Understanding the Clarity for Payment Stablecoins Act

The Clarity for Payment Stablecoins Act is a significant development in the world of cryptocurrency and finance. The Act aims to provide clarity and regulatory certainty for payment stablecoins.

Payment stablecoins, also known as payment tokens, are digital assets pegged to the value of a fiat currency, such as the US dollar. They are designed to facilitate fast and low-cost transactions.

The Act is expected to benefit businesses and individuals who use payment stablecoins for everyday transactions. It will also provide a clear framework for regulatory bodies to oversee the use of payment stablecoins.

By providing clarity and regulatory certainty, the Clarity for Payment Stablecoins Act will promote the growth and adoption of payment stablecoins.

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The Clarity for Payment Stablecoins Act proposes several key provisions that aim to regulate the issuance of payment stablecoins in the US.

The Bill makes it unlawful to engage in the business of issuing a payment stablecoin without authorization.

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To obtain authorization, non-depository state trust companies can issue payment stablecoins up to a nominal value of $10 billion, which can be adjusted by the FRB every four years.

Depository institutions must submit two applications: one to their chartering authority and another to the Federal Reserve Board for authorization as a national payment stablecoin issuer.

The Bill also makes it categorically unlawful to issue, create, or originate an algorithmic payment stablecoin.

The definition of "payment stablecoin" specifically excludes central bank money and securities issued by an investment company registered under Section 8(a) of the Investment Company Act of 1940.

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The Clarity for Payment Stablecoins Act introduces a robust regulatory framework to ensure the stability and security of payment stablecoins. Payment stablecoin issuers would be required to maintain reserves of not less than 100% of the nominal value of their outstanding issued payment stablecoins as of the end of each business day.

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These reserves would be limited to US dollars, demand deposits at a depository institution, certain US Treasury Bills with a maturity of less than 90 days, and other specific assets. Payment stablecoin issuers would also be required to honor customer redemption requests at par in legal tender within a day of the request.

To ensure transparency, payment stablecoin issuers would be subject to certain ongoing mandatory public disclosures, including a monthly summary description of the assets backing the payment stablecoin, the value of the assets, and the number of outstanding payment stablecoins.

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Payment issuer regulatory requirements are crucial for maintaining financial stability and trust in the market. Payment stablecoin issuers would be required to maintain reserves of not less than 100% of the nominal value of their outstanding issued payment stablecoins as of the end of each business day.

These reserves can be limited to US dollars, demand deposits at a depository institution, certain US Treasury Bills with a maturity of less than 90 days, certain repurchase agreements backed by US Treasuries and with a maturity date of seven days or less, and, for depository institutions, balances held at a Federal Reserve Bank.

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Payment stablecoin issuers would also be required to honor customer redemption requests at par in legal tender within a day of the request. This ensures that customers can easily convert their stablecoins back into fiat currency.

To maintain transparency, payment stablecoin issuers would be subject to certain ongoing mandatory public disclosures, including a monthly summary description of the assets backing the payment stablecoin, the value of the assets, and the number of outstanding payment stablecoins, as of the last day of the month.

Here are the key regulatory requirements for payment stablecoin issuers:

These regulatory requirements aim to ensure that payment stablecoin issuers operate in a transparent and secure manner, protecting both the issuers and their customers.

A person providing custodial services for payment stablecoins must treat and deal with the payment stablecoins and customer cash belonging to the customer, taking appropriate steps to protect them from the custodian's creditors.

Commingling of customer payment stablecoins and cash in custody is generally permissible, but not with the proprietary assets of the issuer.

This means that a custodian can hold customer payment stablecoins and cash together, but not with their own assets.

Crypto assets properly held in custody shall not be considered assets or liabilities of the custodian for any purpose and must be maintained off-balance sheet for accounting purposes.

This is a significant change from the SEC's previous guidance, which required firms to present a liability on their balance sheet for customer digital assets.

Here are the key aspects of digital asset custody under this new framework:

A payment stablecoin issuer's parent company will be considered a bank for regulatory purposes, subject to the Bank Holding Company Act. This means they'll have to follow the same rules as traditional banks.

Regulators will have the power to approve or reject any merger or acquisition that gives a person a controlling interest in a payment stablecoin issuer. This ensures that the issuer remains stable and secure.

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Payment stablecoin issuers will be subject to the same restrictions on transactions with affiliates as Federal Reserve member banks. This means they can't engage in certain types of transactions with their affiliates.

The Federal Reserve and chartering authorities will have to approve any merger or acquisition that gives a person a controlling interest in a payment stablecoin issuer. This adds an extra layer of oversight to ensure the issuer remains stable.

All subsidiaries and affiliates of a payment stablecoin issuer will be limited to activities that are "financial in nature". This ensures that the issuer's affiliates are not engaging in non-financial activities that could pose a risk to the issuer.

Here's a summary of the key restrictions on a payment stablecoin issuer's affiliates:

A legal or natural person can't obtain a controlling interest in a payment stablecoin issuer unless they're engaged in activities that are predominantly "financial in nature". This ensures that the issuer's owners are financially stable and capable of managing the issuer.