Quick Take: The STABLE (Stablecoin Tethering and Bank Licensing Enforcement) Act

Tuesday, December 8, 2020

Last week, a bill was introduced in the U.S. House of Representatives that would create new requirements regarding the issuance, management, and supervision of the digital asset class known as “stablecoins.”   

What is a Stablecoin?

First, a bit of background.  While most people have at least heard of Bitcoin, casual observers may be unaware that Bitcoin is just one of thousands of digital assets that have entered the marketplace.  As with traditional assets, different digital assets offer unique uses and value propositions.  For example, some assets (e.g., Bitcoin) can operate as currency, while others may operate more like a traditional security (e.g., a share of stock).  As the digital asset marketplace continues to grow, so shall the potential applications of those assets.

One tremendously useful class of digital assets are referred to as stablecoins.  Simply put, stablecoins are a type of digital asset meant to have the same value at all times.  Although there are a variety of stablecoins in the market, the most prominent tend to be fiat-collateralized (backed by government-issued currency such as the U.S. Dollar or Euro) and pegged to a measure of fiat currency (e.g., 1 Token = $1.00). 

While the uses for stablecoins go far beyond this discussion, investors have made them among the most popular digital assets in the marketplace.  As of today’s date just one type of a particular stablecoin—U.S. Dollar Tether (USDT)—has a circulation of over $19.5 billion.  A number of large companies have also signaled an interest in launching their own stablecoins, and it was reported last week that a new Facebook-backed stablecoin may be coming soon.[1]

What is the STABLE Act?

The STABLE Act is a bill introduced last week by Congresswoman Rashida Tlaib and Congressmen Jesús “Chuy” García and Stephen Lynch.[2]  As summarized by its sponsors, the STABLE Act would:

  • “Require any prospective issuer of a stablecoin to obtain a banking charter;
  • Require that any company offering stablecoin services must follow the appropriate banking regulations under the existing regulatory jurisdictions;
  • Require that any company or bank issuing a stablecoin to notify and obtain approval from the Fed, the FDIC, and the appropriate banking agency 6 months prior to its issuance and maintain an ongoing analysis of potential systemic impacts and risks;
  • And require that any stablecoin issuers obtain FDIC insurance or otherwise maintain reserves at the Federal Reserve to ensure that all stablecoins can be readily converted into United States dollars, on demand.”[3]

These requirements would significantly increase regulation and supervision of stablecoins, treating them more like traditional brick-and-mortar banks under U.S. law.

Quick Take

This bill was introduced on the heels of reporting that Facebook was rebranding the Libra Association as the Diem Association and preparing for the launch of a U.S. dollar backed stablecoin (“Diem Dollar”). 

If this all sounds a bit familiar, in 2019, Facebook and the Libra Association announced their plans to launch Libra (a stablecoin that would have been backed by multiple assets).  The announcement set off something of a political firestorm, leading to Congressional hearings and questions about privacy, supervision, and—quite frankly—the implications of rolling out a digital asset that could “challenge the supremacy of the U.S. dollar.”[4]

To some extent, Libra was an all-caps message to political leaders that digital assets were rapidly growing and very well could find global adoption in the future.  That possibility always existed—of course—but the influence of Facebook and its immediate access to billions of users couldn’t be ignored.  For better or worse, governments had no choice but to start really thinking about where this was heading, and what to do about it.

Back in 2019, Libra spurred the introduction of the Keep Big Tech Out Of Finance Act.  That Act would have barred large companies “predominantly engaged in the business of offering to the public . . . a platform for connecting third parties” (e.g., Facebook) from issuing digital assets outright.[5] 

For all of the fervor around the STABLE Act, it’s worth noting the evolution from prohibition to regulation.  Indeed, this has been a consistent theme of the U.S. legal and regulatory guideposts in this area for some time and speaks to the fact that digital assets already are having a significant impact on the market, are increasingly viewed as legitimate, and are likely to play a much more prominent role in our lives in the years to come. 

The challenge is how to balance promoting investment and innovation with regulation that addresses the need for investor protection (as the STABLE Act purports to). 

The STABLE Act has been criticized as going too far too soon, imposing massive regulatory burdens on stablecoins already in the market, and dissuading prospective stablecoins from coming to the market (or at least the U.S. market).  Others have questioned how the Act would impact individual market participants, such as those who maintain the public networks many digital assets operate on.

In any event, this moment clearly presents an opportunity for the industry to continue engaging and educating—as it has been—to find middle-ground.  Regulation is surely coming, and it will be critical for stakeholders in the digital asset industry to work toward getting it right.

Conclusion

Butzel Long continues to track, analyze, and advise on a variety of issues surrounding the rapidly evolving regulatory landscape facing virtual currency businesses.  

William Kraus
734.213.3434
krausw@butzel.com

[1] Hannah Murphy, Facebook’s Libra currency to launch next year in limited format, Financial Times, https://www.ft.com/content/cfe4ca11-139a-4d4e-8a65-b3be3a0166be

[2] Stablecoin Classification and Regulation Act of 2020, H.R. ___, 116th Cong. (2020)

[3] Tlaib, García and Lynch Introduce Legislation Protecting Consumers from Cryptocurrency-Related Financial Threats, https://tlaib.house.gov/media/press-releases/tlaib-garcia-and-lynch-stableact

[4] Ryan Browne, Here’s why regulators are so worried about Facebook’s digital currency, CNBC, https://www.cnbc.com/2019/09/19/heres-why-regulators-are-so-worried-about-facebooks-digital-currency.html

[5] Keep Big Tech Out Of Finance Act, H.R. 4813, 116th Cong. (2019).

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