Since President Donald Trump’s inauguration, crypto news has been abuzz with the talk of a positive trend for the market thanks to pro-crypto policies from the new administration. In one of the most important moves impact the marketplace, Congress has set the stage for stablecoin framework.
In one of the most impactful moves to date, Congress has officially passed legislation to prohibit the Federal Reserve from being able to issue a central bank digital currency (CBDC). The CBDC Anti-Surveillance State Act (H.R. 1919)w ill prevent the Federal Reserve from being able to offer services directly to individuals or even through intermediaries. The legislation also restricts them from using a CBDC for monetary policy purposes.
Though the bill has officially passed the House, it is still waiting to be seen by Senate. That is the next critical step when it comes to the future of CBDCs.
Key Points of the CBDC Anti-Surveillance State Act
The key takeaway is that the bill, if it passes the House, will prohibit the Federal Reserve from being able to issue a central bank digital currency. But there are other important points and takeaways from this bill.
Banning Retail CBDC. Specifically, the bill will target retail CBDC. This would essentially be a digital dollar accessible to the general public to execute everyday transactions.
Potential Impacts on Innovation. There have been arguments made from those opposing the bill that such a ban on CBDC could potentially hinder the abilities of the Federal Reserves regarding cross-border payment innovations.
Uncertainty in the Senate. Though it manage to pass the House, there is still a great deal of uncertainty about whether or not the bill could pass the Senate. Some senators have already expressed major concerns regarding the negative impacts of such a ban passing.
Focus on Control and Privacy. Those backing the bill have expressed concerns about privacy risks, not to mention government control, over any individual transactions that are associated with CBDC.
Executive Order Connection. There is also a level of continuity to this bill. The legislation would essentially build upon an executive order signed by President Trump. The executive order restricted federal agencies from being able to explore CBDC development.
Establishing Stablecoin Framework
In addition to the aforementioned anti-CBDC legislation, the U.S. House of Representatives passed the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act. This is a landmark piece of legislation, introducing the first federal regulatory framework for payment stablecoins. This bill attempts to address financial stability, national security, anti-money laundering (AML) compliance, and consumer protection.
President Trump is expected to sign the GENIUS Act any day. The act would also regulate the issuance and trading of payment stablecoins while also applying to stablecoin intermediaries and issuers (also known as digital asset service providers).
What are Payment Stablecoins?
According to the GENIUS Act, it would regulate payment stablecoins. These are defined as digital assets that are designed to be used for payments or settlements. The issuer of these is obligated to convert, repurchase, or redeem them for a specific monetary value, and represents that these digital assets maintain a stable value relative to a specific fixed amount of money.
Permitted U.S. Payment Stablecoin Issuers
The act will also ban anyone other than permitted payment stablecoin issuers from creating and issuing a payment stablecoin within the U.S. Through federal and state licensing pathways, entities can become permitted stablecoin issuers.
State Issuers. Those issuers possessing $10 billion or less in consolidated outstanding stablecoins has the option to sign up for a state-only regulatory regime. This is true so long as a state regulatory agency, one with primary supervisory and regulatory authority over issuers certifying that any regulatory framework is similar to the federal regime. Also, the Stablecoin Certification Review Committee, which is comprised of the Chair or Vice Chair for Supervision of the Federal Reserve Board, the Chair of the Federal Deposit Insurance Corporation and the Secretary of Treasury, will not deny certification within 30 days. Issuers that are state-qualified that have more than $10 billion in total outstanding stablecoins will be required to make the transition to federal oversight within 360 days of reaching that mark.
Federal Issuers. Insured Depository Institutions (IDIs), their subsidiaries, federal branches of foreign banks, uninsured national banks, and nonbank entities all have potential eligibility to become licensed as permitted issuers of payment stablecoin. The appropriate federal banking agency of the IDI will ultimately act as the primary regulator regarding permitted issuers that are ultimately subsidiaries of IDIs. The Office of the Comptroller of the Currency (OCC) will ultimately serve as the primary regulator for any other permitted federal issuers.
Foreign Issuers
Additionally, the GENIUS Act will also restrict digital asset service providers from selling, offering, or making available in the U.S. payment stablecoins issued by a foreign issuer. The exceptions include issuers that:
· Will be subject to a “comparable” regulatory regime, which is determined by the Treasury Secretary with recommendations by each of the Stablecoin Certification Review Committee members.
· Registers with the OCC and is subject to its supervision.
· Has the ability to comply with lawful orders to burn, freeze, prevent, and seize the transfer of any outstanding stablecoins.
· Holds enough reserves in other U.S. financial institutions that meet liquidity demands from U.S. customers.
Reserve Requirements
As part of the legislation, the GENIUS Act has strict reserve requirements. These requirements were created in order to ensure the stability and safety of payment stablecoins. Issuers are required to maintain a full 1:1 backing of all outstanding stablecoins with liquid assets that have been permitted – this includers demand deposits at IDIs, U.S. dollars, balances held at the Federal Reserve, and short-term U.S. Treasury obligations.
All stablecoin issuers must hold any of those assets within a segregated account while also going through regular third-party audits and providing disclosures each month in order to verify reserve sufficiency. In lockstep with earlier guidance on stablecoins provided by the SEC, the GENIUS Act forbids algorithmic stablecoins from earning the “payments stablecoin” classification even if it has the proper reserves backing.
Compliance Obligations
All payment stablecoin issuers, under the GENIUS Act, are required to comply with applicable Bank Secrecy Act requirements whether they are state- or federally-regulated. This includes countering the financing of terrorism programs, AML, and complying with the Office of Foreign Assets Control.
The GENIUS Act has been structured in a way that it prohibits issuers from paying any yield or interest on stablecoins. State and federal regulators have also been granted authority needed to conduct periodic exams of outstanding payment issuers.
This move will bring along with it greater compliance and regulation of stablecoin issuers. With clear enforcement actions in place, unlawful or unsafe activity will be deterred at near-perfect levels. It is a major move for large financial institutions like banks and for the future of the cryptocurrency industry.
Regulatory Greenlight
This is what major banks have been waiting on. With reserve requirements, issuer types, and yield restrictions clearer, banks will certainly want their cut of the potentially lucrative stablecoin market. What kind of impact this has on the cryptocurrency marketplace remains to be seen.
