Since the issuance of the PWG Report, several pieces of legislation have been proposed to regulate payment stablecoins, including possible alternatives to the regulatory framework outlined in the PWG Report. Notably, limiting stablecoin issuers to be IDIs would require them to be subject to federal banking supervision and regulation at the issuing entity level by one of the OCC, Federal Reserve Board (“FRB”), or FDIC, and typically at the consolidated holding company level by the FRB. To date, most of the bills proposed would provide stablecoin issuers with additional licensing options. For example, in April 2022, Senator Pat Toomey (R-PA) released a discussion draft of the Stablecoin TRUST Act, which would allow institutions to be licensed as a money transmitting business, a national limited payment stablecoin issuer, or an IDI. The Stablecoin TRUST Act would provide the OCC with the authority to license, supervise, examine and regulate national limited payment stablecoin issuers under a more tailored regulatory regime, limiting the OCC’s authority to regulations that cover: (1) capital requirements, not to exceed six months of operating expenses; (2) liquidity requirements; and (3) governance and risk-management requirements tailored to the business model and risk profile of the issuers. IDIs would have the option to segregate payment stablecoin issuances and reserves from their other activities like lending. Any IDI that chooses to segregate its stablecoin activities would benefit from the same regulatory standards as national limited payment stablecoin issuers. The bill would require stablecoin issuers to maintain assets with a market value equal to at least 100% of the outstanding value of the stablecoins.
More recently, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the Lummis-Gillibrand Responsible Financial Innovation Act. The bipartisan bill aims to empower various agencies with responsibility for regulating cryptoassets and also contains stablecoin provisions that hits on many of the same themes covered in the Stablecoin TRUST Act. Among other things, the Lummis-Gillibrand Responsible Financial Innovation Act would permit IDIs, limited purpose trust companies, and non-depository payment stablecoin issuers operating under a state or federal charter or license to issue, redeem, and conduct incidental activities related to stablecoins, provided they follow the requirements set forth in the bill, including maintaining liquid asset reserves valued at 100% or greater of the value of outstanding stablecoins and redeeming stablecoins at par in legal tender. Stablecoin issuers operating under a new national limited purpose trust charter would be restricted from engaging in activities like lending, but would benefit from a more tailored regulatory regime, including a simplified capital framework, appropriate standards for a community contribution plan, tailored recovery and resolution plan, and tailored holding company supervision.
Other key issues covered in the Stablecoin TRUST Act, the Lummis-Gillibrand Responsible Financial Innovation Act, and other stablecoin bills proposed to date include reporting, disclosure and audit, Bank Secrecy Act/anti-money laundering (“BSA/AML”), insolvency treatment, federal deposit or similar insurance, access to Federal Reserve accounts and services, and the scope of how “stablecoin” or “payment stablecoin” is defined. An overview of various legislative proposals is included in the Appendix.
Stablecoin issuers currently may operate under charters or licenses issued at the state level. For example, the New York Department of Financial Services (“NYDFS”) permits licensed virtual currency businesses (“BitLicensees”) and New York limited purpose trust companies to issue stablecoins with NYDFS approval. The NYDFS recently issued guidance on stablecoins emphasizing certain requirements, including that the market value of the assets backing the stablecoin must be equal to or greater than the nominal value of all outstanding units of the stablecoin at the end of each business day, the assets in the reserve backing the stablecoin must be separated from the proprietary assets of the issuer and held by FDIC -insured state or federally chartered institutions or by asset custodians approved by NYDFS, and issuers must have “timely” redemption policies in writing (approved in advance by the NYDFS). The NYDFS also requires monthly and annual examinations of management attestations by an independent Certified Public Accountant (CPA).
As stablecoins have become more popular, they have faced increasing scrutiny from policymakers. This scrutiny is illustrated by the PWG Report, proposed legislation, and state regulatory actions. It seems almost certain that the focus on and policy activity regarding stablecoins will continue.
