Blockchain and Crypto

Banks and lawmakers are still wary of the stablecoin bill, causing a slowdown on its road to law-ville

  • A potential bill that would create a regulatory framework for stablecoins is hitting some roadblocks.
  • In this Q&A, Alma Angotti, partner and global legislative and regulatory risk leader at consulting firm Guidehouse, dives into some of the whats, whys and hows behind this story.

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Banks and lawmakers are still wary of the stablecoin bill, causing a slowdown on its road to law-ville

In April, US Senate Banking Committee Ranking Member Pat Toomey released a discussion draft of legislation that would provide a regulatory framework for stablecoins.

As more investors took interest in crypto, stablecoins were seen as a way to take part in the party without dealing too much with the consequences of volatility.

But that’s not to say that there aren’t any risks at all. No regulation means there’s no real way of knowing for sure that a stablecoin’s value is remaining – well, stable. Just last year, the CFTC fined Tether $41 million for misleading investors about the reserves it had backing its stablecoin.

The stablecoin bill, which has been up in the air this past year, could make things safer for investors wishing to dabble in the world of stablecoins. It would provide a regulatory framework for both banks and non-bank stablecoin issuers to abide by – essentially requiring transparency regarding the reserves associated with each stablecoin.

But banks and certain lawmakers remain wary regarding this bill, which has caused a slowdown on its road to law-ville.

Alma Angotti is partner and global legislative and regulatory risk leader at consulting firm Guidehouse. She leads the firm's cryptocurrency, digital assets and fintech projects.

For this Q&A, Tearsheet sat down with Angotti to get a better understanding of what’s happening behind the scenes when it comes to this bill, why banks are concerned, and what she thinks the outcomes will be.

How would the stablecoin bill change things?

The goal of stablecoins is to harness the efficiency of a crypto asset without the volatility. Ideally it’s a digital asset representing a fixed amount of another liquid asset – whether it’s currency, cash, or some very liquid asset, like Treasury securities or something like that. And so the value won't fluctuate, like with Bitcoin.

The problem, though, is there's no regulation about what those assets should be, who's going to make sure those assets are there, and how they should be marketed to investors.

So if you remember back to the President's Working Group on digital assets – they were worried about three things: financial crime, stability of the financial system, and investor protection. 

And there's a little bit of this already going on in the Department of Financial Services: they have issued some guidance on how you should set up the controls for your stablecoins. But that only applies if you have a BitLicense.

So what this bill focuses on is the investor protection and the stability issue. 

It would essentially require precise assets to back up the stablecoins, determine the disclosure process on what assets are backing this particular stablecoin, and how the redemptions are going to work. It also deals with the question of who's going to regulate these. The way the bill is set out is that you can get either a banking license or a state money transmitter license for a stablecoin, if one exists.

The other interesting thing it does is bar the SEC from regulating them as securities. That means there wouldn’t be issues like the rumors around the Tether stablecoin, which didn’t have enough assets backing it to correspond to the value that it had, or with the algorithmic stablecoin, which is really just an algorithm based on the value of another digital currency. 

There may be a place for that in this ecosystem, but that's really not what I thought of. It's not really what people think of when they think of stablecoins.

So what they want to do is put the regulatory framework around this so that people know what they're buying, they know how they can redeem it, and they can be fairly certain it's got to hold its value, because none of these things are required today.

How would you differentiate between algorithmic and collateralized stablecoins? And why is it important to understand the difference between the two?

Collateralized stablecoins have value pegged to actual, physical, fiat currency or liquid assets sitting in a bank account, and the stablecoin’s value is based on those assets. It is similar to a money market account.

Algorithmic stablecoins stabilize their value by automated buys and sales on a different asset to which its value is pegged, to affect the supply and demand and thereby affecting the price of the stablecoin. But there are no currency or other liquid assets that back it up. It is backed by math, essentially.

It's important to know the difference because it affects the risk that the buyer is taking. It is one type of risk to invest in a stablecoin backed by money, and another type of risk to invest in a stablecoin that isn’t.  If the algorithm doesn’t work, you could lose all your money. With collateralized stablecoins, someone would have to steal the assets, or the issuer could lie about the assets, for you to lose your investment.

What does it mean for a non-bank to be able to issue stablecoins?

Well, right now they're essentially holding deposits for a consumer in an account that would be under the stablecoin issuer's name.

And that's part of the problem that this bill wants to address. You would have to be regulated as a bank or a money transmitter, because you’re not just creating a token, you are holding other assets for an investor or consumer or purchaser. Or however you want to describe it.

So it’s very important to put some rules around what disclosures they have to make, what assets they have to have to back that up, how the redemption is going to work, when can they tell you you can't get your money out – all of those things that apply to banks and broker dealers and securities and other kinds of asset managers that don't apply to these entities right now. 

But that doesn’t mean to be too critical of Congress or regulators. Because when you have a dramatic new technology like this, you don't want to over-regulate right away, because you may inhibit innovation. On the other hand, it's a big market now. There's a lot of definitional uncertainty around what's what and who's in charge. And they really need to figure out how to give the industry that clarity it needs to grow safely.

How do you know when it's time to regulate?

It's really very hard. And if you noticed, they've been taking some enforcement actions that are fairly obvious, at least in their minds, like whether something's a security or whether somebody should have been registered as a derivatives exchange. 

One of the guideposts, though, is whether the regulation is further along in other places – like Europe and Asia.

We really should probably be a little bit further along now than we are, but, again, it's a hard call and they do their best and it’s probably better to be a little late than a little early.

Why are banks concerned about this bill?

There are a couple of reasons why banks are concerned. One reason is because it's kind of a competition for them, like if you're using a stablecoin, instead of writing a check or sending a payment by ACH. 

They're also worried about the fact that if there is a lot of cash tied up in stablecoins, those bank deposits won't be available to be lent against. So it could have a credit restriction.

Then there’s the concern that regulation should prevent a big run on these institutions. As in, people won't be worried about them because they're regulated.

What are your thoughts on the delay of this bill? How do you think this whole story will unfold?

Well, either they'll get their act together and do something, or there'll be another problem with another stablecoin – because it's not properly regulated – and then they'll do something. So I think this whole technology and its uses are not going away. Just hopefully, they'll get to it before more investors are harmed in the process.

As for banks – I think what you'll see is these institutions deciding, if you can't beat them, join them, and they may be issuing their own stablecoins. 

They may even have a competitive advantage if they do, because consumers might be more comfortable with a stablecoin issued by a big bank that they're used to dealing with than by a startup they haven't heard of.

The concept of digital finance isn’t fully mature yet, but I don't think anyone thinks we'll go back to the old ways, even though there's a lot of growing pains in the market right now.

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