STABLE Act could destabilize stablecoins

A bill introduced by three members of Congress’ progressive wing seeks to dramatically up the regulation and oversight of stablecoins.

The Stablecoin Tethering and Bank Licensing Enforcement—or STABLE—Act seeks to “protect consumers from the risks posed by emerging digital payment instruments, such as Facebook’s Libra and other Stablecoins currently offered in the market, by regulating their issuance and related commercial activities,” its sponsors said in a release.

Specifically, it would require stablecoin issuers to:

• Obtain a federal bank charter
• Follow existing banking regulations
• Obtain approval of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) six months before issuance
• Either get FDIC insurance or deposit the dollar reserves backing their stablecoin with the Fed—the central bank of the U.S.

The proposal drew vigorous opposition from Jeremy Allaire, CEO of Circle Internet Financial, which issues the USDC stablecoin. In a Dec. 2 Twitter thread, he said:

“The STABLE Act would represent a huge step backwards for digital currency innovation in the United States, limiting the accelerating progress of both the blockchain and fintech industry.”

While acknowledging that “there is clearly a critical long-term role for the Fed to play in the development of the standards and supervision around stablecoins,” Allaire tweeted:

“Forcing crypto, fintech and blockchain companies into the enormous regulatory burdens of Federal Reserve and FDIC regulation and supervision is inconsistent with the goals of supporting innovation in the fair and inclusive delivery of payments that comes from stablecoins.”

The Federal Reserve’s role should focus on “technical and governance standards for stablecoins,” he said. Rather than forcing stablecoins into the square hole of existing banking regulations, it would be smarter to consider new types of charters and supervision, he added.

“An enormous amount of the innovation brought to the underbanked and small businesses has been driven by non-bank fintech companies,” said Allaire. He singled out Stripe, Square, PayPal, Circle, Coinbase, Apple, and Google, “among many many others.”

Vulnerable consumers and predatory banks

The bill’s authors, Rep. Rashida Tlaib (D-MI), Rep. Jesús “Chuy” García (D-IL) and Rep. Stephen Lynch (D-MA)—who is chairman of House Financial Services Committee’s Task Force on Financial Technology—have pitched the bill as protecting low- and moderate-income consumers.

Which points to the most difficult aspect of the STABLE Act to wrap your head around: That it attacks the traditional banking industry for a host of predatory practices while simultaneously suggesting that subjecting stablecoin issuers to the regulations that have failed to keep those banks in check will somehow keep crypto firms honest.

According to the release, vulnerable consumers “could be exploited and obscured by bad actors looking to issue stablecoins, like other shadow money issuers in the past.”

It then links to an April article in The New Republic focused on lightly regulated “shadow banks” ranging from Quicken Loans to BlackRock to PayPal, which it links to the 2007 subprime mortgage crisis.

“Getting ahead of the curve on preventing cryptocurrency providers from repeating the crimes against low- and moderate-income residents of color that traditional big banks have is—and has been—critically important,” Rep. Tlaib said in the release

The release also takes aim at Facebook’s Libra stablecoin project, saying it “has attempted to take advantage of the financial exclusion and gap in the market,” citing concerns raised in July hearings by the House Financial Services Committee.

The Libra Association—which renamed itself the Diem Association earlier this week—has long pitched itself as a champion of the poor and unbanked, notably immigrant workers who must currently send home remittances at usurious fees.

Innovation gap

Rep. García took aim at the “Trump administration’s deregulation of our financial system,” saying it “has opened the door for tech companies to consolidate their power by preying on people of color with products that promise inclusion but only undermine our banking system.”

The goal of the STABLE Act, by contrast, is to “ensure that new financial technologies and payment tools do not prey on vulnerable users,” he said, adding that “it embraces innovation while also protecting consumers.”

That last comment drew the ire of Nik Kunkel, head of backend services at the fintech MakerDAO. He he tweeted:

“yea no this bill does none of that. It kills American competitiveness and encourages entrepreneurs to emigrate to friendlier jurisdictions. Very short-sighted.”

The release also took aim at Acting Comptroller of the Currency Brian Brooks—a former Coinbase exec—for pro-cryptocurrency actions like allowing banks to custody digital assets for clients and proposing a rule that would prevent financial institutions from discriminating against industries (like crypto).

What is not clear, however, is whether the word “tethering” in the legislation’s name is a pun on the largest stablecoin tether—or USDT—which is not otherwise mentioned in the congressmembers’ press release.