US Stable Coin Bill: A Comprehensive Overview

The US Stable Coin Bill is a complex piece of legislation that aims to regulate the rapidly growing stablecoin market. The bill has been introduced to Congress, and its provisions are still being debated.

The bill proposes to define stablecoins as a type of digital currency, which would bring them under the oversight of the US Securities and Exchange Commission (SEC). This would require stablecoin issuers to register with the SEC and comply with existing securities laws.

Stablecoins are a type of cryptocurrency that is pegged to the value of a traditional currency, such as the US dollar. They are designed to be more stable and less volatile than other cryptocurrencies.

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The regulatory framework for stablecoins is a complex topic, but it's essential to understand the requirements for issuers. 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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Reserves can be limited to US dollars, demand deposits at a depository institution, certain US Treasury Bills, certain repurchase agreements backed by US Treasuries, and balances held at a Federal Reserve Bank. Non-depository trust companies engaged in the issuance of payment stablecoins would be required to use a depository institution as subcustodian to provide for the safekeeping of their reserves.

A non-depository trust company can issue payment stablecoins up to an outstanding nominal value of $10 billion, although this threshold would be subject to adjustment by the FRB not less frequently than every four years to account for inflation. Depository institutions would be required to submit an application to their chartering authority and the Federal Reserve Board for authorization to issue a payment stablecoin.

Here are the key requirements for stablecoin issuers:

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.

Non-depository trust companies engaged in the issuance of payment stablecoins would be required to use a depository institution as subcustodian to provide for the safekeeping of their reserves.

Payment stablecoin issuers would be prohibited from rehypothecation of their reserves, except for the purpose of creating liquidity to meet reasonable expectations of requests to redeem payment stablecoins.

Payment stablecoin issuers would 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, as of the last day of the month.

Here is a summary of the required reserve assets:

Payment stablecoin issuers would also be required to comply with US anti-money laundering (AML), countering the financing of terrorism (CFT), and sanctions rules, as well as applicable customer privacy and nonpublic personal information protection standards.

Unauthorized participants, including those convicted of certain crimes, would be prohibited from serving as an executive officer or controlling more than 5% of the shares of a payment stablecoin issuer.

The regulatory framework for payment stablecoin issuers includes a conservatorship and receivership regime to ensure customer protection in case of insolvency. This regime is designed to promote confidence in the stability of payment stablecoins.

To fund the costs of a receivership or conservatorship, the FDIC may use the issuer's capital and return on reserves. This means that payment stablecoin issuers would not be charged deposit insurance premiums.

The grounds for appointing the FDIC as conservator or receiver for a payment stablecoin issuer include specific circumstances that would trigger such an appointment. These grounds are not explicitly stated in the text, but it's implied that the FDIC would be appointed in cases where the issuer is insolvent or unable to operate.

A payment stablecoin issuer would not be charged deposit insurance premiums, but the FDIC may use the issuer’s capital and return on reserves to fund the costs of a receivership or conservatorship.

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A payment stablecoin issuer would be considered a bank for purposes of the Bank Holding Company Act if it's chartered by a bank holding company or insured depository institution. This is a significant change in the regulatory landscape.

All subsidiaries and affiliates of a payment stablecoin issuer would be limited to activities that are "financial in nature" as defined in the Bank Holding Company Act. This means they can't engage in non-financial activities like manufacturing or retail sales.

A payment stablecoin issuer would be subject to the same restrictions on transactions with affiliates as are applicable to a Federal Reserve member bank under Sections 23A and 23B of the Federal Reserve Act. This includes restrictions on loans and investments in affiliates.

Here are the key restrictions on affiliations:

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

In general, commingling of customer payment stablecoins and cash in custody is permissible, but never with the proprietary assets of the issuer. This means that a custodian can hold customer assets alongside their own, but must keep them separate from their own funds.

Crypto assets, including payment stablecoins, held in custody shall not be considered assets or liabilities of the custodian for any purpose. This is a significant change from the SEC's 2022 Staff Accounting Bulletin 121, which required firms to present a liability on their balance sheet for holding customer digital assets.

Here are some key points to keep in mind:

A payment stablecoin issuer's holding company would be considered a bank for purposes of the Bank Holding Company Act if it has chartered the issuer. This means that the holding company would be subject to the same regulations as a traditional bank.

The Bill creates a tailored holding company supervision framework for depository institution issuers that are not within a bank holding company. This framework is designed to provide a more nuanced approach to supervision.

All subsidiaries and affiliates of a payment stablecoin issuer would be limited to activities that are "financial in nature" as defined in the Bank Holding Company Act. This is to prevent non-financial activities from distracting from the issuer's core business.

A legal or natural person would not be able to obtain a controlling interest in a payment stablecoin issuer unless they are engaged in activities that are predominantly "financial in nature." This is to ensure that the issuer is managed by individuals with a deep understanding of the financial industry.

Payment stablecoin issuers would be subject to the same restrictions on transactions with affiliates as are applicable to a Federal Reserve member bank under Sections 23A and 23B of the Federal Reserve Act. This includes restrictions on loans to affiliates and investments in affiliate companies.

Any merger or acquisition that would result in a person obtaining a controlling interest in a payment stablecoin issuer would require the approval of the FRB and the applicable chartering authority (i.e., the OCC or state bank supervisor). This is to ensure that the issuer is not taken over by an entity that is not suitable to manage the business.

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Collateralized stablecoins attempt to achieve stability by backing each issued token with a pool of reserve assets, typically at a 1:1 reserve ratio. This means that for every stablecoin issued, there's a corresponding amount of reserve asset held in reserve.

The most common reserve asset is fiat money, such as US dollars, which are held in "cash deposits at insured banks or short-dated U.S. treasuries". This is the case with USD Coin, the second-largest stablecoin by market capitalization, which purports to back each USDC token with one US dollar.

Some stablecoins are collateralized with other valuable assets, including commodities like gold, bonds and notes, and "baskets" of several different types of assets. This diversification can help reduce risk and increase the stability of the stablecoin.

For example, Circle, the company responsible for issuing USDC, publishes audit reports and other assurances of its reserve in an effort to increase trust in this collateralization. This transparency can help build confidence in the stability of the stablecoin.

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The current regulatory landscape for stablecoins in the US is complex and fragmented. There is no comprehensive, nationwide regulatory framework for stablecoins.

Historically, the regulatory regime surrounding stablecoins has been characterized by uncertainty and confusion. This has led to a lack of clarity for issuers and users alike.

The Federal Reserve has been working to develop possible approaches to stablecoin regulation, but more progress has been made by states. New York, for example, has issued its Guidance on the Issuance of U.S. Dollar-Backed Stablecoins, outlining general requirements for USD-backed stablecoins issued by issuers subject to DFS oversight.

The DFS Guidance focuses on three areas of requirements: redeemability, reserves, and attestations. For redeemability, stablecoin issuers must adopt clear, conspicuous redemption policies that confer to holders the right to timely redemption of the stablecoin at par.

Reserve requirements are also a key aspect of the DFS Guidance. Stablecoins must be fully backed by reserve assets, which may consist only of short-term Treasury bills, reverse repurchase agreements with approved counterparties, government money market funds subject to DFS-approved caps, or deposit accounts at US state or federally chartered depository institutions subject to DFS-approved restrictions.

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Attestations are also required by the DFS Guidance. Issuers must release monthly reports conducted by an independent, US licensed certified public accountant to DFS and the public, detailing the value and makeup of the reserve, the outstanding stablecoin units, and whether the reserve is adequate to fully back the outstanding stablecoin units.

State regulators and the Federal Reserve have different roles in regulating stablecoins. Non-depository trust companies can issue smaller stablecoins by chartering from a state regulator, while larger stablecoins require the issuer to apply to become a depository institution with the state banking regulator or the Comptroller of the Currency.

Here's a summary of the reserve requirements for stablecoins:

These requirements aim to ensure that stablecoins are backed by high-quality assets and that issuers are transparent about their reserves.