The United States Congress has drafted a bill for stablecoin regulations that is causing some concerns among crypto enthusiasts. In this research article, we will focus on the implications of the bill, particularly on the requirements for stable coin issuers.
US Congress has produced a draft bill detailing the new proposed regulatory framework for stablecoin issuers. There are a few requirements on the bill which have raised angst among crypto enthusiasts. One of the most notable requirements is that stable coin issuers must provide proof of reserves backing their deposits within one year of the bill’s passing. Additionally, all algorithmic stable coins will be banned for two years under this bill. Finally, stablecoin providers will need to supply proof of diversity and inclusion to the Office of Minority and Women Inclusion of the appropriate Federal payment stablecoin regulator.
Implications of the Draft Bill
The draft bill has a few alarming statements and red flags that crypto enthusiasts should pay attention to. The Federal Reserve is being proposed as the stable coin authority in the United States, which is alarming because it is the only central bank in the world that is 100% private. This means that the stable coin issuers will have to appeal to the Federal Reserve as independently issued non-governmental entities. This may be a hard pill to swallow for stable coin issuers.
If a stable coin issuer fails to comply with the requirements in this draft bill, there is a penalty of up to five years in prison and $1 million. Stable coin issuers based in the US or serving US users will have to comply with these rules. They will have to prove that they have reserves backing their stable coins. For centralized stable coins like USDC, USDT, and Dai, they will have to provide proof of physical reserves, such as cash, Treasury notes, or bonds. This is not necessarily a bad thing for users because it provides some guarantee. However, the irony is that the Federal Reserve will manage this, and it is unclear whether the Federal Reserve will have an independent audit.
Another requirement is that stable coin issuers will have to prove to the Federal Reserve the benefits of having a stable coin that is not issued by a governmental entity. Additionally, the bill suggests that there will be a two-year ban on endogenous stable coins, such as algorithmic stable coins or rebase stable coins that do not have physical assets backing their reserves. These types of stable coins achieve their stability through an elastic supply of the underlying asset, rather than physical reserves.
2 Year Ban on Algorithmic Stable Coins
The bill also proposes a research team to learn about algorithmic stable coins. This is a priority because of what happened with USCI, where billions of dollars were lost through USDT because it was not regulated by any government. The proposed research team will have two years to study algorithmic stable coins and provide recommendations on how to regulate them. The two-year ban on algorithmic stable coins will allow the research team to study and understand how these types of stable coins work.
Diversity and Inclusion?
Finally, the draft bill requires stable coin providers to supply proof of diversity and inclusion to the Office of Minority and Women Inclusion of the appropriate Federal payment stablecoin regulator. This is a positive development because it ensures that the stable coin industry is inclusive and diverse. However, it is unclear how stable coin providers will provide proof of diversity and inclusion. The bill does not provide any guidance on this matter.
The draft bill for stable coin regulations in the United States has some alarming language and ideas for how stable coins can be regulated. The proposed requirements for stable coin issuers are significant, and stable coin issuers will have to comply with these rules to avoid penalties. Additionally, the proposed ban on algorithmic stable coins for two years will allow regulators to study and understand how these types of stable coins work. Finally, while the requirement for stable coin providers to supply proof of diversity and inclusion might be viewed as a positive development for the industry, it is unclear how stable coin providers will provide such information. Yesterday, Congress met to hear from experts in the cryptocurrency field to be advised on this bill and it is likely they will produce something concrete in the coming months.