Senator Bill Hagerty (R-TN), a member of the Senate Banking Committee, has proposed new legislation aimed at establishing a clear regulatory framework for stablecoin issuers. This effort seeks to eliminate regulatory ambiguity and unlock the full potential of stablecoins to enhance payment systems and boost demand for U.S. Treasury securities.
Hagerty emphasized the critical role stablecoins could play in improving transaction efficiency and supporting U.S. Treasuries. However, he pointed out that the lack of regulatory clarity has hampered their growth. The new legislation aims to provide the structure needed to fully harness the benefits of this technology.
Key Provisions of the Proposed Legislation
The proposed bill builds on the Clarity for Payment Stablecoins Act, introduced by Patrick McHenry, Chairman of the House Financial Services Committee. One of the standout features of Hagerty’s draft is an exemption for stablecoin issuers with less than $10 billion in assets from federal oversight. These issuers would continue to be regulated by state authorities. However, issuers exceeding this threshold can request a waiver to remain under state regulation.
The legislation mandates that stablecoin issuers maintain reserves equal to the amount of stablecoins in circulation. These reserves must be backed by high-quality assets, such as U.S. currency or Treasury bills, ensuring that stablecoins are fully backed and secure. Issuers are also required to disclose the composition of their reserves on a monthly basis, promoting transparency and consumer confidence.
Additionally, the legislation calls for the development of interoperability standards to ensure smooth integration of stablecoins with other financial systems, both domestically and internationally.
Regulatory Oversight for Stablecoin Issuers
The proposed bill restricts stablecoin issuance to “permitted payment stablecoin issuers,” which includes both insured depository institutions and approved nonbank entities. These issuers must meet specific regulatory criteria and establish procedures for timely redemption of stablecoins. They are also required to publicly disclose their redemption policies.
The legislation designates the Federal Reserve as the primary regulator for depository institutions issuing stablecoins, while the Office of the Comptroller of the Currency (OCC) will oversee nonbank issuers. These agencies will ensure that issuers comply with safety and soundness requirements, as well as risk management and operational standards.
Strengthening Consumer Protection
To further protect consumers, the legislation introduces several safeguards. Stablecoin issuers must segregate customer assets to prevent them from being commingled with the issuer’s funds. This measure ensures that customer funds remain protected in the event of the issuer’s financial troubles.
Issuers are also prohibited from rehypothecating customer assets, except under specific conditions for liquidity purposes. This provision ensures that the reserves backing stablecoins remain available for redemption at all times.
Additionally, entities offering custodial services for stablecoins or private keys are subject to stringent requirements to protect consumer assets. These custodians must treat customer assets as distinct from their own and ensure they are safeguarded against creditors’ claims.
Encouraging Innovation While Ensuring Stability
The legislation takes a balanced approach by fostering innovation in the stablecoin space while ensuring financial stability. By providing clear legal guidelines and reducing regulatory barriers, the bill encourages the growth of stablecoins while safeguarding consumer interests.
Cooperation between state and federal regulators is also a key aspect of the bill. State-regulated issuers may operate within federal guidelines, and provisions for reciprocal arrangements with foreign jurisdictions aim to facilitate international transactions. This framework seeks to integrate stablecoins into the broader financial system while maintaining high standards of protection for consumers.
In summary, Senator Hagerty’s proposed legislation represents a significant step forward in regulating stablecoins, promoting innovation, and ensuring the security of consumer assets.
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