A new draft legislation penned by the U.S. House Financial Services Committee lays out rules and regulations to govern payment stablecoin issuers in the country.
The bill proposes to give non-bank stablecoin issuers access to central bank borrowing and deposit accounts. Applicants must receive a response within 90 days, or they will be automatically approved. If an application is not approved, the regulator must give an explanation.
If the bill, which has bipartisan support, passes as presented, banks and other insured depository institutions will apply to appropriate Federal regulators, while non-bank entities will be regulated directly by the Federal Reserve. Penalties for operating an unlicensed stablecoin are to be set at $100,000 per day.
The proposed regulation also states that physical cash, short-term treasuries, and treasury repos are acceptable collateral for stablecoins. It does not state that commercial bank deposits are acceptable, likely due to Circle losing 8% of USDC’s assets when Silicon Valley Bank (SVB) collapsed in March 2023.
What will ensure the proper backing of reserves? A new rule suggests that monthly attestations by the CEO of the stablecoin issuers would be enough. There’s no mention of proper audits or the involvement of accountants. However, it’s worth noting that the Federal Reserve could produce stricter regulations related to proving reserves at a later date.
The bill also proposes a two-year interval on issuing new “endogenously backed stablecoins,” meaning those backed by other digital assets. While it does not explicitly mention algorithmic stablecoins, it likely includes these. The logic here is to give the Treasury, SEC, and OCC time to study them.
Will Tether be permanently locked out of the US?
The new rules will make it difficult for issuers like Tether, which was fined and kicked out of New York state for making false statements, to do business in the United States.
It’s difficult to imagine the Federal Reserve approving the application of a stablecoin issuer with such a shady, criminal past. As well as being kicked out of New York, Tether has yet to follow through on its long-awaited promise of a full audit, and it currently has several executives under investigation by the U.S. Department of Justice (DOJ) for bank fraud. Truly, Tether’s long list of misdeeds is almost unbelievable.
If Tether did get approval from the world’s most powerful central bank to open a deposit account with it and to get access to freshly minted dollars, it would almost certainly put to bed the rumors and speculation about whether or not it is backed by real reserves. While it has been proven that Tether has lied about this in the past, many wonder if, by using Tether to pump the prices of various tokens before selling them for dollars, it may now have the funds to call itself fully backed.
Tether is also dealing with a change in the regulatory landscape in Hong Kong where it is currently based. Asia’s financial hub recently declared itself (re)open for business to the digital currency industry, but new regulations will require exchanges and digital currency service companies to meet strict anti-money laundering requirements, cybersecurity rules, and proper accounting/auditing. For a firm that has been linked to convicted financial criminals and which has ducked every attempt to get audited, this could spell trouble.
Regulations will continue and intensify
The new bipartisan stablecoin bill in the U.S. is just one of many around the world attempting to bring law and order to the digital currency industry. This has been a long time coming, and now that the train has left the station, it’s picking up momentum.
Slowly but surely, we’re seeing the bad actors pushed out of the industry as new regulations become law and existing ones are enforced. While some will kick and scream about government interference and heavy-handedness, the fact is this was always going to happen, and it’s likely that many tokens, including stablecoins, will not survive.
As the era of criminality and chaos fades to a memory of wilder times gone by, true innovation will finally take center stage.
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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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