In 2000, various forms of over-the-counter derivatives were emerging fast into the financial mainstream, and Congress passed the Commodity Futures Modernization Act, or CFMA, which purported to encourage financial innovation in a way that would benefit all Americans. In retrospect, the CFMA facilitated the rapid growth of weakly regulated derivative markets that played a major role in creating global financial fragility and systemic risk. Let's now be honest: The CFMA was a legislative mistake, contributing directly to the severity of the global financial crisis of 2008.
Today, stablecoins are an important emerging digital asset that attempt to maintain a stable value against a particular currency, such as the U.S. dollar. This makes stablecoins useful to people active in cryptocurrency trading. There is
With regard to systemic risk, the bill as drafted does not effectively deal with the inherent risk of stablecoin runs and prevents regulators from prescribing strong capital, liquidity and other safeguards. This is a risk that is heightened if the legislation allows foreign stablecoin issuers, like Tether, to deviate from the bill's reserve requirements for U.S. issuers. In addition, there needs to be a specific designated resolution authority for stablecoin issuers, more akin to the process we use for banks outside of the traditional bankruptcy code. Utilizing the bankruptcy code for failed stablecoin issuers will inevitably impose severe costs on consumers, like prolonged delays in receiving what's left of their money, and would likely further exacerbate runs on other stablecoin issuers.
The revised bill also still lacks a federal backup regulator for state-chartered stablecoin issuers. Any stablecoin legislation should provide for a significant federal role in overseeing state-licensed issuers. This would better serve the bill's policy objectives of keeping the bad actors out, while fostering the kind of public confidence and trust that is needed for the market to grow.
In this context, it is important to combat fraud in this market by lowering the annual audited financial statement requirement for stablecoin issuers from $50 billion to $10 billion (or preferably as low as $1 billion). The current threshold is far too high and would capture only one U.S. stablecoin issuer today.
It is also important not to exempt foreign issuers unless they are subject to a regulation/supervision regime that is "substantially similar" to that in the U.S., the same standard that applies to state regimes. The language of "comparable" in the latest version is a very weak standard and will lead to serious difficulties.
Visa, Mastercard, PayPal are among the firms moving the cryptocurrency option closer to the point of sale.
Further, at the very least, foreign issuers should not be exempt from direct U.S. regulation unless they meet and maintain the reserve requirements set forth in section 4(a)(1) of the bill. This will at least give U.S. users some protection that their foreign issuer stablecoins are in fact backed one-to-one by safe, liquid, short-term dollar denominated assets.
The business model of stablecoin issuers is to capture the spread between what they pay on their stablecoins (which is zero interest under this bill) and what they can receive when they invest their reserves, just like a bank. All the incentives for issuers are to invest at least some portion of their reserves in riskier assets to get higher returns. If the goals for this bill supposedly include preserving the U.S. dollar as the world's reserve currency and boosting demand for Treasuries (as stated by its advocates), why allow foreign issuers whose stablecoins are permitted in the U.S. to invest their reserves in other assets, which for that matter, could include their own country's (risky) government debt? Foreign regulators might condone or even favor such an arrangement.
Given reports of U.S. dollar-denominated stablecoins being used to circumvent sanctions laws, the bill should explicitly give the Office of Foreign Assets Control (part of the U.S. Treasury) the same jurisdiction and authority over U.S. dollar stablecoin transactions that it already has over other dollar-denominated transactions. It is also critical for U.S. national security to close the loophole that would enable foreign issuers, like Tether, to evade the bill while still accessing U.S. markets through decentralized exchanges. Tether, the largest stablecoin issuer in the world, is
We see the potential for payment stablecoins to make our financial system safer and more efficient. However, that potential depends on a clear and robust regulatory framework. In particular, such a framework must strongly guard against stablecoins being used in illicit finance or enabling consumer abuse.
The legislation currently under consideration in the U.S. Senate does not deliver on these reasonable goals. As currently drafted, the GENIUS bill paves another road to financial self-destruction that will undermine the American and global economy.
