Proposed Act Seeks to Clarify Stablecoin Regulation in US

October 2023

Bill H. R. 4766, to be known as the ‘Clarity for Payment Stablecoins Act of 2023’, is seeking to change how stablecoins (at least, ones that are used for payment purposes) are regulated in the US by proposing a regulatory framework and licensing process that will provide a common approach across states. 

Stablecoins are cryptocurrencies whose price is pegged to an existing asset or currency (many are tied to the US Dollar) and often backed by reserves (which can take various forms but often fiat currency) in order to maintain a relatively steady price and essentially functions as traditional currency on a blockchain platform. This makes them attractive to people who want to enjoy the various benefits of blockchain-based cryptocurrencies (borderless transactions, instant remittance, transparency, fractionalization etc.) without being subject to the traditional price volatility of many cryptocurrencies. 

Under the Clarity for Payment Stablecoins Act of 2023, there are a number of standards that have to be met by those issuing stablecoins, including: 

  • The type and amount of reserves held by stablecoins. Issuers must ‘maintain reserves backing the issuer’s payment stablecoins outstanding on an at least one to one basis’. The types of accepted reserves include US coins and currency (including Federal reserve notes), treasury bills with a maturity of 90 days or less, or central bank reserve deposits amongst others.
  • The public disclosure of the issuer’s redemption policy and reserves. 
  • Timely procedures to redeem outstanding payment stablecoins.

Alongside this, issuers of stablecoins are prohibited from pledging, rehypothecating or reusing reserves ‘except for the purpose of creating liquidity to meet reasonable expectations of requests to redeem payment stablecoins’ 

Protection of consumers is covered by noting that those providing safeguarding or custodial services for stablecoins are subject to supervision or regulation by a primary Federal payment stablecoin regulator, a primary financial regulatory agency or State bank supervisor, requiring KYC and AML standards to be met. In addition, whilst noting that some aspects such as segregation requirements may be similar to those given by the Securities and Exchange Commission, or the Commodity Futures Trading Commission, the bill is very clear that the payment stablecoins would not fall under the jurisdiction of either, with the inclusion of Section 13: ‘CLARIFYING THAT PAYMENT STABLECOINS ARE NOT SECURITIES OR COMMODITIES.’

This bill could represent the US making a significant move in catching up with many other countries around the world which have embraced the potential of stablecoins to provide revolutionary new opportunities, though there are some that seek to thwart the movement. It could also provide some regulatory clarity that many have been clamoring for, whilst ensuring that the US can create an environment that supports innovation with crypto and blockchain solutions. 

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By Matthew Warner