Reports sprung last weekend that consensus stablecoin legislation from the House Financial Services Committee was near ready. While Congress is unlikely to debate the proposed bill until after the August recess, the bipartisan effort appears imminent. If reports are true, the legislation, as currently proposed, is flawed. In my CEI paper released today, “A Market Approach to Regulating Stablecoins, the Future’s Money,” I provide a market- and consumer-friendly alternative.
Stablecoins are digital assets designed to maintain a stable value by pegging to an underlying asset, usually the U.S. dollar. They began as a convenience for crypto traders seeking efficient trades without constantly converting into fiat money. Although that remains their primary use, stablecoins have begun integrating into the global financial system with myriad beneficial effects.
Political dissidents in Hong Kong and Ukrainians fleeing war have converted assets into stablecoins to store value during crises. Argentinians and Venezuelans use them to maintain economic security amidst runway inflation. Dollar-pegged stablecoins are becoming the Internet’s reserve currency, with benefits to Americans and to the U.S. economy. In fact, the world over, this digital dollarization is gaining fans as people seek to transact instantly in a familiar unit of account with relative privacy.
But stablecoins’ private origins and some missteps, including issuer Tether’s allegedly misstated reserves and the spectacular failure of TerraUSD (an algorithmic stablecoin not backed by actual assets), has regulators aflutter.
While some guardrails could help instill confidence in this growing market, regulators should be prudent. First, asset-backed stablecoins have proved resilient during the current market crash. Second, imposing a blanket federal solution would hinder market competition and entrench established players.
Reports state the upcoming stablecoin bill will have at least three bad parts It will:
- Limit asset types that can serve as reserves;
- Require 100 percent reserve backing; and
- Limit the types of companies that can become issuers.
There is a better way.
In my CEI paper, I detail a tripartite approach to stablecoin regulation that offers maximum issuer freedom and consumer choice while still providing needed information for market confidence. Some of these approaches are contained in Senate Banking Committee Ranking Member Pat Toomey’s draft stablecoin legislation.
The paper proposes for stablecoin issuers to choose one of three regulatory paths.
First, issuers could choose a newly created federal money transmission license that preempts state-level authority. The license would require issuers to publicly post their reserves along with any third-party attestation on regular intervals. It would not dictate reserve composition, which the market, especially virtual exchanges, will quickly sort out. It would also declare stablecoins are not securities and thus beyond the reach of the Securities and Exchange Commission, which under the leadership of current chair Gary Gensler, has stifled crypto markets.
Second, allow issuers to proceed under state-by-state money transmission laws. This option would be less efficient but should provide a regulatory avenue for those wishing to pursue it.
Issuers would choose which option best suits their business plan and risk tolerance.
In a short time, stablecoins have emerged to provide benefits to people the world over. Congress should regulate carefully, lest the world lose stablecoins’ burgeoning benefits. A light regulatory approach, as outlined in the new CEI paper, will benefit not only the United States, but people around the world.