Title: Proposed Stablecoin Act in the United States Could Displace USDT’s Position
S&P Global Ratings recently released a report analyzing the potential impact of the bipartisan stablecoin proposal, the Lummis-Gillibrand Payment Stablecoin Act, introduced in the United States Senate earlier this month.
The proposed legislation allows non-bank financial institutions registered with the Federal Reserve System, also known as the Fed, to issue stablecoins with a maximum cap of $10 billion. However, there is no such limitation for banking institutions. Additionally, the bill establishes strict requirements for asset reserves and operational transparency.
According to the report, this legislative action not only promotes the wider use of stablecoins in everyday and institutional transactions, enhancing market stability and user confidence, but also provides a competitive advantage for banks by encouraging their entry into the stablecoin market and ensuring a fair competitive environment.
However, the $10 billion cap may not be good news for Tether, the largest stablecoin issuer globally with a current market capitalization of $110 billion. Since Tether is not issued by a registered entity in the United States, it does not meet the definition of a payment stablecoin outlined in the proposed bill. As a result, U.S. institutions would be unable to hold or transact in USDT, reducing its demand in the United States and weakening its dominant position in the global stablecoin market while increasing the issuance of stablecoins by U.S. institutions.
Nevertheless, the report also indicates that USDT’s trading activities are mainly concentrated in emerging markets outside the United States, driven by retail users and international remittances. While Tether may be affected by the proposed legislation, the impact might not be as significant as anticipated.
Turning to the question of whether the bill truly benefits domestic institutions in the United States, it’s worth noting that the second-largest stablecoin, USDC, issued by Circle, has a market capitalization of approximately $34 billion. However, under the proposed bill, Circle falls under the category of a non-bank financial institution and would also be subject to the $10 billion cap, necessitating the need to find alternative solutions.
Paxos, a collaborative issuer with Paypal’s stablecoin PYUSD, which is next in terms of issuance, holds a trust charter issued by the New York Department of Financial Services. However, the combined market value of all its stablecoins falls far below $10 billion, making regulation less significant for the company.
The report concludes by affirming the potential positive impact of the stablecoin legislation, stating that its implementation will accelerate institutional blockchain technology innovation, particularly in tokenized on-chain payments and digital bond issuance. The growth in demand for stablecoin usage by institutions will create opportunities for banks as stablecoin issuers.
The introduction of the stablecoin legislation by members of the U.S. Senate, Cynthia Lummis and Kirsten Gillibrand, emphasizes the importance of regulatory oversight in maintaining the dominance of the U.S. dollar. The Lummis-Gillibrand Payment Stablecoin Act aims to provide clear regulations for the operation of stablecoins in the United States.
The bill defines “payment stablecoin” as any digital asset pegged 1:1 to the U.S. dollar and used for payment or settlement purposes. The issuer is obligated to convert the tokens into dollars, and the asset is not classified as a security.
In addition to defining the scope of application, the bill extensively regulates the reserve and operational obligations of payment stablecoin issuers, highlighting five key points:
1. Payment stablecoin issuers must register with the Federal Reserve Board as “non-depository trust institutions” (non-bank financial institutions) or as “depository institutions authorized to be national payment stablecoin issuers” (banking institutions).
2. Payment stablecoin issuers must establish a subsidiary dedicated to issuing payment stablecoins.
3. Payment stablecoin issuers must ensure that their tokens have fully reserved assets, which can be cash or equivalent cash assets, and have an obligation to publicly disclose reserves.
4. Payment stablecoin issuers and their users must comply with U.S. anti-money laundering and sanction regulations and cannot use stablecoins for illegal or unauthorized purposes.
5. Payment stablecoin issuers need to hire a non-depository trust institution as a reserve asset custodian, with the custodian using a depository institution as its sub-custodian (dual safeguard mechanism).
However, the bill also sets a $10 billion limit for non-depository trust institutions. If a stablecoin issuer exceeds this amount, they must become a “depository institution authorized to be a national payment stablecoin issuer.”
The bill also prohibits algorithmic stablecoins that maintain price stability through algorithms and lack full reserves. This is speculated to prevent a recurrence of the Terra-Luna collapse.
Kirsten Gillibrand, the Democratic Senator who co-sponsored the bill, stated in a statement that a clear regulatory framework for stablecoins is “absolutely essential” in maintaining the dominance of the U.S. dollar. She believes that the legislation, which mandates a 1:1 reserve, prohibits algorithmic stablecoins, and requires compliance with anti-money laundering and sanction regulations, maximizes consumer protection and expects necessary support in both the Senate and the House of Representatives.
Cynthia Lummis, the Republican Senator who co-sponsored the bill, added that the legislation also meets the expanding needs of the continuously evolving financial industry and reiterated the significant impact on the dominance of the U.S. dollar.
With the upcoming presidential election and the uncertain political landscape, the progress of these bills, including the Lummis-Gillibrand Payment Stablecoin Act, has stalled temporarily like many other bills.
According to the U.S. legislative process, once a bill is passed in one house, it is sent to the other house for consideration. Usually, similar or identical proposals are passed in both houses before being submitted to the president.
Despite the recent introduction of the Lummis-Gillibrand Payment Stablecoin Act, Lummis and Gillibrand have previously co-sponsored several bills aimed at regulating the digital asset market’s issues. This includes a bill introduced last summer that clearly defines decentralized finance and delineates the jurisdiction of federal agencies like the Commodity Futures Trading Commission (CFTC) in the crypto market.
Although stablecoins have long been considered the most likely category of crypto assets to have dedicated legislation in the United States, the Financial Services Committee of the U.S. House of Representatives began drafting its version of a “stablecoin bill” in 2022, but progress has been stagnant for over 20 months.
As the bills face the approaching presidential election and an uncertain political landscape, they have been put on hold like many other bills, and no progress has been made.
Source: Coindesk, Bitcoin.com, The Block
Proofread by: Gao Jingyuan