New Legislation Proposes to Merge Crypto and Banking
Newly-proposed federal legislation would require all issuers of stablecoins and certain other digital asset companies to obtain a bank charter as a condition to operation. Referred to as the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, the draft legislation is intended to shift certain digital currency activities into the regulated banking framework.
The one-pager on the STABLE Act states that “cryptocurrency should not [be] beyond the reach of fair lending laws and regulation” and that “[i]t is critical not to let Wall Street and Silicon Valley own the future of payments.” It goes on to cite as one of its primary purposes the protection of consumers from risks posed by digital payment instruments.
The STABLE Act includes four broad provisions:
requires any prospective issuer of a stablecoin to FDICobtain a banking charter, obtain federal deposit insurance and become a member of the Federal Reserve system;
requires any company offering stablecoin services to follow the appropriate banking regulations under the existing regulatory jurisdictions;
requires any company or bank issuing a stablecoin to notify and obtain approval from the Federal Reserve, the FDIC, and the appropriate banking agency six months prior to its issuance and maintain an ongoing analysis of potential systemic impacts and risks; and
requires all stablecoin issuers to obtain FDIC insurance or otherwise maintain reserves at the Federal Reserve to ensure that all stablecoins can be readily converted into United States dollars, on demand.
The draft bill broadly defines “stablecoin” to essentially include any cryptocurrency or privately-issued financial instrument that has its value denominated in or pegged to any fiat currency. Regardless of whether the value is in fact pegged to fiat currency, the STABLE Act would apply to any cryptocurrency that creates the “reasonable expectation or belief among the public that the instrument will retain a nominal redemption value.”
The bill could have far-reaching consequences. For example, even though the STABLE Act is primarily focused on stablecoin issuers, the second requirement outlined above involves requiring any company offering stablecoin services to follow the appropriate banking regulations. This would potentially have sweeping, and unpredictable, implications.
As a general matter, banks already have the authority to issue stablecoin-like products under existing commercial and banking law principles. As we have suggested in previous blog posts, if a bank issues what may generally be considered a stablecoin, it is likely to function much closer to a digital negotiable instrument—with the specific type of negotiable instrument varying depending on the underlying technological features. By way of example, digital negotiable instruments, such as promissory notes, are commonplace in electronic mortgage closings.
Meanwhile, state banking regulators like those in Wyoming and New York have already started building out robust frameworks allowing banks to engage in certain cryptocurrency and digital asset activities, even though the two states’ approaches are in many ways on opposite ends of the spectrum. But not all states will be ready to supervise banks engaged in cryptocurrency activities as contemplated under the STABLE Act—not least of all building out the internal expertise to do so effectively. Even New York, which introduced the widely-known BitLicense in 2015, has yet to officially address whether non-New York state chartered banks and national banks are permitted to provide crypto services in the state without first obtaining the BitLicense or NYDFS approval—despite OCC guidance clearly granting nationally-chartered banks the authority to do so.
There is little chance that the STABLE Act will become law this year. Nevertheless, it clearly shows that members of Congress are increasingly looking at cryptocurrency and digital activities with a growing interest in ensuring these activities take place within a more regulated environment. We are hopeful that eventual legislation will not stifle innovation, which is a key reason we encourage industry stakeholders to continue engaging with legislators at a state and federal level.
In the meantime, we expect existing banking regulators will continue to issue rules and guidance to address how digital assets fit within the current financial regulatory framework. In terms of what is on the horizon, Comptroller Brian Brooks publicly stated that the digital asset community should expect “a lot of good news for crypto” in the coming weeks, including how banks may connect to blockchain-based payment networks as well as more clarity on digital assets generally. It remains to be seen whether this “good news” will come in the form of actual regulations or more informal guidance such as additional interpretive letters.