On April 6, Senator Pat Toomey (R-PA) released a draft of his proposed stablecoin legislation titled, Stablecoin Transparency of Reserves and Uniform Safe Transactions Act, or the Stablecoin TRUST Act. Toomey, the ranking member of the Senate Banking Committee, has been a vocal proponent of blockchain innovation, and his recent bill calls for a deft regulatory touch on stablecoins:
- General Prohibition on Issuance of Payment Stablecoins Except for Entities Authorized by a State or the Federal Government. The bill generally prohibits all persons from issuing “payment stablecoins,” which the bill defines as “convertible virtual currency” issued by a centralized entity and designed to maintain a stable value relative to fiat currency. However, money transmitting businesses, insured depository institutions, national limited payment stablecoin issuers, or any entity that has received authorization to issue stablecoins from a state-banking authority, are excluded from the bill’s prohibition and may issue payment stablecoins. Other entities may apply to the Office of Comptroller of Currency (OCC) for a charter to become national limited payment stablecoin issuers (NLPSIs), which would enable those entities to issue payment stablecoins. The bill subjects NLPSIs to higher regulatory scrutiny. Additionally, the bill requires that payment stablecoins be recorded on a “public distributed ledger” (which means data associated with the transactions that occur on the network is shared with and can be accessed by everyone).
- Payment Stablecoin Asset Disclosure and Reserve Requirements. Each entity excluded from the bill’s general prohibition must make monthly disclosures to the public concerning the assets backing its payment stablecoins and quarterly attestations that the assets disclosed do not “materially diverge” from the assets the entity is purporting to hold. The bill does not specify the assets that a money transmitting business, insured depository institution, or other entity that has received authorization to issue stablecoins from a state-banking authority must have in its reserves to back payment stablecoins that it issues. However, payment stablecoins issued by NLPSIs must be backed — in one-to-one fashion — by assets possessing a market value not less than 100% of the face value of the total, outstanding number of payment stablecoins issued by the NLPSI, or cash, or a Level 1 liquid asset (for example, a Treasury bond).
- Rulemaking and Enforcement Authority Vested in the OCC. Under the bill, NLPSIs would be exclusively supervised by the OCC, which would have both rulemaking and enforcement authority. The bill limits the OCC’s rulemaking authority to determining the maximum threshold of a NLPSI’s liquidity requirements, as well as general governance and risk management. If a NLPSI violates any applicable laws or regulations, the bill empowers the OCC to issue either cease and desist orders or take “affirmative action” to prevent future violations and rectify existing violations.
- Exemption From Securities Requirements. Critically, if enacted, 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 “payment stablecoin” as defined by those laws. Stated differently, the bill would effectively remove stablecoins from the SEC’s reach and exempt those digital assets from the purview of the U.S. Supreme Court’s Howey test, which we discussed here.
- Privacy Protections. Although the bill requires payment stablecoin transactions to be conducted on a public distributed ledger, public-key encryption enables users to transact on a distributed ledger without providing his or her private, identifying information to execute a transaction. In alignment with this ethos, the bill prohibits the Treasury secretary from collecting, or mandating the collection of, “nonpublic information” regarding virtual currency transactions unless either the person at issue voluntarily provides the information to a third party that holds it for a legitimate business purpose, or the Treasury secretary obtains a search warrant that one or more persons to a transaction has committed or is committing a crime.
Our Take. Today, most stablecoin issuers are primarily regulated by money transmitter laws at the state level. On November 1, 2021, the President’s Working Group on Financial Markets released a report recommending that stablecoin issuance should be limited to insured depository institutions or banks. Such regulation would require today’s issuers of stablecoins to obtain either a federal or state bank charter, which is often a strenuous process that could take a year or longer to finalize. Senator Toomey’s proposed bill would preserve these issuers’ state-registered money transmitter status and enable them to continue to provide stable liquidity to the digital asset markets at the expense of heightened regulatory scrutiny.