A new bill on stablecoin was introduced in the US Congress, which was positively received by Tether (USDT).
According to Tether, the issuer of the world’s leading stablecoin (USDT), regulation of stablecoins could provide clarity and benefit the digital token economy.
The US stablecoin bill and the reaction of Tether (USDT)
The bill was released Friday, and its explicit goal is precisely to provide requirements for stablecoin issuers.
Currently there are no specific laws in the US regulating the issuance of dollar-collateralized stablecoins, and this in effect creates a regulatory vacuum that generates uncertainty.
The proposal aims to fill this gap by creating a viable regulatory framework for stablecoins in the US by entrusting the central bank (Fed) with the oversight of issuers of non-bank stablecoins.
Indeed, if approved as proposed, the new rules would bring under the supervision of the relevant federal banking agency only insured depository institutions that wish to issue stablecoins, while all non-bank institutions, such as Tether or Circle issuing USDC, would be subject to the supervision of the Federal Reserve.
The failure to register with the authorities would even carry up to five years in prison, and a $1 million fine. Any foreign issuers would also have to apply for registration in order to operate in the US.
The requirements of stablecoin issuers
In order to obtain and maintain such registration it would be required for the issuer to demonstrate that it has the resources and capacity to maintain reserves to back stablecoins, in US dollars, Treasury bills with a maturity of 90 days or less, repurchase agreements with a maturity of seven days or less backed by Treasury bills with a maturity of 90 days or less, and reserve deposits with the central bank.
This last point is interesting, because it would mean that the Fed itself could act as the custodian of the reserves, or at least a portion of them, thus effectively eliminating many of the doubts still circulating to date about the collateralization of reserves.
It is worth noting that in March, when Silicon Valley Bank closed, Circle found itself without a portion of USDC’s reserves, since these were funds held in that bank and became inaccessible.
Having the central bank as custodian could solve the root of the problem of custody of dollars used as stablecoin reserves, since the Fed by statute can create as many dollars as it wants.
US and stablecoin: comments from Circle and Tether (USDT) on new regulation
The CEO of Circle, Jeremy Allaire, commented on Twitter saying that there is a clear need for laws to ensure that digital dollars on the Internet are safely issued, backed and managed.
Draft US Digital Dollar / Payment Stablecoin Bill Enters Congress
1/ A product of bi-partisan efforts, the first comprehensive proposed law for Payment Stablecoins has arrived in Congress. Some thoughts below:
https://t.co/SD0x2oQMmk— Jeremy Allaire (@jerallaire) April 15, 2023
According to Allaire, it is time for US leadership, and that means clear regulation and the empowerment of entrepreneurship and innovation within the framework of prudential US law.
He also added that although this bill appears to be complete, there are actually still open questions, hoping that the US will be able to dig deep and do it well.
Tether‘s comment is a tad less general, because it raises at least one specific critical issue.
According to the company that issues USDT, it is hoped that stablecoin regulation will really provide much-needed clarity for large corporations, institutions, and fin-tech companies seeking to enter the cryptocurrency market.
However, the problem is that in addition to addressing the risks associated with stablecoins, financial regulators should also not lose sight of the broader goal of modernizing the payments system to increase access to the financial system.
Indeed, with any non-custodial wallet, even those who do not have a bank account can have access to the financial system, but provided they are allowed to freely own and use a non-custodial wallet.
What Tether emphasize is that regulation should by no means be only repressive, but rather should be open to innovation and the benefits it brings.
However, they also add:
“We believe that greater regulatory clarity will benefit the digital token economy.”
There might be other problems
So there are mainly two issues at stake.
On the one hand, more regulatory clarity would be required to enable financial institutions and companies to be able to use stablecoins without any problems.
On the other hand, however, innovation should not be allowed to be killed so that new tools that go beyond what the traditional financial system has been up to now can continue to be provided to citizens.
While for now no specific and precise objections have been raised about the bill, which is still being discussed, it might be better to involve in some way in this genesis process the organizations that are already active in the stablecoin market, in order to avoid having to correct any problems later.
However, it may not be particularly easy to reconcile the spirit of innovation with regulatory clarity, because there is a risk of ending up pulling too much, or too little, of a blanket that may simply be too short to cover the full spectrum of risks and issues affecting the stablecoin market.
One of the key issues from this perspective could be that of anonymity, because it is not technically possible to allow the free use of non-custodial wallets on truly decentralized networks without accepting their anonymous use. In fact, there is no way to ascertain a person’s identity that does not involve some centralized entity.
Stablecoins are also widely used precisely because they can be held and used with non-custodial wallets on truly decentralized networks, and if this were banned they would lose much of their reason for existing.
In contrast, with regard to digital dollars, anonymity is not considered acceptable by the authorities, and this could be a major obstacle to innovation if such an approach were also used in regulating stablecoins.