The growing popularity of stablecoins, even in times of financial difficulty, is a big reason why the need for regulation is greater now than ever. On that front, the new draft bill ensures that stablecoins are issued and regulated in a safe and secure manner, addressing the existing and potential risks associated with them.
The United States Congress has made another attempt to create a legislative framework for the increasingly popular stablecoins, a type of cryptocurrency that is pegged to a particular product or currency. The potential landmark bill, which introduces the US Federal Reserve to the stablecoin sector, comes on the heels of several recent stablecoin crashes.
Proposed regulatory framework
On April 14, the US House Of Representatives released a discussion draft aimed at increasing regulation and oversight of stablecoins. The draft bill will be set up for a panel hearing on April 19.
The proposed legislation places non-bank stablecoin issuers such as Tether (USDT) and Circle (USDC) under the control of the Federal Reserve. In other words, organizations launching stablecoins must obtain Fed approval before issuing them to the public. The bill also requires corporations to be transparent about their stablecoin reserves, which the Fed will investigate before granting approval.
The bill details that companies must hold reserves at least on a one-to-one basis. Treasury bills, US dollars, repurchase agreements backed by treasury bills, and central bank reserve deposits qualify as appropriate reserves companies can maintain their stablecoins.
In addition, stablecoin issuers must also demonstrate their financial resources, technical expertise, and management to increase their chances of getting a green signal from the Fed.
Those who fail to comply with the rules mentioned under the bill can face up to 5 years in prison and a fine of $1 million. The document also makes it illegal to have a licensed stablecoin backed by reserves other than US dollar equivalents. For example, it is illegal for licensed stablecoins backed by ETH, gold reserves, etc.
How will the bill help stablecoin issuers and customers?
Last year, the collapse of the stablecoin UST caused a market-wide collapse that wiped out the savings of many holders overnight. The ensuing sell frenzy also caused the world’s largest stablecoin by market cap USDT to lose its peg against the dollar. Last month, the second largest stablecoin, USDC, also temporarily lost its peg following the collapse of Silicon Valley Bank.
However, despite such events, stablecoins have not lost their appeal among the crypto audience. A report by CoinMetrics shows that stablecoin transactions will reach $7.4 trillion by 2022, up 19 percent from last year. Peter Johnson, a former partner at the trading firm Jump Crypto, said that the stablecoin sector in 2022 will beat leading credit card companies such as MasterCard and American Express in trading volumes.
The growing popularity of stablecoins, even in times of financial difficulty, is a big reason why the need for regulation is greater now than ever. On that front, the new draft bill ensures that stablecoins are issued and regulated in a safe and secure manner, addressing the existing and potential risks associated with them.
The bill recognizes that stablecoins offer benefits such as providing protection to individuals during market fluctuations without having to enter or exit the cryptocurrency market or exchange it for fiat currency.
Therefore, if stablecoins are issued within a clear regulatory framework, it can become a more efficient retail payment and reach a wide range of customers. The same can also foster healthy competition and also improve the function of sending and receiving remittances. In the long run, the framework will be beneficial not only for customers but also companies that issue it.
The drafted bill also imposes a two-year ban on the creation or issuance of stablecoins that are not backed by tangible assets. Hopefully, such measures will also protect customers from events like the TerraLUNA crash.
Community response was mixed
Jeremy Allaire, co-founder, and CEO of Circle, the second largest stablecoin issuer, responded positively to the recently published newly drafted bill on stablecoins. He emphasized that it is important to establish clear regulations that promote innovation and entrepreneurship within the framework of US prudential law.
However, some crypto players are disappointed with the bill’s proposal to establish a central authority, like the Fed, to oversee stablecoin regulation. They argue that while the licensing process can be structured, it remains discretionary, meaning that regulatory authorities decide who can issue licensed stablecoins.
Conclusion
Stablecoins have witnessed rapid mainstream adoption in the recent past and US regulatory authorities have finally detailed a framework for their adoption and issuance in a newly drafted bill. While the full ramifications of the draft remain to be seen, the call for greater oversight and outlining procedures for stablecoin issuers is a step in the right direction.