How we bill crypto will help Stablecoin owners and issuers

The growing popularity of stablecoins, even in times of economic distress, is a big reason why the need for regulation is greater now than ever before. On that front, the new bill ensures that stablecoins are issued and regulated in a safe and secure manner, and addresses existing and potential risks associated with them.

The US Congress has made another attempt to create legislation for the increasingly popular stablecoins, a type of cryptocurrency that is linked to a specific commodity or currency. The potential landmark bill, which introduces the US Federal Reserve into the stablecoin sector, comes on the heels of many recent stablecoin crashes.

Proposal for regulations

On April 14, the US House of Representatives released a discussion draft aimed at increasing stablecoin regulation and oversight. The bill will be submitted to a panel hearing on 19 April.

The proposed legislation places non-bank stablecoin issuers such as Tether (USDT) and Circle (USDC) under the control of the Federal Reserve. In other words, organizations launching stablecoins must obtain Fed approval before issuing them to the public. The bill also requires companies to be transparent about their stablecoin reserves, which the Fed will examine before granting approval.

The bill shows that companies must hold reserves at least on a one-to-one basis. Treasury bills, US dollars, repurchase agreements backed by treasury bills and central bank reserve deposits qualify as appropriate reserves that companies can maintain to back up their stablecoins.

In addition, stablecoin issuers must also demonstrate their financial resources, technical expertise and governance to increase their chances of getting a green signal from the Fed.

Those who do not comply with the rules mentioned under the bill can face 5 years in prison and a fine of 1 million dollars. The document also makes it illegal for a licensed stablecoin to be backed by reserves other than equivalent US dollars. For example, it would be illegal for licensed stablecoins to be backed by ETH, gold reserves, etc.

How will the bill help stablecoin issuers and customers?

Last year, stablecoin UST’s collapse triggered a market-wide meltdown that drained the savings of several owners overnight. A subsequent selling frenzy also caused the world’s largest stablecoin USDT to lose its peg against the dollar. Last month, the second largest stablecoin, USDC, also temporarily lost its peg in the wake of the Silicon Valley Bank collapse.

However, despite such incidents, stablecoins have not lost their appeal among the crypto audience. A CoinMetrics report shows that stablecoin transactions totaled $7.4 trillion in 2022, up 19 percent from a year ago. Peter Johnson, a former partner at trading firm Jump Crypto, said that by 2022 the stablecoin sector would beat leading credit card companies such as MasterCard and American Express in trading volume.

The growing popularity of stablecoins, even in times of economic distress, is a big reason why the need for regulation is greater now than ever before. On that front, the new bill ensures that stablecoins are issued and regulated in a safe and secure manner, and addresses existing and potential risks associated with them.

The bill recognizes that stablecoins offer benefits such as providing protection for individuals during market volatility without the need to enter or exit the cryptocurrency market or exchange it for fiat currency.

Therefore, if stablecoins are issued within a clear regulatory framework, they can become a more efficient retail payment and reach a wide range of customers. The same can also promote healthy competition and also improve the function of sending and receiving remittances. In the long run, the framework will be beneficial not only to customers, but also to companies that issue them.

The draft bill also imposes a two-year ban on creating or issuing stablecoins that are not backed by tangible assets. Hopefully, such measures will also protect customers from events such as the TerraLUNA crash.

Mixed community response

Jeremy Allaire, co-founder and CEO of Circle, the second largest stablecoin issuer, reacted positively to the recently published bill on stablecoins. He emphasized that it is important to establish clear rules that promote innovation and entrepreneurship within the framework of American supervisory law.

However, other crypto players were disappointed with the bill’s proposal to create a central authority, like the Fed, to oversee stablecoin regulation. They argued that while the licensing process could be structured, it remains discretionary, meaning regulatory authorities get to decide who can issue licensed stablecoins.

Conclusion

Stablecoins have witnessed rapid mainstream adoption in recent times, and US regulators have finally detailed a framework for their adoption and issuance in the recently drafted bill. While the full ramifications of the draft remain to be seen, calling for greater oversight and outlining procedures for stablecoin issuers is a step in the right direction.

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