A new bill by the U.S. House Financial Services Committee has proposed to give non-bank stablecoin issuers access to central bank money. According to the 73 page draft legislation, any bank or non-bank applicant must receive a decision within 90 days or otherwise be automatically approved. Penalties for operating an unlicensed stablecoin have been set at $100,000 a day.
The proposed bill introduces new rules and regulations for payment stablecoin issuers in the United States. It clarifies the requirements for insured depository institutions (i.e. banks) – who shall apply to the appropriate Federal stablecoin regulator – and establishes a similar process for non-bank entities who wish to issue payment stablecoins, except their regulator is the Federal Reserve.
Stablecoin issuer access to central bank accounts
The legislation would explicitly give non-bank stablecoin issuers full access to central bank deposit accounts and central bank borrowing. Even the Treasury has acknowledged the potential for central bank deposits to provide the safest asset backing. Other acceptable stablecoin backing assets are physical cash, short term Treasuries and Treasury based repurchase agreements (repos). The draft document does not list commercial bank deposits amongst the assets allowed for a non-bank stablecoin (although it’s slightly inconsistent). Notably, Circle’s USDC lost its peg when Silicon Valley Bank (SVB) collapsed, holding about 8% of the USDC assets.
While central bank accounts make for safer stablecoins, when there are worries about banks such as SVB, money could be transferred from banks into stablecoins, accelerating runs.
90 days max for stablecoin application response
One of the most striking provisions of the new stablecoin law relates to timing. The bill stipulates that the regulators have 90 days to reach a decision on an application, regardless of whether it comes from a bank or non-bank entity. However, the application is automatically approved if the regulator does not respond within that specified period. This clause may have been motivated by the multi year delay experienced by crypto bank Custodia, which applied to the Federal Reserve for a master account, and sued the regulator when it failed to get an answer (it was subsequently denied).
Meanwhile, if a stablecoin application is not approved, the regulator has to provide an explanation.
Two year hiatus on crypto backed stablecoins
If passed, the bill would also introduce a two-year moratorium on new “endogenously collateralized stablecoins”. This means that no new stablecoins backed by other digital assets can be issued within the first two years of enactment. This likely includes algorithmic stablecoins. The aim is to give the Department of the Treasury, the Security and Exchange Commission, and the Office of The Comptroller of the Currency enough time to ‘study’ the topic.
The CEO can attest to stablecoin reserves
To ensure the proper backing of reserves, lawmakers propose a new rule that would only require a monthly attestation of backing assets by the stablecoin issuer’s CEO. There is no mention of audits or accounting firms, although more stringent regulations could still be introduced as part of detailed regulations that the Federal Reserve will produce.
Stablecoin attestations became more commonplace after the New York Attorney General banned Tether from the state and forced it to provide attestations after the stablecoin issuer made false statements about the stablecoin’s backing assets. For Tether to continue operating in the United States, it will have to apply to become a stablecoin issuer. Penalties for operating as an unlicensed stablecoin issuer have been set at $100,000 a day.
The Federal Reserve has to establish regulations for non-bank stablecoins within the first 180 days after the law is enacted. With regard to the effective date, the stablecoin law will come into effect 18 months after the enactment, at the latest, or 90 days after the new stablecoin regulations are finalized, if earlier.
The bill has received bipartisan support and has been in the works since last year. However, it was delayed due to unresolved issues over standards and non-bank licenses. The Subcommittee on Digital Assets, Financial Technology and Inclusion will hold a hearing on Wednesday, April 19.