We wrote not so long ago that crypto entities that hold people’s money are likely to end up being regulated like banks are. In the case of banks, some have state charters and others have national charters. State banks are answerable to state banking authorities but eventually fall under the sway of the US Federal Reserve. Legislation is being considered in the US House of Representatives that would give initial authority over stablecoin operations to state banking authorities. These would have to do with state payment stablecoin regulations. Payment stablecoin is the term the legislators are using to describe stablecoins that are pegged one to one with the US dollar and have dollar reserves to match their crypto assets. These would be stablecoins used for payment purposes.
Legislation Does Not Deal with Algorithmic Stablecoins
As with all types of legislation under consideration, it is a work in progress and only reaches its final form at the end of negotiations and multiple votes. Prior proposals had issues and varieties of stablecoins included. This time around, Republicans in committee have cut out all that does not apply to dollar backed stablecoins with reserves to match their crypto assets. They have ramped up state responsibility. As written in the draft legislation, states will have increased power to charter issuers of stablecoins. The Federal Reserve will have ultimate authority but only when states have failed to follow Fed recommendations or to offer a concrete plan for dealing with specific concerns about an individual stablecoin issuer. The proposed legislation does not deal with algorithmic stablecoins which the legislators view as totally different entities.
US Lags the EU in Enacting Crypto Legislation
As we noted recently, new EU crypto rules have put the European Union ahead of all major economies in having concrete crypto regulations. As we expected going back a year or more, we may expect to see a crypto regulation fight over any of various issues that will slow the development of a comprehensive package. To us, the Republican move to streamline legislation regarding a subset of stablecoins, the ones that are probably the easiest to regulate, is an excellent idea. While many crypto businesses are moving or thinking of moving offshore due to what they see as excessive regulation, many simply want regulation clarity and certainty to the rules that they will need to follow going forward. From what we see with the state payment stablecoin work in progress this looks like the sort of thing that the crypto realm could live with.
Will We See a Ban on Algorithmic Stablecoins?
Although the issue was removed from the current US legislation under consideration, a ban on “endogenously collateralized” stablecoins is likely in the US in the near future and is a reality today in Canada. This wording refers to algorithmic stablecoins like Terra which collapsed last year. In the previous US legislative package these stablecoins would have been banned for a couple of years. We would not be surprised if the US follows the Canadian lead when the issue comes to a vote in the House of Representatives and Senate in the US in the coming year or so. Those who choose to speculate by trading Bitcoin are OK with volatility but anyone who chooses to use a crypto token that tracks the dollar or another hard currency deserves protection so that they do not see their monetary assets evaporate overnight. For DeFi businesses this is essential as the downward-sliding values of crypto tokens last year were what drove some out of business.
State Payment Stablecoin Regulations – SlideShare Version