The stablecoin industry recently hit a market cap of US$25 billion, and along with that has come proposed legislation that would require issuers to obtain a banking charter in addition to FDIC insurance and deposits with the U.S. Federal Reserve that are 1:1 with every token issued.
At first glance, the “Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act” might seem like a logical policy response that would regulate some fiscal integrity into a nascent industry that has seen Tether, its largest stakeholder, become a magnet for controversy. But the bill sponsored by Reps. Rashida Tlaib, Jesús “Chuy” García and Stephen Lynch have been met with a mix of skepticism and concern by the industry, with two prominent leaders in this space telling Forkast.News that the STABLE Act comes from a place of misunderstanding, and is in fact “deeply troubling.”
Although Facebook’s Diem, the stablecoin formerly known as Libra, has had its share of headlines, the lawmakers likely also had their sights fixed on Tether — a US$20 billion dollar-plus goliath by market cap. For all of its size and scale, Tether has a tumultuous relationship with auditors. Whether it has currency reserves at a 1:1 ratio, which gives stablecoins value, is also up for debate.
In a recent interview with Forkast.News Editor-in-Chief Angie Lau, Joe Lubin, a co-founder of Ethereum and founder of blockchain developer ConsenSys, compared the proposed law to legislator misgivings in the 1990s about a then-brand new technology called the internet.
“If they had the opportunity in, say, 1996 to kill this dangerous World Wide Web thing, because it will provide too much democratic access to content creation, to publishing…. anybody can just publish things that they want to, anybody can communicate in real-time via text or audio or video as we’re doing,” Lubin said, likely referring to some of the legislation put forward in the 1990s to regulate the internet.
See related article: Proposed US law would require stablecoins to be 1:1 dollar-backed
“It’s produced by people who don’t understand the technology and therefore don’t understand the profound positive implications of the technology,” Lubin added.
Fast forward to the present day. As the internet became ubiquitous and a permanent fixture in society and the economy, legislators changed their tone.
“I don’t see anybody arguing that the internet protocols and the Web protocols haven’t been profoundly positive for humanity. And we’re always going to outstrip the current bounds of the available technology,” Lubin said.
Lubin thinks that there will be hearings on the so-called STABLE Act next year as part of the legislative process, and lawmakers will likely scrap it before it becomes law.
“I’m predicting that there will be a public discussion in this nation and others and then it’ll go well,” Lubin said. “It’s just such a slam dunk how valuable this technology is.”
Blockchain investor, author and corporate advisor Alex Tapscott calls the proposed legislation “deeply troubling.”
“I think policymakers sometimes don’t have access to all the facts,” Tapscott told Forkast.News. “They don’t really understand what they’re talking about when it comes to deep technology.”
In Tapscott’s interpretation of the proposed law, the mere act of simply running a blockchain node that happens to validate a stablecoin transaction could be enough to send the user to jail.
While a straight reading of the text might support this interpretation, technology lawyer Preston Bryne disagrees, contending that legal provisions for “information content providers,” such as servers, would grant an immunity from liability for the actions of their users.
Given that these are the waning days of the 116th Congress and debate over Covid-related stimulus measures is dominating many other lawmakers’ attention, there is probably little chance that this proposed bill, in its current form, will become law.
That said, the industry will likely not be able to escape regulation of some form for long.
Prominent commercial law firm Clifford Chance has already highlighted that stablecoin issuers will face some legal challenges ahead given the fact they are effectively offering deposits — a legal term with established regulatory consequences.
Update: Dec. 12, 2020 – 9:30 AM HKT
Rohan Grey, a law professor that contributed to the drafting of the bill, reached out to Forkast to say that the PAX token and Gemini Dollar would not meet the requirements of the proposed STABLE Act. Grey explained that each issuer would need to obtain their own specific banking charter rather than just store funds in a trust account at a licensed institution. Grey explains more in this interview over at Decrypt.
It’s also important to note that some stablecoin issuers like the PAX token and Gemini Dollar would already meet the requirements outlined in the proposed STABLE Act, given their establishment of related trusts and the use of FDIC-insured banks to hold funds.