Stablecoins and future US Federal Regulations

A US republican senator will soon introduce a bill that, for the first time, attempts to regulate the cryptocurrency space. The bill would reportedly add investor protections, rein in Stablecoins,[1] which are pegged to a stated currency, and create a self-regulatory body under the jurisdiction of the US Securities and Exchange Commission and its sister agency, the Commodity Futures Trading Commission.

The proposal stems from a Wyoming senator who is a longtime crypto-evangelist and one of two US senators to have reportedly invested in virtual currency. Her crypto-assets reportedly total a quarter of a million dollars. In legislation she plans to introduce in early 2022, the senator intends to provide regulatory clarity on Stablecoins long the subject of congressional debate over concerns around risks and liquidity and define the different asset classes, while introducing additional protections to insulate investors against substantial losses, scams and potentially lax cybersecurity. She also reportedly plans to create an organization under the joint jurisdiction of the SEC and CFTC to oversee the market. This a legislative move that, if successful, would help resolve ongoing debate over which US regulators have authority over digital assets.

The same senator recently asked for bipartisan co-sponsors for the bill and encouraged constituents to contact their elected officials to back the proposal. An aide reported that the proposal "is highly detailed and fully integrates digital assets into the US financial system." The aide also confirmed that through eight separate titles or sections, the bill will address definitions, tax requirements, consumer protection, Inter-agency coordination as a starting point. The aide said that the bill "gives clear guidance to regulators, protects consumers through strong standards and provides mechanisms for policing bad actors. These and other policies in the legislation will guarantee that America's burgeoning digital asset industry has the room it needs to grow, while making sure consumers are protected and scammers are prosecuted.”

As a member of the Senate Banking, Housing and Urban Affairs Committee, this senator has worked with Democratic colleagues, including senators from Virginia and Arizona, to address what several lawmakers have called deficiencies in the crypto provisions of the recently passed $1.2 trillion Infrastructure Investment and Jobs Act. The law carries a broad definition of a cryptocurrency "broker," imposing tax reporting requirements on crypto professionals, which many believe cannot be met.

In response, the six senators sent a letter to the US Treasury Secretary this month to address investor concerns around the reporting requirements. The lawmakers said the provision will stifle innovation at a time when clear guidance is necessary in the space. The new law, they said, captures individuals who are "solely involved with validating distributed ledger transactions through mining, staking, or other methods, and entities solely providing software or hardware solutions enabling users to maintain custody of their own digital asset wallets.”

This legislative proposal comes as a top US Treasury Department official also said this month that financial regulators hope the US Congress will move quickly on key legislation to regulate Stablecoins and its infrastructure. The comments came from the undersecretary for domestic finance at the Treasury Department. She formerly served as a top financial stability official at the Federal Reserve. She told media that legislation is needed to reduce systemic risks ranging from fraud to illicit finance.

In December 2021, the Senate Banking Committee held a hearing on risks related to Stablecoins. The Committee Chairman suggested that the volatility of the cryptocurrency market poses a clear risk to investors, saying market dips or crashes help make these tokens "untethered from reality." A senator from Massachusetts, who is an outspoken critic of crypto volatility, said during the hearing that decentralized finance, known as DeFi, which does not rely on traditional intermediaries and instead is built off peer-to-peer smart contracts, is "the most dangerous part of the crypto world," and one that relies on Stablecoins. Cybersecurity experts have long warned against lax security controls in DeFi protocols, which often run open-source software. The space currently houses some $103.7 billion in assets across DeFi apps, or DApps, according to DeFi Pulse.[2]

In other crypto news, Visa announced it will partner with 60 cryptocurrency trading platforms and allow consumers to make purchases with digital currency at more than 80 million global merchant locations. Earlier in the month, Visa also launched a crypto advisory service, offering customers the ability to acquire advice about digital assets. Visa's head of Crypto, Cuy Sheffield, told NDTV that this move will make it easier for consumers to spend virtual currency and will "support the crypto ecosystem."

A principal at the firm Netenrich, says the move, which comes amid wider adoption of crypto could still pose governance, risk management and compliance challenges, as regulators continue to assess digital assets and their interaction with traditional financial institutions. "[Cryptocurrency] started as a way to get out of the banking system. … In the end, the banking system will be the ones that operate and profit [off crypto]," he noted.

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