Contextualizing the STABLE Act
In the summer of 2019, Mark Zuckerberg testified before the U.S. House of Representatives, facing nearly-unanimous and atypically bipartisan criticism from legislators related to Facebook’s leading role in the development of the Libra stablecoin. The Libra network and digital asset—whose credentials as a blockchain and cryptoasset, respectively, have been perhaps appropriately criticized—were intended to facilitate the transfer of a low-volatility quasi-stablecoin, pegged to a basket of fiat currencies and government securities. Remarks made throughout the inquiry made clear lawmakers’ stance: a private, unregulated technology company should not have the power over the U.S. economy and banking system that control of a stablecoin such as Libra would confer. In the more than a year since this testimony, there have been upwards of thirty pieces of legislation proposed that would, in some capacity, regulate the digital asset market and its servicers. However, until the proposition of the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act by Rep. Rashida Tlaib (D – Michigan) this month, none have so innately embodied the aforementioned sentiment. This dispatch overviews the STABLE Act and, building on commentary from Coin Center, the unintended consequences it may have.
The STABLE Act differentiates itself from similarly proposed cryptoasset regulatory legislation by uniquely focusing specifically on the systemic risks to the U.S. financial system posed by collateralized stablecoins, rather than entirely crypto-native digital assets such as Bitcoin. According to a summary of the bill released by its sponsors, the bill intends to “protect consumers from the risks posed by emerging digital payment instruments…by regulating their issuance and related commercial activities.” In practice, this translates to the implementation of three core regulatory barriers to stablecoin issuance and servicing:
- Stablecoin issuers and service providers must comply with all regulatory requirements placed on banks both federally and in the jurisdictions in which they operate. Stablecoin issuers, specifically, must obtain a federal bank charter.
- Stablecoin issuers must obtain approval at least six months prior to issuance from the Federal Reserve, FDIC, and other relevant authorities. Issuers must also “maintain an ongoing analysis of potential systemic impacts and risks.”
- Stablecoin issuers must obtain FDIC insurance on the fiat deposits collateralized the stablecoin or make deposits directly to the Federal Reserve in order to “ensure that all stablecoins can be readily converted into United States dollars, on demand.”
Perhaps the most obvious consequence of this bill is the effective exclusion of large technology companies, such as Facebook, from entering or otherwise participating in the banking sector via the issuance of stablecoins. Despite an insistence that the proposed legislation would “not to let Wall Street and Silicon Valley own the future of digital payments,” the requirements put forth disproportionately target the latter, as most of the larger traditional financial institutions comprising ‘Wall Street’ already meet or are more easily positioned to meet these criteria. Further, the bill’s vague definition of ‘stablecoin’ leaves open the possibility for any issuers’ dollar-denominated liabilities, including payment processors that maintain user balances such as Paypal, to be regulated in the above manner should authorities choose to do so. Extending beyond Big Tech, the legislation would also exclude relatively smaller, emerging financial technology firms, such as Tether and Circle, from issuing stablecoins.
While the bill’s insistence on only highly-regulated entities being able to issue and service centralized, custodial stablecoins is clear, its intent towards and impact on decentralized, collateralized stablecoins is worthy of further scrutiny. Namely, as stablecoin issuers and service providers who fail to comply with the above regulations would presumably face legal consequences, one should question how distributed actors participating in stablecoin minting and transacting would be dealt with. For example, MakerDAO’s Dai stablecoin, which boasts a market capitalization of over $1 billion, targets a USD-peg and is collateralized by cryptoassets held trustlessly in smart contracts, meaning that users’ collateralizing assets are most directly managed by those executing the smart contracts’ code: Ethereum miners. Under the STABLE Act, any miner operating on a smart contract platform that hosts decentralized stablecoins could theoretically be punished for facilitating the minting and servicing of unregistered stablecoins. (MakerDAO developers merely publishing and not themselves executing smart contract code appear to remain protected under the First Amendment, making miners most directly liable). This poses an existential threat not only to assets such as Dai, but also to major blockchain networks such as Ethereum.
Though the STABLE Act has been drafted such that it has garnered significant backlash from the blockchain community, the arguments in favor of increased regulation and oversight of collateralized stablecoins should not be ignored. One need not look further than the 2019 Tether scandal, in which its affiliate Bitfinex allegedly misappropriated $850 million of Tether’s reserves to compensate for its own losses, which resulted in a class-action lawsuit and ongoing investigation by the New York Attorney General’s office, to see the need for increased transparency and oversight of stablecoin issuance. Ultimately, more focused and informed legislation, with an emphasis on regulation of activity rather than targeting of specific entities, would be well applied to the emerging stablecoin sector.