This week, a new stablecoin draft bill was proposed and brought to the US House Financial Services Committee. The bill, viewable on the committees hearing page, is a landmark bill that could be the first major enactment of rules for the crypto markets in the US. The bill comes in the wake of a tumultuous year with the collapse of TerraUSD (UST), an algorithmic stable coin with fully endogenous collateral, and also USDC temporarily losing its peg against $1.
In regards to the bill, the House Financial Services Committee held a hearing on stablecoins featuring Dante Disparte from Circle Internet Financial, issuer of USDC, the Blockchain Association's Jake Chervinsky; Columbia Professor Austin Campbell and New York Department of Financial Services Superintendent Adrienne Harris. In Chervinsky’s written testimony he states that “U.S. dollar stablecoins also offer an extraordinary opportunity to advance U.S. interests at home and abroad” and that “Congress must move quickly to pass tailored legislation providing regulatory clarity to U.S.-based stablecoin issuers.”
A spokesperson for Rep. Patrick McHenry (R-N.C.), told Coindesk that the bill has been privately discussed by lawmakers since last fall, and this is the first time that the public has been able to review it. The bill is very similar to another draft bill that was published in September 2022, before the collapse of FTX. The previous bill was shot down by Democrats, the Biden administration, and Federal Reserve for variety of reasons to include digital wallets, anti-money, laundering rules, and potential financial system risks. At the time McHenry called the bipartisan bill “ugly baby” just before it was scuttled. It's unclear at this time, whether there is enough political capital behind the bill to see its passing, however, Sam Bankman-Fried’s $9 billion fraud, potentially has lit a fire under lawmakers.
So What’s in The Bill?
According to the draft bill, a "payment stablecoin" is a digital asset that is to be used as a means of payment and settlement. Issuers are obligated to convert, redeem, or re-purchase for a fixed amount of monetary value, in this case one dollar. All issuers must obtain a license, either at the federal or state level, and are regulated by the Federal Reserve. Issuers may only be insured depository institutions, a.k.a. banks, national credit unions, as well as licensed non-bank entities which ensures already entrenched incumbents don’t carve too much of a moat for themselves. The Federal Reserve Board shall be responsible for deciding who may issue stablecoins.
Issuers maintain full reserve, backing for their payment stablecoins on a at least a one to one basis. Collateral may only be cash, funds held at a bank, T-bills with maturity of 90 days or less, repo agreements with maturity of 7 days or less or central bank reserve deposits. Collateral reserves may not be re-hypothecated, replenished, or reused and must be held in segregated, non-commingled accounts. Issuers will be required to publish attestations once a month, as well as annual reports. Importantly, all redemption requests must be filled within one day.
Payment stablecoins will be able to access Fed Master Accounts and other services such as the discount window. These privileges should help quell any redemption issues caused by duration risk.
The bill also would enforce a two-year moratorium on endogenously collateralize stablecoins like UST while the Secretary of the Treasury, the OCC, and the SEC carry out a study on the matter. Notably, endogenously stablecoins must solely rely on the value of another digital asset to maintain its price, which Frax does not.
Lastly, the bill directs the Federal Reserve to carry out a study on the impact of CBDCs and their potential impact on monetary policy tools, the financial system and banking sector, financial stability, payment ecosystems, and the potential impact to privacy rights and civil liberties of Americans. The Fed will also be looking at compliance issues with the BSA, existing AML laws, sanctions, fraud, and other financial crimes.
Some Personal Thoughts
Well in my opinion, this is a step in the right direction. The recent history of Custodia bank trying to acquire a Fed Master Account illustrates the murky application process that exists. The last thing we want is the Fed to determine winners and losers, shutting out those companies which it deems “not fit.” It is unclear whether companies like Circle and Paxos would be grandfathered in with the bill or would have to go through the licensing process like everyone else. Stablecoins such as Tether, which has developed a niche with centralized exchanges as well markets outside the US (especially Asia), would most probably be excluded from the United States if this bill becomes law (unless they applied for license).
“It’s an extraordinary moment for the future of the dollar in the world, and the future of currency on the internet,” said Jeremy Allaire, CEO of Circle
Economist Gordon Liao, who works at Circle, published a paper, making the distinction between "payment stablecoins" and "trading stablecoins,” placing USDC in the former category, well, naming Tether, DAI, and BUSD in the latter. The idea is that these "payment stablecoins" will be used for real goods and services, and not for speculative activities. They also have a low ratio of daily trading volume, compared to circulation and little correlation to the price of highly volatile, crypto assets.
“USDC has minimal speculative exposure compared to its fiat currency equivalent, while trading stablecoins like Tether and BUSD have over seven times the speculative exposure relative to payment stablecoins,” the economist, Gordon Liao, writes.
It's hard to see the difference, though between what USDC is offering versus other, potentially "speculative" stablecoins like Tether and BUSD. One of my favorite bloggers, JP Koenig, also was unconvinced about this distinction, who believe that this paper was just a way of current political favor. He notes that while Tether is used heavily at all of the major trading exchanges, it's likely the primary stablecoin used for cross border payments. My own anecdotal evidence bears the same answer, outside the United States, Tether is far more popular and widely used as a payment stablecoin than USDC.
Coming back to Chervinsky’s written testimony, he writes the following:
Today, stablecoins are used by the United Nations Refugee Agency to distribute dollars to internally displaced persons and other war-affected people in Ukraine; for cross-border remittances between family members working and living abroad; by citizens in countries ravaged by inflation like Argentina, Turkey, and Zimbabwe; and to fight for the health and safety of people suffering under authoritarian regimes like that of Nicolás Maduro in Venezuela.
There is no doubt that stablecoins are revolutionary financial tool. They allow anyone in the world to send and receive dollars no matter who they are or where they live. Stablecoins allow anyone to escape the effects of inflation and financial repression. While stablecoins are primarily used for trading currently, with regulatory clarity, they would be able to proliferate to all sectors of the global economy and in turn continue the dominance of the US dollar as the global reserve currency.
Furthermore, stablecoins are a check on the federal government and clear rules and regulations would enshrine the current banking model that we have today. Left-leaning actors are trying to nationalize the dollar system into a "public good" through the use of CBDCs. This would transfer enormous power away the private sector to the US government to control all aspects of both monetary and fiscal policy, a truly disastrous scenario. Excluding all of the privacy concerns around CBDCs, centralization of monetary control further with the Fed would only further politicize money’s production dissemination and use.
The introduction of this bill represents an important first step towards crafting policy, but we must continue driving the conversation forward as there are innovators entering the space daily with new bright ideas how to streamline money with novel ideas. Overreacting to the collapse of FTX and other crypto projects with restrictive, opaque laws that would prevent existing new actors from competing is anti-American, and should be resisted on all fronts.
What The Bill Means For Frax
So where does this leave Frax? If the bill is passed in the next few weeks, it will have little change on how Frax's operates, as it's not widely used in any trading exchange like Binance or Coinbase. Frax's is primarily used in defy and relies on USDC deposited in various DeFi protocols for most of its backing (for now). In addition, time is ticking on the endogenous collateral that is backing Frax currently; a vote has already been approved to make Frax fully-collateralized. On-chain, Frax will be functioning like business as usually.
In off-chain matters, this bill would open up the possibility of Frax establishing a non-bank financial institution with access to a Fed Master Account, stated end goal by founder Sam Kazemian. While many might point to the failure of Custodia, it’s business model was significantly different than what Frax is trying to accomplish. Frax's is seeking to set up a entity which can issue a stablecoin, frxUSD, so that I can fully manage its collateral and severance reliance on USDC. The benefit of this would be that the interest income circle is earning on the back of Frax’s collateral would go to the DAO instead.
