Stablecoin Firms Face Tough Reserve, Capital Demands in US Bill, Source Says

Digital tokens such as tether and Circle’s USDC that are vital to functional crypto markets would have to meet stringent new requirements in legislation that’s close to the finish line.

AccessTimeIconJul 20, 2022 at 9:01 p.m. UTC
Updated May 11, 2023 at 6:32 p.m. UTC

Companies that issue stablecoins would have to face bank-like regulations and back their tokens with conservative assets under the latest plan for U.S. legislation still being negotiated by leaders of the House Financial Services Committee, according to a person familiar with the talks.

The offices of Chairwoman Maxine Waters (D-Calif.) and the panel’s ranking Republican, Patrick McHenry (R-N.C.), have preliminarily agreed that stablecoins should be directly reinforced with assets such as cash and U.S. Treasury bonds that won’t be vulnerable in a panic, said the person, who requested anonymity because the legislation hasn’t yet been released to the public. The firms issuing them would also have to maintain capital, liquidity and open themselves to agency supervision, the person said.

The lawmakers’ effort packs heavy implications for global crypto trading, and it could leave some questions about how existing stablecoins can meet the new demands.

If the bipartisan effort clears the House of Representatives and can win enough votes in the Senate – potentially a higher hurdle – it would become the first significant legislation setting up U.S. regulations for a crucial corner of the cryptocurrency industry. It may also lend some long-awaited legal legitimacy to crypto, though it would narrow the path for how existing stablecoin firms would need to set themselves up in the U.S.

Stablecoins, which are tokens tied to the value of another asset such as the dollar, may also be able to lean on some amount of short-term repurchase agreements – highly liquid transactions in government securities – in their stringent new reserve requirements, the person said. And the new regulatory standards would also ban commercial companies issuing stablecoins, which would close a door on the tokens being issued by companies such as Meta’s (FB) Facebook, Amazon (AMZN) or Walmart (WMT).

The bill would additionally provide regulators with the power to insist on interoperability among stablecoins to guard against anti-competitive behavior.

A key worry among Republicans was that nonbank firms may not be given a chance to participate in the space they invented, but that concession was granted by letting issuers outside the banking system seek government approval to issue stablecoins. However, details on exactly how that would work haven’t yet emerged.

While today’s chief stablecoins such as Tether’s USDT and Circle Internet Financial’s USDC make up a limited slice of the $1 trillion crypto market, their trading volume can easily eclipse other tokens because they are routinely used on the other side of transactions. When people buy and sell bitcoin (BTC), ether (ETH) or other coins, they’re often doing it with stablecoins because they act as a relatively steady proxy for the dollar.

Tether's USDT is the dominant dollar-tied token, and the issuer has often been targeted by critics complaining about the murky picture of the reserves meant to ensure a USDT can be safely swapped for a dollar. The British Virgin Islands-registered firm behind USDT reports that some of those reserves remain in commercial paper, or short-term corporate debt that yields higher returns than government securities but also comes with higher risk. The company has been working to reduce that debt use.

While the House’s legislation is said to provide a path for nonbank financial firms to issue stablecoins, as CoinDesk previously reported, the requirements for reserves and the demands that they maintain certain capital and liquidity levels – similar to the U.S. oversight of banks – may be an adjustment challenge for companies like Tether.

Last year, the U.S. Treasury Department – alongside key financial regulators – made recommendations on policing stablecoins. Though their President’s Working Group on Financial Markets report insisted that stablecoins issuers be walled within the perimeter of U.S. banking regulations, Nellie Liang, Treasury’s undersecretary for domestic finance, told reporters this week the agency never meant that issuers needed to be banks with deposit insurance. She said it would be OK with the financial watchdogs if the firms putting out stablecoins were merely affiliates of banks or bank holding companies, so they’d still be subject to the same regulations as mainstream lenders.

It’s unclear whether the current version of the legislation, which is expected to be finished as soon as this week, will please the regulators who would have to put it into action. A Treasury spokesman declined to comment on the latest discussions about the bill. And spokespeople for Waters and McHenry didn’t immediately respond to requests for comment on the effort.

The committee is planning for a legislative markup on July 27 to deal with the bill, the person familiar with the discussions said.

In recent months, the near-instant vaporization of $18 billion in the collapse of algorithmic stablecoin terraUSD (UST) lent some steam to lawmakers hoping to put up guardrails around this sector. Regulators have pinpointed stablecoins as the crypto world’s greatest threat to financial stability, asking that Congress act fast. But to clear both chambers, the legislation needs to be bipartisan and exceedingly narrow to give the parties fewer points for objections.

The potential Waters-McHenry stablecoin bill is aiming at that mark, rather than trying to set up a wide-ranging system of rules to wrangle the whole industry, as previous legislation from senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) is seeking to accomplish.


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Jesse Hamilton

Jesse Hamilton is CoinDesk's deputy managing editor for global policy and regulation. He doesn't hold any crypto.