The United States turns its attention to the regulation of a stable currency

Thanks to the efforts of Senator Patrick Toomey, the White House is at the forefront of cryptocurrency regulation, and the United States continues to become the global leader in the cryptocurrency industry. Last year, US President Biden signed a US $1.2 trillion bipartisan infrastructure bill, including some new legislation affecting the encryption industry. Recently, in a comprehensive executive order, the president of the United States announced a “government as a whole” approach to the regulation of cryptocurrencies, ordering multiple government agencies to answer specific questions about cryptocurrencies. In the past year, the United States has obviously been seeking help to make the cryptocurrency industry more sustainable, which will greatly simplify the operation of the cryptocurrency platform.
The stable currency reserve transparency and unified safe trading act of 2022 (referred to as the stable currency Trust Act) makes the United States the only country that fully regulates and accepts the stable currency as a formal part of the financial and banking system, or at least the only western country.
The stable currency Trust Act was proposed by Senator Patrick Toomey, a senior member of the Senate Banking Committee, to force the issuer of stable currency to comply with certain rules. The Act establishes comprehensive rules and clarifies that the payment of stable currency is not securities, which is a good thing for the industry. The bill also calls the stable currency “payment stable currency” – a digital asset that can be “directly converted into legal tender by the issuer” and “has a stable value relative to legal tender or other currencies”.
Stable currency issuers will have to choose between obtaining an OCC license, a state currency issuer or similar license, or a traditional banking license. Issuers of stable currency operating in the United States will be subject to a disclosure mechanism, which will require them to conduct regular audits, specify a clear redemption policy, and specify what kind of equivalents they actually issue stable currency.
Does the United States need a central bank digital currency?
As the draft of the bill circulated in Congress and received feedback, I asked a question: if the bill becomes law, does the US government still need to develop the central bank digital currency (CBDC), or the so-called “digital dollar”?
If private stable currency issuers are recognized by the broader financial system, it seems unnecessary for the United States to develop digital dollars. Does the government need to have both private and public digital dollars, one issued by suppliers and the other by the federal government? As US regulators continue to address these issues, the answers to these questions will become clearer in the coming months.
However, according to an accompanying briefing issued by the White House, it is clear that some of Biden’s executive orders include “the urgency of research and development of potential U.S. CBDC should be considered in the national interest”.
This will be the first time in history that a country will allow the stable currency issued by the private sector and the stable currency issued by the government to operate in the same market at the same time. Some countries have banned private stable currency because they want to promote their own CBDC, but the United States has taken a different route, which can stimulate major innovation in the stable currency industry and, of course, make it more transparent and sustainable. But there are also many problems, which may bring serious consequences.
Interest rates will be constrained – consolidation is expected
The stable currency Trust Act specifies which assets can support the stable currency linked to the US dollar, that is, cash with incredibly low interest rates and treasury bills with no better interest rates. This poses a major problem for both current issuers of stable currency and future participants, because they cannot earn higher interest from higher risk assets.
At present, some stable currency issuers support most tokens by paying higher commercial paper. Without higher transparency and audit, commercial paper cannot be evaluated. According to the data of the usdt stable currency issuer tether on March 31, 2021, more than 65% of its reserves are supported by commercial paper, only about 4% by cash and about 3% by short-term treasury bonds. Therefore, if the stable currency trust act becomes law, tether and other stable currency providers will have to completely change the composition of their reserves to comply with the provisions of the act.
Competition in the stable currency industry may slow down, and we may see some consolidation. Since issuers of stable currency will not be able to generate high interest by paying higher assets, it will be difficult for them to make profits while managing compliance risk, human resource tax and general management costs.
Large participants are likely to find ways to gain a foothold, but if the act is formally enacted, smaller stable currency issuers will find it difficult to make profits.
Let’s pass the stable currency Trust Act
Although the stable currency Trust Act may bring some obstacles to new participants in the stable currency industry, I believe it will make the stable currency industry more transparent and sustainable. The mandatory disclosure and redemption requirements for the USD stable currency will make it more secure and transparent in the future.
The biggest advantage of the stable currency trust act is that it really brings the stable currency into the traditional American financial system. Issuers licensed by OCC will be able to use the Federal Reserve’s master account system, which will enable them to take advantage of the broader financial system and greater liquidity in their transactions. It is still some time before the stable currency trust act becomes law. Let us work together to ensure that the act becomes law.