The RFIA could make it easier for fintechs dealing in digital assets and stablecoins to access Federal Reserve bank services.
Latham & Watkins presents a blog series on the Responsible Financial Innovation Act, which was introduced in the US Senate on June 10, 2022, to create a framework for digital assets, cryptocurrency, and blockchain technology. This fourth post in the series covers banking and payment stablecoin issues.
Banking issues are covered in Title VII of the bill (Responsible Banking Innovation).
The RFIA would add a new Section 11A of the Federal Reserve Act that would require the Board of Governors of the Federal Reserve System (FRB) to make available currency and coin services, wire transfer services, automated clearinghouse services, and settlement services to any depository institution chartered under state or federal law, and to make available a segregated balance account to a depository institution upon request. Within two years of the bill’s enactment, the FRB must assume responsibility for issuing routing transit numbers to depository institutions for all purposes relating to the clearing of transactions and the services required under the Federal Reserve Act noted above.
Furthermore, Title VII of the RFIA would, in part:
- Prohibit the federal banking agencies (including Federal Reserve banks) from delaying decisions on applications by requiring that decisions be rendered within one year of application, and to report to Congress a list of the applications that have been pending for more than nine months.
- Require the Federal Financial Institutions Examination Council (FFIEC) (in consultation with the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN)) to publish final guidance and adopt examination standards relating to the digital asset activities of depository institutions within 18 months. Topics should include anti-money laundering, customer identification, beneficial ownership, and sanctions compliance (including with respect to payment stablecoin activities and subsidiary value), custody, fiduciary and capital markets activities, information technology standards, payment system risk, and consumer protection.
- Codify basic principles around custody by defining the term “custody” for depository institutions and non-depository trust companies as “the safekeeping, servicing, and management of customer financial assets, including currency, securities and commodities, on an off-balance sheet basis.” Custody will generally be accomplished through a bailment and written customer agreement, and will not be considered a fiduciary or trust activity, unless the custodian is providing “substantial discretionary services” with respect to an account (e.g., through investment advice or investment discretion).
- Prohibit the federal banking agencies from (i) restricting or discouraging a depository institution from entering into or maintaining a banking relationship with a specific customer or group of customers based on reputation risk (including through the examinations and ratings of the depository institution); or (ii) requesting or ordering a depository institution to terminate a specific customer account or group of customer accounts (unless the agency has a valid reason and provides a written justification for such request or order, e.g., the customer poses a threat to national security, is involved in terrorist financing, etc.).
- Require the FRB to complete a study and submit to Congress a report within 180 days of enactment of the bill, describing how distributed ledger technology can reduce risk for depository institutions (e.g., settlement risk, operational risk, and capital requirements).
Payment Stablecoin Issues
Considerations around the issuance of payment stablecoins are covered in Title VI of the bill (Responsible Payments Innovation).
The RFIA defines a payment stablecoin as a digital asset that is:
- redeemable, on demand, on a one-to-one basis for instruments denominated in US dollars and defined as legal tender, or for instruments defined as legal tender under the laws of a foreign country (excluding digital assets defined as legal tender under the laws of a foreign country);
- issued by a business entity;
- accompanied by a statement from the issuer that the asset is redeemable as specified from the issuer or another identified person;
- backed by one or more financial assets (excluding other digital assets); and
- intended to be used as a medium of exchange.
This definition would therefore exclude algorithmic stablecoins, stablecoins backed by digital assets, or stablecoins backed by bitcoin in the capacity as legal tender of at least one sovereign nation.
The RFIA would add Section 4810 to Chapter 48 of title 12, United States Code, to make clear that a depository institution, or a non-depository institution operating under a state or federal charter or license, may “issue, redeem and conduct all incidental activities [e.g., management of assets, market-making, custodial services, settlement and clearing, post-trade services, etc.] relating to payment stablecoins.” The FRB, through the Federal Reserve banks, would also be required to provide clearing and settlement services of payment stablecoins among depository institutions. The federal banking agencies, in consultation with state bank supervisors, would be required to adopt rules implementing the section, although no timeline is specified.
A depository institution may request permission to issue a payment stablecoin from a federal banking agency or state bank supervisor, and an affirmative decision would need to be rendered within four months unless it is determined that the payment stablecoin activities are not likely to be able to operate in a safe and sound manner, the depository institution does not have the required resources and expertise to manage the operation of the payment stablecoin, or the depository institution does not have required policies and procedures relating to material areas of the operation of the payment stablecoin activities. Any such application to issue a stablecoin would need to be accompanied by a tailored recovery and resolution plan (that would permit the orderly resumption of a safe and sound operation or the orderly wind-down of operations in the event of distress, including the redemption of all outstanding payment stablecoins), a draft customer agreement, flow of funds explanation, a robust information technology plan, and operational design of the payment stablecoin.
Furthermore, among other things, Title VI of the RFIA would:
- Allow the Office of the Comptroller of the Currency to charter national banks for the exclusive purpose of issuing payment stablecoins.
- Require all issuers of payment stablecoins to maintain high-quality liquid assets valued at 100% of the face value of all outstanding payment stablecoins issued by the institution.
- Require all issuers of payment stablecoins to provide publicly accessible disclosures on a monthly basis relating to the number of outstanding stablecoins, the assets backing the stablecoin, and the value of the assets. Such disclosures would be subject to verification, as part of regular examinations of the depository institution by the appropriate federal banking agency or state bank supervisor.
- Require that customers of a depository institution (including other depository institutions) have the ability to redeem all outstanding payment stablecoin at par in legal tender.
- Require the Office of Foreign Assets Control (OFAC) to develop guidance within 120 days of enactment of the bill clarifying the sanctions compliance responsibilities and liabilities of an issuer of payment stablecoins.
- Require the Office of Management and Budget, in consultation with the Director of the Cybersecurity and Infrastructure Security Agency, the Director of National Intelligence, and the Secretary of Defense, to formulate standards and guidelines for executive agencies to develop security measures for the use of the digital yuan on government-issued information technology devices.
- Establish within FinCEN an Innovation Laboratory to promote, among other things, regulatory dialogue and pilot projects with financial institutions to facilitate the supervision of financial technology.
The RFIA, if enacted as proposed, would allow fintechs and digital asset market participants to issue payment stablecoins and access banking services provided by the Federal Reserve that have previously been unavailable to non-depository institutions. By requiring higher levels of engagement and transparency from the Federal Reserve, the RFIA would break down many of barriers to entry into the mainstream banking system that digital asset service providers are facing in the current regulatory environment.
Responsible growth and innovation in the digital asset market would also benefit from clear FFIEC and FinCEN guidance and examination standards relating to the digital asset activities of depository institutions, as well as from the regulatory dialogue that the proposed FinCEN Innovation Laboratory would promote.
Finally, while market participants and consumers may benefit from the ability of depository or non-depository institutions to issue payment stablecoins fully backed by high-quality liquid assets, many in the banking industry are concerned that the RFIA would establish a regulatory regime for certain stablecoin issuers that is not consistent with past precedent and does not adequately address the concerns and recommendations in the President’s Working Group Report on Stablecoins (see this Latham post for more).
 Eligible high-quality liquid assets would include: (1) US coins and currency and any other instrument defined as legal tender under 31 U.S.C. § 5130; (2) demand deposits at a depository institution, subject to certain conditions; (3) balances held at a Federal Reserve bank, which may be held in a master account or segregated balance account; (4) foreign withdrawable reserves (as defined in 12 C.F.R. § 249.3), consistent with any foreign unit of account in which the payment stablecoin is denominated or pegged; (5) a security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the US Department of the Treasury, with an original maturity of one year or less; (6) a reserve repurchase agreement relating to a security described in the foregoing paragraph (5); and (7) any other high-quality, liquid asset determined to be consistent with safe and sound banking practices, as determined by the appropriate federal banking agency or state bank supervisor.