On July 27, 2023, The U.S. House Financial Services Committee advanced a stablecoin-focused bill for the first time. The Clarity for Payment Stablecoins Act of 2023 would establish a federal regulatory framework for stablecoins with the U.S. Federal Reserve playing a pivotal role. The bill would grant the Federal Reserve the power to write requirements for issuing stablecoins but would not infringe on the authority of state regulators.
The following editorial was written by guest authors Wyatt Noble and Michael Handelsman for Kelman.Law
Under this bill, stablecoins are generally understood as digital assets which an issuer must redeem for a fixed monetary value, a definition that all those involved in blockchain technology and cryptocurrency are likely familiar with. However, this bill’s controversy largely stems from what or who can become a permitted issuer. Permitted issuers would be the only entities allowed to issue a payment stablecoin for use by people in the United States.
Permitted Issuers
The bill would require that permitted issuers be “a subsidiary of an insure depository institution that has been approved to issue payment stablecoins,” “ a Federal qualified nonbank payment stablecoin issuer that has been approved to issue payment stablecoins,” or “ a State qualified payment stablecoin issuer.” The third category of permitted issuers opens the door for appropriate state legislators and represents a carve-out for states looking to develop their own approach with respect to stablecoins.
Some Democratic politicians, including Representative Maxine Waters, opposed the bill on the grounds that issuers could simply opt to be regulated under relaxed state regimes. Another concern is that the language and definitions concerning issuers would allow commercial companies to effectively issue their own money.
Additionally, permitted issuers would be required to maintain reserves that back their stablecoins on a one-to-one basis in assets such as U.S. coins and currency, funds held as insured demand deposits or insured shares at insured depository institutions, treasury bills with a maturity of 90 days or less, repurchase agreements with a maturity of seven days or less backed by the aforementioned treasury bills, central bank reserves deposits, and other assets that the “primary Federal or State payment stablecoin regulator determines appropriate.”
Other digital assets such as cryptocurrencies are notably absent from the list of assets that can be used as reserves for payment stablecoins, and that is probably because of the volatile nature of most cryptocurrencies, along with the recent slew of bankruptcies in the industry fueled by that price volatility. In light of this exclusion, the bill would place a two-year moratorium on payment stablecoins that rely on the value of another digital asset created or maintained by the same originator to maintain the fixed value.
The bill would also create requirements for the rehypothecation or reuse of reserves, custodial or safekeeping services for stablecoins or private keys, and supervisory, examination, and enforcement authority over non-state qualified issuers.
Clarifying That Stablecoins Are Not Securities
Importantly, the bill’s final section clarifies that stablecoins are not securities or commodities as those terms are defined under the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Securities Act of 1933, the Securities Act of 1934, or the Securities Investor Protection Act of 1970. This final section of the bill would definitively remove stablecoin issuers from the Securities Exchange Commission’s jurisdiction, so long as they operate within the confines of the bill.
What Should You Do in the Meantime?
In light of ongoing regulatory uncertainty and the increasing frequency of enforcement actions by the SEC, it’s more important than ever to consult with legal experts well-versed in digital assets. Consulting with the lawyers here at Kelman PLLC early on is the most efficient way to ensure compliance with potentially applicable laws and regulations, and avoid legal pitfalls and expenses that could otherwise handicap your business.
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What do you think about the House Financial Services Committee’s Stablecoins Act? Share your thoughts and opinions about this subject in the comments section below.
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