For years, the unregulated terrain of cryptocurrencies attracted innovators and hucksters curious about their potential. Now the same landscape is attracting lawmakers.

After the Office of the Comptroller of the Currency (OCC) issued guidance regarding crypto custody to banking institutions in July, a new bill aimed at regulating companies that issue stablecoins was introduced in Congress last week. Unlike the OCC guidance, which received a warm reception, the new bill has riled up the crypto community.

Key Takeaways

  • The STABLE Act intends to regulate stablecoin issuers by requiring them to obtain bank charters and place reserve funds, equivalent to the figure for their stablecoin issues, with the Federal Reserve.
  • Proponents of the bill say that it is necessary to regulate stablecoins because they act like money, while opponents say that the bill stymies innovation by placing onerous regulations on stablecoins.
  • Efforts to regulate stablecoins are expected to continue in the future as the market for such cryptocurrencies grows.

What Is the STABLE Act? 

The Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, proposed by three U.S. congressional representatives led by Rep. Rashida Tlaib (D-Mich.), requires stablecoin-issuing companies to obtain a banking charter and follow "appropriate" banking regulations in their jurisdiction. It also requires them to maintain reserves, equivalent to the dollar amount of their stablecoin issues, at the Federal Reserve and undergo regular audits to ensure compliance. The intent behind these requirements is to protect low and moderate income (LMI) consumers from unscrupulous issuers of such coins, according to the press release.

Under current regulation in the United States, organizations that issue stablecoins, or coins that do not have frequent and wide price changes, function as trust companies or fiduciaries and agents. While they hold reserves to back up their coins, stablecoin issuers are not required to obtain banking charters or place funds with the Federal Reserve. After the financial crisis of 2008, banks have been subject to an increasing number of financial regulations and expenses that have affected their earnings and operations. 

Why Is the Crypto Community Against the STABLE Act?

Prominent issuers of stablecoins have criticized the bill, claiming that it represents a "huge step backwards" for digital currency innovation in the United States. In an emailed statement to online publication Coindesk, Jeremy Allaire, CEO of Circle – a Boston-based payments firm that issues the USDC stablecoin – said that the proposed bill was "inconsistent with the goals of supporting innovation in the fair and inclusive delivery of payments that comes from stablecoins."

Kristin Smith, CEO of crypto advocacy group Blockchain Association, said the regulation would "strengthen the position of the most powerful financial institutions, while overlooking two core promises of decentralized networks: the chance to put more power in the hands of individual consumers and to catalyze innovation across payments and other financial services."

In a post, nonprofit Coin Center argued that the risks for stablecoin-issuing transmitters are much lower as compared to traditional money transmitters because blockchains are public tools and can be used to audit numbers and addresses of such coins.

"Any entity that wants to issue something that walks and talks like money or like a deposit should be regulated like a depository institution," Rohan Grey, a consultant for the bill and an assistant professor at the Willamette University College of Law in Oregon, told Coindesk.

Why Are Stablecoins a Regulatory Target?

As their name indicates, stablecoins have a stable value and do not have volatile price changes that are a characteristic of crypto trading. They are generally backed by a basket of goods, which may include a mix of cryptocurrencies, assets like gold, and fiat currencies. Digital currencies can be considered a form of stablecoin because they are backed by centralized authorities or organizations and do not change in value.

Facebook, Inc.'s (FB) proposed cryptocurrency Libra is an example of a digital currency. As the number of governments and corporations issuing or mulling the issue of digital currencies increases, the market for stablecoins is expected to explode in the future. Regulation will follow. But it is still early days to evaluate and measure the impact of stablecoins (or the credentials of their issuers) on the economy.