Can Banks Issue Stablecoins?

There is no law that bans U.S. banks from issuing paper or digital private banknotes, American Institute for Economic Research senior fellow Thomas Hogan writes.

AccessTimeIconJan 23, 2023 at 1:44 p.m. UTC
Updated Sep 28, 2023 at 2:28 p.m. UTC
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Stablecoin regulation is one of the most controversial topics in cryptocurrency. Recent reports from U.S. regulators as well as the Biden Administration have warned that stablecoins could threaten financial stability, although many are skeptical of that claim. Previous proposals sought to regulate transparency, issuance, and licensing of stablecoins, although no legislation has yet been passed.

This debate, however, may be missing an important point: The issuance of redeemable notes by private banks, in paper or electronic form, appears to already be legal in the United States.

Thomas Hogan is a senior fellow at the American Institute for Economic Research. He was formerly the chief economist for the U.S. Senate Committee on Banking, Housing, & Urban Affairs. This article is part of CoinDesk’s “Policy Week.”

Private banknotes were widely used as a medium of exchange for the majority of U.S. history. Prior to the establishment of the Federal Reserve in 1913, banks issued paper notes redeemable for the equivalent amount of some asset, usually gold. Even after the end of the gold standard in 1933, notes issued by national banks continued to circulate, dwindling to around $20 million in circulation by 1970.

Private banknote issuance is common practice in several countries today. In Hong Kong, Scotland and Northern Ireland, for example, private banks issue paper notes redeemable for their own local currencies. Private bank-issued currency is legal in dozens of countries around the world.

Electronic stablecoins are the modern analog to paper banknotes. Stablecoins are crypto tokens whose value is tied to some other asset, such as the U.S. dollar. The total market value of the top four U.S. dollar-linked stablecoins is currently around $135 billion, which although quite large, is modest compared to the U.S. monetary base of about $5.4 trillion.

Most stablecoins are redeemable on demand, just like deposits in a checking or savings account. Tether (USDT), the largest stablecoin by market capitalization, promises redeemability in U.S. dollars. Some stablecoins, such as the dai (DAI) token, require more than 100% collateralization to help ensure token holders’ funds are secure even if the collateral value falls.

Legal authority

In 2001, U.S. Department of the Treasury economist Kurt Schuler found that the issuance of private banknotes is technically legal in the United States. The tax on state-chartered notes, which effectively prohibited the practice, was repealed in 1976. The laws preventing issuance by nationally chartered banks were repealed in 1994, although a semi-annual tax (totaling 1% per year on the value of notes in circulation) would still apply.

If Schuler is correct, then no law or regulation currently restricts the issuance of private banknotes. A white paper from the Clearing House, a bank association, supports this view, noting that stablecoin-related activities “clearly fall within the existing legal authority of banks.” Further, they write, “no legislative change is required to permit banks to issue digitized deposits” in the form of stablecoins. In 2012, I calculated that U.S. banks could earn billions in profits by issuing their own private notes.

For regulatory purposes, redeemable stablecoins would presumably be treated like banknotes or other non-interest-bearing liabilities. They would not be subject to reserve requirements, which apply only to transaction accounts and were lowered to zero in 2020. Prior to 1994, national banknotes were required to be fully collateralized, but that requirement is no longer in effect.

Bank-issued stablecoins would also not be subject to insurance from the Federal Deposit Insurance Corporation (FDIC), which applies only to specific types of accounts, such as checking and savings accounts.

State-chartered banks would likely enjoy more regulatory flexibility in issuing stablecoins. States such as New York have deterred the crypto industry with restrictive regulatory regimes, but others including Wyoming have welcomed cryptocurrencies, and might provide a regulatory environment amenable to stablecoins.

Another question is whether anti-money laundering (AML) laws, such as know-your-customer (KYC) requirements, would apply to bank-issued stablecoins. Some might argue that holding a stablecoin is like having a bank deposit, but a more accurate comparison is to personal or cashier’s checks, which require only the check writer to have an account at the issuing bank. Signed checks can be passed on to other users who eventually redeem them. AML and KYC laws do not apply to intermediate holders of the check, only the check writer and possibly the redeemer. This standard should apply to stablecoins as well.

The Clearing House’s white paper points out other areas where compliance might be necessary, such as with Staff Accounting Bulletin 121, but none that would prohibit stablecoin issuance.

Limited oversight

In the short term, regulators have only limited authority to increase regulatory scrutiny of bank liabilities. Some regulatory changes, such as increasing reserve requirements, can be made immediately. However, changing regulations specifically to alter the treatment of stablecoin liabilities may require new rules to be created through the official notice-and-comment process, which often takes years to complete.

Prior legislative proposals sought to clarify the legal requirements for issuing stablecoins. Sen. Bill Hagerty’s Stablecoin Transparency Act, Sen. Pat Toomey’s Stablecoin TRUST Act and the Responsible Financial Innovation Act by Sens. Cynthia Lummis and Kirsten Gillibrand would each have required stablecoins issued by depository institutions to be fully collateralized and redeemable for U.S. dollars.

While it may be good policy to require that stablecoins be backed by liquid assets, future proposals should acknowledge the current legal status of stablecoin issuance, rather than creating unnecessary or redundant issuance regimes.

As the law currently stands, no legislation appears to be necessary for banks to issue stablecoins. The practice is not legally prohibited. If Congress or regulatory agencies wish to prohibit the issuance of stablecoins by U.S. banks, they must pass new laws or regulations to do so. Congress can help clarify the current legal ambiguity and ensure that safe, transparent stablecoin issuance continues to be allowed.


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Thomas Hogan

Thomas Hogan is a Senior Fellow at the American Institute for Economic Research.

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