A bill introduced in both the House and Senate Thursday (March 31) seeks to set quality standards for the cash reserves backing many stablecoins while also requiring full public disclosure of those assets.
The “Stablecoin Transparency Act” comes as congressional and regulatory eyes focus more and more on the actual stability of stablecoins, a type of cryptocurrency whose one-to-one peg to the U.S. dollar (or other fiat currencies) is backed by a one-to-one reserve of currency and — in theory — highly liquid investments.
While stablecoins have been used mostly to facilitate the trading of cryptocurrencies, they are becoming more common as a payments tool, leading to concerns that a run caused by a loss of confidence in the funds backstopping the $180 billion industry could threaten wider financial stability.
“There is a tremendous amount of potential in stablecoin technology, and we should lay down a foundation providing stablecoin issuers clarity to ensure consumers are well-protected and to ensure that the future of the technology is well-protected,” said House sponsor Rep. Trey Hollingsworth of North Carolina in a statement. “As these digital assets proliferate across financial services and permeate Americans’ lives, we should make sure it happens safely to enable more development and investment in the industry.”
The bill would require stablecoin issuers to back them with U.S. dollars or U.S. government securities with maturities of less than one year. In addition, it would force issuers to release public, third-party audits of those reserves.
The same day, USD Coin stablecoin issuer Circle announced that it had selected Bank of New York Mellon, the 10th-largest U.S. bank, as custodian for its $52 billion in reserves.
Trust Is Lacking
There are several concerns about stablecoins’ reserve backing, most notably surrounding No. 1 issuer Tether, which has 82 billion USDT in circulation.
Those began in earnest when New York’s attorney general accused Tether and its sister company, the crypto exchange Bitfinex, of fraud after it was discovered that Tether loaned hundreds of millions of dollars to Bitfinex when the latter was robbed of more than $800 million. It settled the suit for $18.5 million without acknowledging any wrongdoing.
Read more: What Senate Banking Committee Chair Sherrod Brown Should Be Asking Tether
In October, it settled another suit by the Commodity Futures Trading Commission (CFTC) over the same issue for $41 million.
More concerns were raised after Tether published an “attestation” by Caribbean auditing firm Moore Cayman in May that showed just 2.9% of its reserves were in cash, with a great deal held in commercial paper.
Tether, for its part, has always maintained that it was able to cover any redemptions and last month published its latest report showing a 21% drop in commercial paper holdings.
“The utility of Tether has grown beyond being just a tool for quickly moving in and out of trading positions, and so, it is mission critical for us to scale alongside the peer-to-peer and payments markets,” the company said in the Feb. 21 report. “To serve these new retail and institutional customers, Tether will continue to be the leader amongst its peers when it comes to transparency and reliability.”
Circle ran into the same issue last year when it revealed in May that nearly 40% of its reserve wasn’t in cash. It quicky changed that, announcing that its Grant Thornton-audited reserves were 100% cash and U.S. Treasuries.
See more: USDC Now Backed by Cash, US Treasuries
Circle’s Solution
With $46.7 trillion in assets under management, BNY Mellon gives Circle not only a partner that will provide Wall Street with confidence in its reserves, but also with the prestige that comes with being affiliated with one of America’s oldest and most-storied banks, founded in 1784 by Alexander Hamilton.
“Building trust, stability and resilience in the digital asset economy is foundational to Circle’s mission,” said Jeremy Allaire, co-founder and CEO of Circle. “The opportunity to work with BNY Mellon is one way we build bridges between traditional financial services and emerging digital asset markets, without sacrificing trust.”
BNY Mellon will provide Circle with more than a piggy bank, the firms said in a press release.
The relationship will provide a bridge between traditional and digital markets, it said, pointing to “cash management for fiat and non-fiat payments, and the exploration of digital cash for purposes of settlement,” as well as digital asset custody, investment management and capital markets.
“We are at a point in the evolution of our industry where the digitization of assets is presenting new and exciting opportunities to a broad range of market participants,” said BNY Mellon CEO of Asset Servicing and Head of Digital Roman Regelman in the release.
Saying that the bank’s “role as a custodian for USDC reserves supports the broader marketplace and brings value to clients,” Regelman added that BNY Mellon intends to continue providing “products and services to players in this evolving market.”
More broadly, Allaire added, the combined expertise of the two institutions will allow them “to innovate and build the financial ecosystem of the future.”
Protection Versus Innovation
This harks back to another goal of what the Stablecoin Transparency Act’s other sponsor, Sen. Bill Hagerty of Tennessee, called a “common-sense effort” — ensuring the safety of the broader cryptocurrency industry’s products “without giving the keys away to unaccountable bureaucrats who threaten to choke off innovation.”
That protection versus innovation balancing act has become a bigger issue since the President’s Working Group on Financial Stability released its “Report on Stablecoins” Nov. 1.
While saying that if “well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options” as well as speed the “transition to broader use of stablecoins as a means of payment,” the report nonetheless took a very wary view of the dollar-pegged cryptocurrencies.
Read more: President’s Working Group Says Stablecoin Risks Warrant Legislation
Calling out the role they play in both centralized and decentralized —DeFi — crypto trading, the report warned that stablecoins could facilitate market fraud and raise “illicit finance concerns and risks to financial integrity.”
As they grow more entwined with the broader payments and investing market, a loss of confidence in the ability of issuers’ reserves to cover fiat redemption requests “could result in a ‘run’ on that stablecoin,” the report said. That, it warned “could pose systemic risk.”
The best solution, it concluded, is to require all stablecoins to be issued by federally regulated, Federal Deposit Insurance Corporation (FDIC)-insured banks.
That led to a backlash by Republicans, with Sen. Cynthia Lummis of Wyoming calling the proposal “misguided and wrong.”
See more: Powell, Yellen Clash Over Stablecoin Regulation at Senate Hearing
Adding that it would “only serve to benefit big banks and will restrict innovation,” Lummis said, “there are other, safer ways of achieving the same objectives.”
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