Members of the US Congress announced on December 2 the proposal of a new consumer protection bill to increase the oversight and regulation of existing stablecoin issuers, potential stablecoin issuers, and stablecoin-related service providers. The Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, seeks to provide protection to unbanked and underbanked communities from fair lending risk and other consumer protection challenges such as disparate impact, predatory lending, and digital redlining.

Due to the coronavirus (COVID-19) pandemic, some consumers have changed how they send and receive money. COVID-19 forced many individuals to limit their time outside their homes and even quarantine under certain circumstances. Those with limited or no ability to leave home to go to a bank, credit union, financial institution, or ATM may face new barriers to accessing and utilizing traditional financial institutions and brick-and-mortar bank locations, leaving some to rely on online resources. In addition, the emergence of digital assets using blockchain technology on a distributive ledger has increased the demand for digital transaction exponentially—threatening to disrupt traditional models on the way consumers transfer value, and putting pressure on more traditional financial institutions to modernize monetary and payment infrastructures.

These changes, coupled with the current health environment, have broad implications for corporations in the financial technology sector who seek to meet the financial servicing needs of low- and moderate-income (LMI) consumers with faster direct payments, easy access to loans, and instant paperless currency as society tries to grapple with issues ranging from privacy concerns, financial inclusion, proper regulatory oversight, and monetary policy. The STABLE Act seeks to address any LMI consumer vulnerabilities that could be exploited and obscured by stablecoins. This LawFlash provides a summary of the STABLE Act’s proposed requirements, including timing and implications for companies to consider with respect to the proposed legislation. If this bill becomes law, companies in the stablecoin business will need to carefully navigate the regulatory requirements.

Stablecoin Issuers Would Need to Be Banks or Savings Associations That Are Insured Depository Institutions

The proposed legislation would amend the Federal Deposit Insurance Act to require a stablecoin issuer to be an insured depository institution—and, by default, a bank or savings association—that is a member of the Federal Reserve System. Under the legislation, a stablecoin issuer would receive a Master Account at the Federal Reserve System.

In addition, a stablecoin issuer would be subject to the following requirements:

  • Notify the appropriate federal banking agency, the Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal Reserve System (Board of Governors) of its intent to issue stablecoin at least six months in advance of issuance and receive from each such regulator written approval to issue stablecoin prior to issuance.
  • Provide “ongoing analysis” to the Board, Financial Stability Oversight Council, and Office of Financial Research on potential systemic impacts or monetary policy implications of the stablecoin.
  • Immediately redeem all outstanding stablecoin upon demand in US dollars.
    • The appropriate federal banking agency may impose penalties for failing to immediately redeem an outstanding stablecoin, upon demand, in US dollars, or for the inability to do so as determined by the appropriate federal banking agency, and may:
      • revoke the issuer’s deposit insurance provided under the Federal Deposit Insurance Act,
      • revoke its membership in the Federal Reserve System,
      • revoke its federal charter, or
      • impose a lesser penalty as the agency determines appropriate.
  • Maintain collateral for all outstanding stablecoin, excluding the value of outstanding collateral known to the issuer to be insured deposits. That being said, the proposed legislation goes on to provide that, with regard to a depositor and for purposes of determining whether a deposit is an insured deposit, the FDIC “shall first include deposits that are not stablecoins.” While prioritizing deposits in this manner impacts consumers, many other aspects of the banking regulations to which stablecoin issuers would be subject under this legislation provide consumers with added protections. For example, under this legislation stablecoin issuers would become subject to the Bank Secrecy Act and attendant anti-money laundering requirements, anti-fraud requirements, privacy laws and regulations, financial integrity standards, and other consumer protection laws.

Definition of Stablecoin Under the Proposed Legislation

The term “stablecoin” means any cryptocurrency or other privately-issued digital financial instrument that—

(A) is directly or indirectly distributed to investors, financial institutions, or the general public;

(B) is—(i) denominated in United States dollars or pegged to the United States dollar; or (ii)denominated in or pegged to another national or state currency; and

(C) is issued—(i) with a fixed nominal redemption value; (ii) with the intent of establishing a reasonable expectation or belief among the general public that the instrument will retain a nominal redemption value that is so stable as to render the nominal redemption value effectively fixed; or (iii) in such a manner that, regard less of intent, has the effect of creating a reasonable expectation or belief among the general public that the instrument will retain a nominal redemption value that is so stable as to render the nominal redemption value effectively fixed.

The term “nominal redemption value” means the value at which the stablecoin can readily be converted into United States dollars, or any other national or state currency, or a functional monetary equivalent, on demand, at the time of issuance, or otherwise accepted in payment or to satisfy debts denominated in United States dollars or any other national or state currency.

The legislation describes “the value at which the stablecoin can be readily converted” into U.S. dollars or to another national or state currency, stating that the value of stablecoin should be calculated using the express or implied pegged rate for such conversion at the time of issuance.

“Functional monetary equivalent” means (i) deposits, as defined under section 3 of the Federal Deposit Insurance Act; (ii) e-money and money transmitter balances; (iii) other stablecoins; and (iv) any other financial instrument issued for the purpose of circulating as money, making payments, or satisfying debts denominated in United States dollars or any other national or state currency.

Disclosure Requirements

A person who offers or provides a product or service with respect to stablecoin (irrespective of whether the person is the issuer of the stablecoin) would be required to clearly disclose:

  • Whether the person is the original issuer of the stablecoin;
  • If the person is the issuer, further disclosure of whether the stablecoin is held as an insured deposit or fully collateralized by reserves maintained at a federal reserve bank; and
  • To the extent the person wishes to use the term “dollar” to refer to stablecoin balances, the person must seek approval from the FDIC or the Board of Governors.

Stablecoin-Related Businesses Would Be Subject to Oversight

The proposed legislation also requires non-issuers to obtain from the appropriate federal banking agency, the FDIC, and the Board of Governors advance written approval and approval on an ongoing basis before engaging in stablecoin activity. The legislation captures a broad number of non-issuers that would be subject to this approval requirement, including any person who issues a stablecoin-related product, provides any stablecoin-related service, or otherwise engages in any stablecoin-related commercial activity, including activity involving stablecoins issued by other persons. These persons would be required to adhere to the disclosure requirements, too.

Generally, stablecoin is not considered an investment security, commodity, or traditional banking product, and for these stablecoin-related businesses that are not currently subject to bank regulatory oversight, there is no obvious “appropriate federal banking agency” responsible for approving their stablecoin activities. Arguably the Financial Crimes Enforcement Network, the Commodity Futures Trading Commission, and the Consumer Financial Protection Bureau may have enforcement or examination authority over some aspects of a stablecoin issuer’s activities, and the Gramm-Leach-Bliley Act may authorize additional oversight. However, no one agency is tasked with overseeing stablecoin issuers.

Consumer Protection Concerns Driving the Legislation

Over the past few months, the Office of the Comptroller of the Currency (OCC) has issued cryptocurrency guidance, including guidance that a bank that holds stablecoin reserves be able to verify the outstanding stablecoins on a regular basis to confirm that the reserve deposits are always equal to or greater than the number of outstanding stablecoins that the issuer has issued (consistent with the proposed legislation’s requirement that an issuer maintain a 1:1 reserve). The bill’s sponsors, however, expressed their concerns over the OCC’s activities related to cryptocurrency and stablecoin in a November 10, 2020 letter to the Acting Comptroller of the Currency. The congressional representatives ask the Acting Comptroller of the Currency to respond to a number of questions highlighting their consumer protection concerns by December 10. The questions include:

  • With the permission granted to banks to now use bank deposits as reserves against stablecoins, will these reserves be segregated from calculating the capital requirements of banks or will they be able to lend against these deposits?
  • What consumer protections will the OCC impose on the stablecoin providers themselves?
  • Considering a stablecoin issuer will likely be willing to move large amounts of reserves between different banks, will stablecoin reserves be treated as brokered deposits, subject to applicable restrictions on banks accepting them?
  • Considering mass redemptions of a stablecoin backed by reserve accounts would result in a mass withdrawal of those reserves, what measures will banks and FSAs have to take to ensure that a “run” on a stablecoin does not result, in effect, in a run on deposits?
  • If stablecoins are increased as a result of your interpretive letter, will this increase the Digital Divide or negatively impact your Project Reach? Do other agencies and considerations factor into your decision in terms of internet access to stablecoins?
  • How do you plan to protect the notion of the dollar itself, in that this will be private money used for payments digitally, and therefore subject to potential losses should the stablecoin provider go out of business? Is it the bank’s, the stablecoin provider’s, or the OCC’s responsibility to ensure that enough deposits are held at these institutions to protect the consumer?
  • To what extent have you collaborated with your fellow regulators on your decisions? What implications for regulation outside of your sole jurisdiction do you anticipate as a result of your interpretive letter?
  • Since the Federal Reserve Bank has strategically used its control of the money supply in times of stress to address inflation, what is the OCC’s assessment of the likely impact of diluting the FRB’s authority and effectively transferring the control of our money supply to stablecoin providers?

Although the bill’s sponsors and the letter’s other authors acknowledge that responding to the growth in crypto-related financial services is important, they caution against the OCC’s “unilateral approach” in connection with special purpose payments charters and recommend that the OCC collaborate with other regulators and Congress on these issues. Highlighting FDIC statistics on the unbanked (6.5% of Americans), the underbanked (18.7% of Americans), and the number of minority-owned banks that have closed between 2008 and 2018 (66 banks), the letter’s authors expressed concern that the OCC’s efforts to serve those who are “already-banked” has the effect of overlooking opportunities to help the unbanked and underbanked to participate in the US economy and its banking system. The representatives’ concerns about digital redlining (where technologies like AI could facilitate discrimination and unequal access to credit or unequal terms of credit based on the race of a community) and disparate treatment are not new and the legislation aims to prevent unfair lending practices by regulating stablecoin issuers.

What regulatory framework applies to stablecoin issuers is a common question. Stablecoin issuers operate in a new and innovative space that offers the potential for fast and creative solutions for quicker payments and more efficient money movement as well as a nebulous regulatory jurisdiction that could present risks for financial stability, consumer harm, financial integrity, and data protection. Stablecoin issuers generally are not subject to Securities and Exchange Commission requirements (unless their stablecoin is considered securities, which may not be the case), banking regulation, or other regulatory oversight. Any future stablecoin legislation is likely to address consumer protection.

What’s Next?

Although it is highly unlikely that this legislation goes anywhere prior to the end of this session of Congress in less than a month, it is possible that the sponsors of the bill reintroduce the legislation during the next session of Congress. While who will control the Senate remains unclear, the next session of Congress may pass this legislation.

If the legislation is adopted, it could generate increased attention to this regulatory grey area and new ideas about how to effectively regulate stablecoin issuers. Current stablecoin issuers should take note that the legislation does not provide a grandfathering provision and, thus, it is unclear whether they could continue their operations while coming into compliance with the new requirements. In addition, regulators would be subject to new rulemaking efforts; the STABLE Act gives the Board of Governors, the Comptroller of the Currency, and the FDIC just three months to adopt regulations under the new bill.