Loyola University Chicago School of Law, JD 2023
On Tuesday, February 15, 2022, Congressman Josh Gottheimer released a draft of the Stablecoin Innovation and Protection Act of 2022 (“the bill”). This legislation attempts to both define stablecoins as well as provide a legal framework in which the issuers and users of stablecoins can safely and legally operate. The bill is surprisingly brief, only nine pages long, but Gottheimer claims that it will provide greater direction and certainty to the marketplace in order to boost innovation while also protecting consumers.
Redefining stablecoin within American currency
First and foremost, the bill defines stablecoins as “any cryptocurrency . . . redeemable, on demand, on a one-to-one basis for United States dollars; and issued by and insured depository institution; or a nonbank qualified stablecoin issuer.”
Stablecoins, as a type of cryptocurrency, is rife with decentralization and lack of regulation. However, by legally defining stablecoins as outlined above, Gottheimer brings stablecoins under the umbrella of banking regulations while giving the necessary latitude to nonbank issuers, provided they conform to the framework laid out in the bill.
Agency oversight in the existing framework
The Stablecoin Innovation and Protection Act seeks to provide a safe harbor to properly qualified issuers of stablecoins, whether they are banks or other nonbank entities, so that they may legally operate within the United States.
So, who may issue stablecoin? The answer comes directly from the bill, which states that a nonbank issuer may participate as long as they maintain 100% or more reserve assets in U.S. dollars or other government-issued securities. This is in keeping with the general goal of the bill, which is to find a place within the current federal framework of currency for cryptocurrencies, and consequently stablecoins, rather than carving out a new space altogether. By keeping stablecoins inside the existing framework, they would effectively become a series of new currencies in the nation, reducing their volatility and allowing them to be used as a regular means of payment.
Additionally, as a federally-defined currency, an approved stablecoin would not be subject to registration and disclosure requirements as presently required under modern securities laws. By defining them as a currency, however, this would bring stablecoins under the explicit authority of the Office of the Comptroller of the Currency (OCC). While the bill gives authority over stablecoins to the OCC, other cryptocurrencies and privately-issued digital instruments that are not stablecoins remain under the watchful eyes of agencies such as the Securities and Exchange Commission (SEC) and the Commodity and Futures Trading Commission (CFTC).
Stablecoins and banking law
The Bank Secrecy Act of 1970 (BSA) was created to prevent financial institutions, whether banks or not, from being used a tools by criminals to hide or launder any ill-gotten gains. By bringing the issuers of stablecoins into the existing framework of financial institutions, laws such as the BSA could apply to the nonbank issuers of stablecoins. This could require any entity that wishes to issue a stablecoin to comply with documentation requirements that become important when clients engage in suspicious transactions in excess of $10,000. The need to follow a digital paper trail and reconstruct suspicious transactions has only grown, with $8.6 billion laundered using cryptocurrency in 2021, a growth of thirty percent from 2020.
By welcoming stablecoins into the realm of regulated currencies, the bill applies existing laws that people come to expect of banking institutions, and even requires that the cash collateral held by issuers of a stablecoin be in a Federal Deposit Insurance Corporation (FDIC)-insured account. Protected assets of the issuers of stablecoin means that the assets of stablecoin users and consumers are protected. This application of regulatory law could protect consumers from becoming one of the growing number of cryptocurrency users who lose everything in one fell swoop.
Cryptocurrency is a remarkable new tool that is still finding its place in the world. It has the potential for tremendous growth in the global economy but has so far been held back by a total lack of stability and trust in its systems. If the Stablecoin Innovation and Protection Act passes into law, it will be the first and most important step to utilizing cryptocurrency without the hazards and pitfalls that the world has witnessed from cryptocurrencies at large. Stablecoins are coming fast, but if Congressman Gottheimer has anything to say about it, they are arriving in a manner that is safe for banks, nonbank issuers, and most importantly, consumers.