Proposed Bill Would Require Stablecoins to Be Backed by Dollars, Government Securities

Keep in mind the entire hubbub about Tether solely kinda sorta being backed by the U.S. greenback?

Two legislators—Rep. Trey Hollingsworth (R-IN) within the Home and Sen. Invoice Hagerty (R-TN) within the higher chamber—have launched a invoice designed to be sure that’s by no means a difficulty once more. 

The Stablecoin Transparency Act would require stablecoins to be absolutely backed by a mixture of U.S. {dollars} and “authorities securities with maturities lower than 12 months” (i.e., bonds). It could additionally legally compel issuers of stablecoins—reminiscent of Circle (USDC) and Tether (USDT)—to repeatedly publish audited studies demonstrating their reserves.

“From whether or not cash are securities or commodities, to who’s accountable for regulating them, these within the cryptocurrency market are navigating vital ambiguity,” says Sen. Hagerty, empathizing with shoppers desperate to know their funds are protected.

Stablecoins are crypto belongings pegged 1:1 with a fiat forex, usually the U.S. greenback. The thought is that for each stablecoin in circulation, there is a $1 invoice within the financial institution; if anybody needs to redeem that coin, they’ll. 

However the New York Legal professional Common’s Workplace took Tether to process for spreading this notion, stating that “Tether’s claims that its digital forex was absolutely backed by U.S. {dollars} always was a lie.” As an alternative, when Tether in the end issued studies in 2021, they confirmed a large chunk of reserves in money or “money equivalents,” reminiscent of cash market funds, in addition to substantial holdings in secured loans, bonds, or crypto investments.

Whereas a few of these investments helped Tether flip a revenue, they might make the corporate much less liquid in case of a digital “financial institution run.” Furthermore, a decline within the worth of Bitcoin or different crypto holdings might cut back the worth of the corporate’s reserves under the circulating worth of USDT and doubtlessly torpedo the worth.

Circle, the corporate that companions with Coinbase on USDC, is the second-largest stablecoin behind USDT by way of market capitalization. Final 12 months it got here in for criticism that, as of July, solely 61% of its holdings have been backed by money or money equivalents. 

However by August, it had introduced that it will solely use money and short-term authorities bonds, just like the necessities within the Hagerty-Hollingsworth invoice. That October, an attestation from accounting group Grant Thornton confirmed this to be the case, and Circle at this time introduced it will maintain its roughly $50 billion in reserves in mega-bank BNY Mellon.

Sen. Hagerty contends that whereas the Stablecoin Transparency Act is about shopper safety, the invoice will not put stablecoins within the fingers of “unaccountable bureaucrats who threaten to choke off innovation.”

That’s, if it ever will get a vote. Each chambers of Congress are managed by Democrats; whereas there is a bipartisan curiosity in getting cryptocurrency rules proper, the duo will doubtless want some help from throughout the aisle to get a committee vote.