Two U.S. Congress representatives, Maxine Waters and Patrick McHenry, have floated a proposal that would see stablecoin issuers like Circle Inc and Tether Holdings adhere to strict banking laws, a recent report shows.
Stablecoin Issuers’ Reserves to be Cash and Treasuries
In the bill, stablecoin issuers would be required to back their circulating coins with conservative assets, mostly in cash and U.S. Treasuries. These are instruments the lawmakers are confident won’t be negatively impacted by unexpected market shocks that have seen crypto users lose a fortune.
One of the primary reasons for the lawmakers to float the bill is their worry that stablecoin issuers are not entirely immune to “runs”. In this case, like in traditional banks, stablecoin holders panic that they might not redeem their coins, convert their holdings for liquid assets, but mostly cash as they exit the market. When such an event happens, often the resulting panic tends to push the broader crypto and financial market lower, triggering even more liquidation.
Therefore, to prevent possible illiquidity amongst stablecoin issuers, the proposal will demand that their coin reserves be dominated in cash, mainly USD, and trusted treasury bills. By adhering to this proposal, stablecoin issuers, especially those operating from the U.S. and serving U.S. citizens, will be barred from holding any other assets, especially highly volatile cryptocurrencies, as part of their reserves. This standardization of stablecoin reserve requirement is necessary when there is a broader agreement that crypto, and stablecoins, in particular, need guiding regulation for stability purposes and to foster the development in the sphere.
Flexibility for Crypto Innovation
By taking a bipartisan approach, the two representatives are getting the ball rolling on leading the drafting of necessary stablecoin-only laws that will, in the long haul, should it be implemented, massively benefit the industry, preventing needless panic. However, it is still not clear whether this proposal will sail through.
Patrick Toomey, the Republican Senator, maintains that issuers shouldn’t be entirely boxed within the “banking framework”. Instead, to foster innovation in crypto, stablecoin issuers should be issued with a different federal license where it will be required that they work closely with the U.S. depository institutions.
