Stablecoin Policy Issues for the 118th Congress

Stablecoin Policy Issues for the 118th Congress

July 12, 2023
Stablecoin Policy Issues for the 118th Congress
Stablecoins are digital financial instruments that use
see CRS Insight IN11928, Algorithmic Stablecoins and the
technology underpinning cryptocurrencies (e.g., Bitcoin and
TerraUSD Crash.) According to the SEC, UST satisfied the
Ether) but attempt to eliminate volatility by pegging their
Howey test, a legal standard it uses to identify a security
value to a stable asset (e.g., one U.S. dollar). For more
with four prongs: (1) the investment of money, (2) in a
information, see CRS In Focus IF11968, Stablecoins:
common enterprise, (3) with a reasonable expectation of
Background and Policy Issues. Stablecoins have garnered
profits, (4) to be derived from the efforts of others.
significant congressional attention because of the wider
Stablecoins are not expected to appreciate or generate
interest generated by cryptocurrencies and claims that they
returns. However, the SEC cited Terraform’s promotion of
could improve payments. Recent instability and failures in
nearly 20% returns from the affiliated Anchor protocol as
stablecoin markets have also raised systemic risk concerns.
proof, in part, of the expectation of profits.
This In Focus addresses current stablecoin-related policy
issues and policymakers’ efforts to regulate them.
Policy Options
Congress may consider how the existing framework
Regulatory Framework
accommodates existing licensure and permissions for
In the absence of an explicit overarching regulatory
money service businesses and banks or whether legislation
framework, various federal and state regulatory agencies
is needed requiring the former to acquire federal licenses
have improvised a de facto framework comprising guidance
and the latter to establish subsidiaries to continue engaging
and enforcement actions, applying existing banking and
in such activity.
capital market regulations to stablecoins where applicable.
Today, stablecoin issuance remains the domain of state-
Regulatory Jurisdiction
licensed nonbank entities (e.g., money services businesses),
Legislation has generally considered stablecoins in their
which face limited federal oversight outside of registration
prospective capacity as payment instruments. The term
requirements for anti-money laundering purposes.
payment stablecoin is sometimes used to define such
instruments. However, for a variety of reasons, such
Federal bank regulators have established guidelines for
distinctions do not exist in practice. Stablecoins have not
potential bank stablecoin activity. In a series of interpretive
been widely adopted for retail payments but are considered
letters in 2020 and early 2021, the Office of the
a crucial component of crypto trading. Also, stablecoins are
Comptroller of the Currency (OCC) outlined various
currently not issued directly by issuers for retail use, a perk
stablecoin activities permitted by banks, including
for which one requires a business account. To the extent
custodying cryptocurrency and holding stablecoin reserves,
that legislation focuses on payment stablecoins, Congress
among others. In late 2021, the OCC seemingly affirmed
could consider how much clarity to provide in statute—
these previous views but imposed a requirement that a bank
potentially defining it broadly or narrowly—or whether to
notify its regulatory supervisor of its intention to engage in
defer to regulators to provide a definition. Given that major
such practices and not to engage until it receives written
stablecoins are not currently used primarily for retail
notification of “non-objection.”
payments, how legislation defines payment stablecoin could
determine whether they are included in any new regulatory
Similarly, the Federal Reserve Board issued a supervision
framework. Congress may also consider whether stablecoin
and regulation letter mandating that banks confirm the
issuers are able to opt in/out of a framework or whether
permissibility of actions, establish appropriate risk
existing issuers should be grandfathered out of the
management and other controls, and notify a point of
framework.
contact prior to engaging in any crypto-related activity
(including stablecoins). The Federal Deposit Insurance
As such, a key policy issue is regulatory jurisdiction.
Corporation (FDIC) issued similar guidance. For more, see
Congress can mandate that authorized stablecoins issuers be
CRS In Focus IF12320, Crypto and Banking: Policy Issues.
chartered or licensed at the federal level by one or more
agencies, at the state level, or some combination thereof. In
Some stablecoins may also fall under the jurisdiction of the
the absence of a dedicated federal payment regulator, bank
Securities and Exchange Commission (SEC). In 2023, the
chartering may serve as a model for such decisions. (For
SEC took legal actions against Terraform Labs, issuer of
more information, see CRS Report R47014, An Analysis of
the UST algorithmic stablecoin, alleging it had, among
Bank Charters and Selected Policy Issues.) In November
other things, issued unregistered securities in the form of
2021, the Treasury Department and regulators issued a
stablecoin UST and its “balancer coin,” LUNA.
Report on Stablecoins, which recommended that
(Algorithmic stablecoins are generally not backed by any
“legislation should limit stablecoin issuance, and related
assets and use computer programs to monitor supply and
activities … to entities that are insured depository
demand and manage issuance of the stablecoins. For more,
institutions,” such as banks.
https://crsreports.congress.gov

Stablecoin Policy Issues for the 118th Congress
The report suggested, “Depending on the facts and
hazard and the need for safety and soundness regulations to
circumstances, a stablecoin may constitute a security,
protect the deposit insurance fund, and consumers’
commodity, and/or derivative implicating the jurisdiction of
decision-making when choosing among stablecoins.
the SEC … or the CFTC [Commodity Futures Trading
Commission].” While the report did not elaborate, the chair
Consumer and Investor Protection
of the SEC listed various potential attributes to consider,
Relatedly, stablecoin issuers and the firms that trade
such as whether or not the stablecoin pays interest, the
stablecoins present customer and investor protection
mechanisms used to maintain its value, and how it is
considerations. For example, an issuer is not currently
offered and subsequently used. Therefore, the question of
required to disclose information about a stablecoin’s
whether stablecoins are securities or commodities remains
underlying technology or its reserves, which may create
open, with policy ramifications.
operational risks and information asymmetry. Also, unlike
traditional brokers, which must segregate customer funds,
Congress may consider whether to regulate all stablecoins
stablecoin issuers and cryptocurrency platforms may be co-
similarly or whether those that are backed by deposits and
mingling user funds with platforms funds. This could make
traditional securities and more closely resemble payment
it difficult for holders to retrieve funds if the exchange were
products should be regulated differently than those with a
hacked or went bankrupt, putting users in the
different structure. Similarly, if legislation puts stablecoins
disadvantageous position of being “unsecured creditors.”
in the jurisdiction of banking regulators, it raises the issue
(For more information, see CRS Legal Sidebar LSB10832,
of whether to absolve it from SEC or CFTC regulatory
Crypto Assets and Property of the Bankruptcy Estate: An
requirements or whether there may be overlapping
Analysis.) Instead, stablecoin transactions occur on
jurisdictions. If various charter types (including nonbanks)
exchanges, and issuers and exchanges may have
with different regulators (including state regulators) are
undisclosed relationships that create conflicts of interest.
permitted, it would raise the issue of how to establish
uniform requirements and whether such requirements can
Considering the novel risks posed by stablecoins, Congress
be applied evenly by various regulators.
may choose to subject issuers to prudential regulation
similar to that of banks, or it may adopt the same
Master Accounts
disclosure, segregation, custody, and conflict-of-interest
In recent years, the question of whether newer financial
rules that apply to traditional securities and intermediaries.
institutions—such as fintech companies or cryptocurrency
Alternatively, it may opt to adopt stablecoin-specific
firms—should have access to master accounts at the Federal
measures to mitigate risks.
Reserve has emerged as a key policy issue. Master accounts
allow holders to access the Fed’s wholesale payment
Reserves and Disclosure
systems and related Fed payment services. (For more on
Currently, there are no requirements regarding the types of
master accounts, see CRS Insight IN12031, Federal
assets an issuer must hold to back stablecoins, the ratio of
Reserve: Master Accounts and the Payment System.) In
assets to stablecoins at which assets must be held (for
August 2022, the Fed issued final guidance stating that it
example, one to one), or the capital that issuers must hold.
may grant master accounts only to member banks or
Similarly, there are no rules requiring issuers to disclose
depository institutions. As such, if Congress permits
this information. Instead, issuers provide information at
nonbanks to continue issuing stablecoins, existing policy
their own discretion, and reserve compositions vary. Some
may prevent them from accessing master accounts.
issuers opt to subject themselves to monthly attestations—
financial reviews that are less robust than formal audits.
Deposit Insurance
Federal deposit insurance protects bank depositors up to a
A key policy issue is whether Congress should prescribe the
limit from losses that could occur if an insured depository
types and duration of assets that are permitted to back (or
institution were to become insolvent. The FDIC oversees
be held by) a fiat-backed stablecoin based on their liquidity
the deposit insurance fund. The FDIC has issued guidance
and likelihood of default, for example, and the ratio in
clarifying that deposit insurance does not apply to digital
which they should be held. In addition, Congress may
assets. However, the Report on Stablecoins suggested that
consider whether to impose certain reporting and auditing
“with respect to stablecoin issuers, legislation should
requirements on issuers.
provide for … potentially, access to appropriate
components of the federal safety net,” which may include
Committee Legislative Proposals
FDIC insurance.
The 117th Congress ended before the release of a bill
reportedly negotiated by members of the House Committee
Legislators therefore may consider whether deposit
on Financial Services. In the 118th Congress, the committee
insurance would apply to stablecoins issued by banks, if
majority released the bill, which was quickly disowned by
permitted, and whether to extend insurance to nonbanks. If
minority lawmakers. Since then, the chair and ranking
legislation were to omit stablecoins from deposit insurance
member have each issued stablecoin discussion drafts, a
protection, Congress may consider what priority to give
hearing for which was held on May 18, 2023. While the
stablecoin holders in the event of a failure. Congress could
two bills include various areas of overlap, debate is likely to
also consider what role the existence or absence of deposit
center on the several differences between the proposals.
insurance guarantees may have on issuers’ decisions when
selecting among potential types of licensure/charters,
Paul Tierno, Analyst in Financial Economics
competition among issuers with different licenses, moral
IF12450
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Stablecoin Policy Issues for the 118th Congress

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