRB and would be subject to the same supervision and regulation as a non-depository institution issuer approved by the FRB.
- Criminal penalties would apply to issuers that do not comply with applicable approval or registration requirements.
- Acquisitions made by stablecoin issuers would require federal regulatory approval.
- Federal regulation would require issuers to maintain a 1:1 reserve ratio of appropriate assets subject to strict limits on their rehypothecation — US currency, central bank reserve deposits, Treasury bills with a maturity period of 90 days or less, and certain repurchase agreements backed by Treasury bills with the same maturity — and to permit redemptions within one day after the redemption request.
- Federal regulators would also be empowered to impose capital, liquidity, and risk management requirements on stablecoin issuers.
- Stablecoin issuers’ other business activities as well as such issuers’ ownership by non-bank, non-financial firms would face restrictions.
- The FRB would be empowered to grant stablecoin issuers access to its programs relating to accounts, payment services, and discount window advances.
- An enforcement regime similar to that under the Federal Deposit Insurance Act for banks, bank holding companies, and their institution-affiliated parties would apply to stablecoin issuers.
The similarity in the draft bill to bank regulation drew skeptical comments from other Subcommittee members. For instance, Subcommittee Ranking Member Stephen Lynch, argued that one of the saving graces of the recent digital asset market collapse was that it was not tied to the traditional banking system. In his view, Congress should “separate crypto assets from our banking system,” and should consider public sector alternatives to stablecoins such as the “FedNow” payment system and a publicly issued digital dollar.
At the April 19 hearing, however, it became clear that the draft bill was more of a starting point to further negotiations. In her statement, Ranking Member Waters stated:
“[T]he posted bill in no way recommends the final work on stablecoins by negotiations between the two of us… [and] does not represent any final product of any kind. And so, I think we’re starting from scratch to deal with stablecoins. We must deal with it. We must get a stablecoin bill. I think we can do that, but disregard the bill that has been posted altogether.”
This divergence of opinion was further reflected in the statements of the other members.
To complicate matters, House Republicans introduced a discussion draft of yet another stablecoin bill on April 24. This draft focuses exclusively on payment stablecoins, and would be more deferential to state regulators that charter stablecoin issuers, while retaining FRB supervision. Reserves would also be required at a 1:1 ratio, and stablecoin issuers would be required to publish monthly reports on reserve composition that are audited by a registered public accounting firm at least once annually. Unlike the April 15 draft, however, a prohibition on rehypothecation is omitted. The bill would also explicitly exclude stablecoins from the definition of “security” in all relevant federal regulations, and therefore remove such assets from the authority of the Securities and Exchange Commission.
It is not entirely clear from Ranking Member Waters’ statement what parts of the April 15 draft were troublesome. And while narrower in focus, the April 24 draft may suffer from the same defects that prompted Ranking Member Waters to issue a call for bipartisan negotiations to start from scratch. Her statement, however, is indicative of a view that some legislation relating to stablecoins remains a priority. This view continues to be strongly held in other parts of the government, notwithstanding — and indeed, likely due to — the recent digital asset market collapse and other market issues.
Latham & Watkins will continue to monitor developments in this area.
This post was prepared with the assistance of Gemma (Yiwen) Zhang in the New York office of Latham & Watkins.
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