On April 6, Senator Pat Toomey (R-PA) released a draft of his stablecoin bill titled the Stablecoin Transparency of Reserves and Uniform Safe Transactions Act, or Stablecoin TRUST Act. Toomey, the prominent member of the Senate Banking Committee, has been a strong proponent of blockchain innovation, and his recent bill calls for skillful regulation of stablecoins:
- General ban on the issuance of Payment Stablecoins, except for entities authorized by a state or the federal government. The bill generally prohibits anyone from issuing “payment stablecoins,” which the bill defines as “convertible virtual currency” issued by a centralized entity and designed to maintain a stable value against the currency. fiduciary. However, money transmitters, insured depository institutions, domestic issuers of limited payout stablecoins, or any entity that has received permission to issue stablecoins from a state banking authority, are excluded from the scope of the application. bill ban and can issue payment stablecoins. Other entities may apply to the Office of the Comptroller of the Currency (OCC) for a charter to become National Limited Payout Stable Coin Issuers (NLPSI), which would allow those entities to issue payout stable coins. The bill subjects NLPSIs to further regulatory scrutiny. Additionally, the bill requires payment stablecoins to be recorded on a “distributed public ledger” (meaning that data associated with transactions that occur on the network is shared and accessible to everyone).
- Payment Stablecoin Asset Disclosure and Reserve Requirements. Each entity excluded from the bill’s general prohibition must disclose to the public the assets backing its payment stablecoins on a monthly basis and quarterly attestations that the disclosed assets do not “materially diverge” from the assets the entity claims to hold. The bill does not specify the assets that a money transmission business, insured depository institution, or other entity that has received permission to issue stablecoins from a state banking authority must have. in its reserves to guarantee the payment stable coins that it issues. However, payment stablecoins issued by NLPSI must be backed – individually – by assets with a market value of at least 100% of the face value of the total number of payment stablecoins issued by NLPSI in circulation. , or in cash. , or a level 1 liquid asset (e.g. a treasury bill).
- Rule-making and enforcement authority vested in the OCC. Under the bill, NLPSIs would be exclusively overseen by the OCC, which would have both regulatory and enforcement powers. The bill limits the OCC’s regulatory power to determine the upper limit of an NLPSI’s liquidity requirements, as well as general governance and risk management. If an NLPSI violates applicable laws or regulations, the bill empowers the OCC to issue cease-and-desist orders or take “affirmative action” to prevent future violations and rectify existing violations.
- Exemption from securities requirements. Importantly, if passed, the bill would amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to redefine the term “security” to exclude the term “stablecoin payment” as defined by those laws. In other words, the bill would effectively remove stablecoins from the scope of the SEC and exempt these digital assets from the jurisdiction of the United States Supreme Court. Howey test, which we talked about here.
- Privacy Protections. Although the bill requires stablecoin payment transactions to be made on a public distributed ledger, public key encryption allows users to transact on a distributed ledger without providing their private credentials to execute a transaction. . In keeping with this philosophy, the bill prohibits the Secretary of the Treasury from collecting or requiring the collection of “non-public information” regarding virtual currency transactions unless the person in question voluntarily provides the information to a third party who holds them for a legitimate business. end, or the Secretary of the Treasury obtains a search warrant that one or more persons in a transaction have committed or are committing a crime.
Our catch. Today, most stablecoin issuers are primarily regulated by state-level money issuer laws. On November 1, 2021, the President’s Financial Markets Task Force released a report recommending that the issuance of stablecoins be limited to depository institutions or insured banks. Such regulation would require current stablecoin issuers to obtain a federal or state banking charter, which is often an arduous process that could take a year or more to finalize. Sen. Toomey’s proposed bill would preserve the state-registered funds transmitter status of these issuers and allow them to continue to provide stable liquidity to digital asset markets at the expense of increased regulatory scrutiny.