A new bill has been introduced to US congress requiring stablecoins to be backed 1:1 with US dollars.
The legislation’s supporters claim this will help deter bad actors. Some crypto advocates see it as unnecessary regulation.
Stablecoin Stability
On Dec 2, 2020, Rashida Tlaib, Jesus Garcia, and Stephen Lynch, three congresspeople, introduced the Stablecoin, Tethering, and Bank licensing Enforcement (STABLE) Act.
The bill, which was written in November, acknowledges the use cases for digital currency, especially during the social distancing caused by the COVID-19 pandemic. Tlabi’s office pitched the bill as a law that would “protect” consumer interests from “financial threats.”
However, the authors’ definition of “threats” has upset some crypto advocates. Specifically, the lawmakers say they are wary of bad actors looking to issue stablecoins, comparing them to shadow money issuers of the past. The authors of the bill specifically mention Facebook and it’s “Libra” stablecoin as one potential bad actor.
“Getting ahead of the curve on preventing cryptocurrency providers from repeating the crimes against low- and moderate-income residents of color that traditional big banks have is—and has been—critically important,” Congresswoman Tlaib said.
They also point out that JPMorgan and Apple could use stablecoins to take advantage of “unbanked” and “underbanked communities. In fact, representative Tlaib’s press release specifically expressed a desire to protect the public from Wall Street and Silicon valley from owning, “the future of digital payments.”
Ron Hammond, a crypto lawyer, suggested that the bill would not become law any time soon. With the congressional session ending in two weeks, there was no rush to worry.
The Rules of Engagement
The new law would enforce several new requirements for regulated stablecoins.
Firstly, stablecoin issuers would have to file a bank charter. This could spell trouble for the slew of companies that have recently issued stablecoins.
Some larger companies like Circle may have the financial and legal clout to do this, however, some estimates suggest there are up to 200 stablecoins out in the wild.
Likewise, stablecoin creators would have to follow all US banking relations, notify the Federal Reserve and the FDIC of issuance, and obtain insurance. The authors believe that stablecoins like Facebook’s Libra (aka Diem) could take advantage of poor communities or gaps in the market.
In theory, a stablecoin based on assets could work around taxation and regulation. This might give certain entities, be they crypto enthusiasts or large corporations, an advantage over traditional market participants.
In addition, all stablecoins would have to be immediately liquid for an exchange to US Dollars. In effect, this requires a 1:1 backing.
But is the law meant to protect the little guy from corporate interests, or is it meant to keep the power of regulation in the hands of congress?
Who Does the Law Really Protect?
Many have seen holes in such legislation. In fact, they question the intentions of the law.
Alex Lindgren, an attorney focused on cryptocurrencies found the law to be illogical. Though the bill’s authors claim to protect against the evils of banks, they propose the same regulations that already oversee traditional bank activity.
Furthermore, the bill suggests that stablecoins are vulnerable to the same risks as traditional credit products.
But technologies like decentralized finance promise to prevent such issues. Reuben Bramanathan, a crypto developer, also pointed out the anachronism of last-century bank practices on new digital technology:
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