An Overview of H.R. 4766, Clarity for Payment Stablecoins Act
INSIGHTi
An Overview of H.R. 4766, Clarity for
Payment Stablecoins Act
September 25, 2023
The House Committee on Financial Services on July 27, 2023, ordered to be reported an amendment in
the nature of a substitute of the Clarity for Payment Stablecoins Act (H.R. 4766), sponsored by Chair
Patrick McHenry, which would change how stablecoins are regulated. Currently, there is no
comprehensive federal regulatory framework specifically designed for stablecoins. Instead, existing state
and federal laws and regulations are applied to aspects of the stablecoin industry based on the nature of
activities and individual stablecoin features. For example, stablecoin issuers are subject to state money
services business licensure regimes and must comply with federal anti-money laundering requirements.
The bill’s proposed regulatory framework and licensing process are described below.
Requirements for Issuing Payment Stablecoins
H.R. 4766 focuses on payment stablecoins—which it defines as digital assets issued for payment and
redeemable at a predetermined fixed amount—that hold assets in reserve that can be used to redeem the
stablecoins. The bill would require an issuer to hold at least one dollar of permitted reserves for every
dollar worth of stablecoins outstanding/issued. The bill would limit acceptable reserves to coins and
currency, insured funds held at banks and credit unions, short-dated Treasury bills and repurchase
agreements backed by Treasury bills, or central bank reserve deposits. Issuers would be prohibited from
using reserves except to create liquidity for redemptions. Despite limiting reserves to safe assets, capital
and liquidity requirements might still be needed to mitigate run risk, and the bill would require relevant
regulators to jointly issue capital, liquidity, and risk management rules for both federal and state
stablecoin issuers.
Issuers would be required to establish and disclose stablecoin redemption procedures and to publish
monthly reports on outstanding stablecoins and reserve composition. The bill would require the report to
be “examined”—as opposed to audited—by a registered public accounting firm and would require that
issuers’ executives certify the reports, subject to criminal penalty for knowingly false certifications.
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Applications and Regulatory, Supervisory, and
Enforcement Regimes
The bill would establish a framework for regulation, supervision, and enforcement of stablecoin issuers.
The bill envisions a federal or state option for stablecoin issuers, and issuers could be banks or nonbanks.
Banks and credit unions would be subject to federal regulation, while nonbanks would have the option to
be subject to state or federal registration and oversight. However, the Federal Reserve would still have
rulemaking authority for state-qualified issuers. The bill would clarify that payment stablecoins are
neither securities nor commodities, nor are they subject to the jurisdiction of the Securities and Exchange
Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The bill would amend
various securities laws to that end but does not include amendments to any commodity-related sections of
the U.S. Code.
Subsidiaries of Insured Depository Institutions, Credit Unions, and
Nonbank Federal Issuers
Stablecoin subsidiaries of insured depository institutions (IDI), a term that refers to banks and credit
unions, would be required to apply with and receive approval from the same banking regulator as that of
the IDI. Nonbanks—defined in the bill as entities that are not IDIs or subsidiaries thereof—that choose
the federal option must receive approval from the Fed.
Applications would be evaluated on three key principles: the ability of the applicant to meet the baseline
requirements (described above); the “general character and fitness of the management of the applicant;”
and consumer risks and benefits. If a decision is not rendered within 120 days, the application would be
deemed approved. Regulators would have to justify denied applications and permit an applicant to request
an appeal hearing and to reapply.
Subsidiaries of IDIs would be subject to supervision by the primary federal regulator “in the same manner
as such [IDI].” Nonbank stablecoin issuers would be required to file reports with, and may be subject to
exams by, federal regulators to, among other things, ascertain and evaluate the financial condition and
nature of operations of the issuers, the risks to safety and soundness and financial stability, and the
systems used for controlling these risks.
The regulators would be permitted to “prohibit a permitted payment stablecoin issuer from issuing
stablecoins” or to stop certain activities or issue civil money penalties if the issuer violated the act or any
written condition imposed by the regulator in connection with an agreement with the issuer.
State Qualified Payment Stablecoin Issuers
State regulators would presumably approve state qualified payment stablecoin issuers (this is not explicit
in the bill) and be responsible for their supervision and enforcement, whereas the Fed would be
responsible for writing regulations for these institutions. However, the bill would give state regulators the
option of ceding their supervision and enforcement authorities to the Fed. The Fed would also be allowed
to take enforcement actions against state issuers in “exigent” circumstances, a term the Fed would be
required to define within 180 days of the bill’s enactment. It is unclear how the Fed’s authority for
rulemaking of state qualified payment stablecoins issuers would interact with a clause of the bill that
grants state preemption of federal law.
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Other Provisions
The bill would establish rules for institutions charged with safeguarding stablecoins and other assets.
Specifically, only custodians supervised by either a federal stablecoin regulator—the SEC or the CFTC—
or a state banking or credit union supervisor could safeguard stablecoins. It would also prohibit
custodians from comingling their own funds with customers, with exceptions. Custodians would be
required to “take such steps as are appropriate” to protect customer funds from a custodian’s creditors.
The bill would also enshrine in law that banks may engage in various activities involving stablecoins.
The bill would establish a two-year moratorium on the issuance of new endogenously collateralized
stablecoins (colloquially called algorithmic stablecoins, stablecoins that rely on the value of another
digital asset to maintain a fixed price). In Spring 2022, TerraUSD, a so-called algorithmic stablecoin, lost
nearly $16 billion in value. The bill would mandate a study of these instruments but does not subject
those in existence prior to the bill’s enactment to the bill’s regulatory regime.
Author Information
Paul Tierno
Andrew P. Scott
Analyst in Financial Economics
Analyst in Financial Economics
Disclaimer
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