The Office of the Comptroller of the Currency (OCC) has been granted limited authority to issue stablecoins. It is worth noting that under the new legislation, algorithmic stablecoins will be considered hybrid instruments and will be regulated by the US Commodity Futures Trading Commission (CFTC). Furthermore, according to the updated law, issuers of algorithmic stablecoins will be prohibited from referring to these products as “stablecoins.”
Stablecoin legislation is also underway in the House of Representatives. Led by Representative Patrick McHenry, House Republicans have introduced the Clarity for Payment Stablecoins Act, which recently passed the House Financial Services Committee largely along party lines. Non-bank issuers will face similar requirements as banks, such as capital, liquidity, and risk management requirements. The bill excludes digital assets representing deposits created by banks and imposes a two-year moratorium on the creation of new algorithmic stablecoins (referred to as “native collateral stablecoins”), while directing the Treasury Department to conduct further research on them.
3. State Regulatory Policies and Legislative Developments
Amid federal uncertainty from the SEC and CFTC, various state-level regulatory frameworks have emerged for stablecoin issuers. Currently, many states regulate virtual currency activities under their money transmission laws, but few provide specific guidance on stablecoins.
3.1. Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act
Texas law considers stablecoins backed by sovereign currency to be regulated under its money transmission laws. According to Texas law, stablecoins “may be viewed as a claim convertible into money, and therefore falls within the definition of money or monetary value” under the Texas Finance Code.
Money Transmission
Stablecoins pegged to sovereign currency can be viewed as a claim convertible into money, falling within the definition of money or monetary value under Section 151.301(b)(3) of the Texas Finance Code. If a stablecoin is backed by sovereign currency reserves and the holder has the right to redeem the stablecoin, the holder has a claim against the sovereign currency supporting the stablecoin because the issuer is obligated to provide sovereign currency in exchange for the stablecoin upon request in the future.
Policy Statement
Under the Money Services Act, sovereign-backed stablecoins may be considered as money or monetary value, and therefore accepting stablecoins in exchange for a promise to provide stablecoins at a later time or place may fall under money transmission. The licensing analysis will depend on whether the stablecoin provides the holder with a right to redeem sovereign currency, creating a claim convertible into money or monetary value. Whether the redemption right is explicitly granted by the issuer or implied, the same principle applies.
3.2. Nebraska Revised Statute 8-3024
The statute outlines that digital asset custodians are authorized to engage in the following one or more digital asset business activities:
(1) Providing digital asset and cryptocurrency custody services. Such custody services may not be provided for digital assets or cryptocurrencies unless the digital asset or cryptocurrency:
(a) Has been publicly traded for at least six months prior to providing custody services; or
(b) Is created or issued by any bank, savings bank, savings and loan association, or building and loan association organized under the laws of this state or the laws of the United States and doing business in this state.
(2) Issuing stablecoins and holding deposits at a financial institution insured by the Federal Deposit Insurance Corporation, which has its principal charter office in this state, has any branch in this state, or has any branch in this state before becoming a branch of that financial institution, as reserves for stablecoins; and
(3) Conducting payment activities using an independent node verification network and stablecoins.
3.3. Wyoming Stable Token Act
Summary of the Act:
A single stable token is a virtual currency representation of one US dollar.
A stable token can be redeemed for one US dollar on demand (unless the US Treasury bill rate falls below zero or the value of assets held in the trust account falls below one US dollar per stable token).
The nominal value of all circulating tokens will be 100% deposited into a newly established Wyoming Stable Token trust account (although the trust will not create any trust obligations between the state government and token holders).
Trust funds will be invested solely in low-risk short-term US government bonds.
Any investment returns exceeding 102% of the nominal value of circulating tokens will be deposited into the Wyoming Stable Token Management Account to cover operational costs and fund other state government work.
The Act establishes the Wyoming Stable Token Committee responsible for issuing and overseeing the program.
The Act stipulates that the Committee “shall aim to issue at least one Wyoming stable token by December 31, 2023.” Wyoming’s treasury will provide $500,000 in seed funding for the issuance and management of the tokens, but it is expected that these funds will be repaid from anticipated interest income.
3.4. New York Stablecoin Regulation (DFS Guidance)
On June 8, 2022, the New York Department of Financial Services (DFS) issued the “DFS Guidance on Issuance of Dollar-Backed Stablecoins,” outlining general requirements for issuers regulated by the DFS issuing dollar-backed stablecoins.
Regarding redeemability, the DFS Guidance requires, among other things, that stablecoin issuers adopt a “clear, prominent redemption policy and obtain prior written approval from the DFS,” granting holders the right to redeem stablecoins at face value promptly. The DFS defines “promptly” redemption as within two business days of the redemption instruction, although this requirement may be subject to exceptions if the DFS determines that prompt redemption may jeopardize the asset support requirements of the reserve or the orderly liquidation of reserve assets.
As for reserves, the DFS Guidance mandates that stablecoins must be fully backed by reserve assets, which can only include: (1) short-term US Treasury bills; (2) repurchase agreements with approved counterparties; (3) government money market funds, subject to DFS-approved limits; and (4) deposit accounts at state or federally chartered depository institutions in the US, subject to DFS-approved allowable amounts held at any specific institution. The DFS also expects issuers to manage liquidity risk to ensure that the market value of reserve assets is at least equal to the value of outstanding stablecoin units at the end of each business day.
On verification, the DFS Guidance requires issuers to submit reports monthly to the DFS and the public prepared by independent US-licensed registered accountants detailing: (1) the value and composition of reserves; (2) outstanding stablecoin units; (3) whether reserves are sufficient to fully support outstanding stablecoin units; and (4) compliance with all the DFS’s conditions on reserves. The DFS Guidance also mandates issuers to obtain an annual report demonstrating management’s assertion of the effectiveness of internal controls, structure, and procedures to comply with the requirements of the monthly reports and submit it to the DFS within 120 days of the coverage period, although issuers are not required to publicly release the report.
4. Key Legal Disputes:
Terraform Case – Cryptocurrency Securities Fraud
LUNA is the governance token of the Terra blockchain network, a delegated proof-of-stake blockchain whose operational purpose is to issue and maintain a stablecoin, UST, a token designed to precisely trade at $1. To incentivize long-term holding and usage of UST, Terraform Labs, the creator of the Terra blockchain network, introduced Anchor, a purportedly low-risk, high-yield savings protocol guaranteeing a 20% annual return on UST deposits.
To maintain the peg of UST, the protocol utilized a mechanism called “seigniorage,” which in theory could incentivize arbitrage trades, leading to upward or downward price pressure. Arbitrage traders were incentivized to buy UST whenever it traded below $1 and sell it when it traded above $1, as UST could always be exactly exchanged at the protocol level for $1 worth of LUNA, regardless of UST’s market price. This process continued until it failed. Once UST was unpegged in May 2022, it triggered a bank run where UST was exchanged for LUNA, further decoupling from its peg, ultimately leading to a death spiral that crashed the price of LUNA to zero.
On February 16, 2023, the US SEC sued Terraform Labs and its founder Do Kwon, alleging the issuance and sale of UST and LUNA as unregistered securities. On July 31, 2023, the trial court denied Terraform Labs and Kwon’s motion to dismiss, ruling that marketing the Anchor protocol as a revenue-generating mechanism constituted an investment contract, thus classifying it as a security. While the court ruled that BUSD and other stablecoins were not isolated securities since fixed-price assets themselves did not carry a “reasonable expectation of profits,” Terra’s marketing and sale of equity derivatives (via Mirror Protocol) and interest products (via Anchor Protocol) to encourage UST “deposits” constituted the unregistered sale and issuance of securities.
5. Conclusion
This article extensively discusses the regulatory framework and definition of stablecoins in the United States. With the Responsible Financial Innovation Act (RFIA) and the Clarity for Payment Stablecoins Act, stablecoins have a clearer definition: any digital financial instrument privately issued and pegged to the US dollar or other fiat currencies with a fixed nominal redemption value. These laws require stablecoin issuers to meet specific capital, liquidity, and risk management requirements and obtain authorization from the Office of the Comptroller of the Currency (OCC). Federal agencies such as the SEC and CFTC are also actively vying for regulatory oversight of stablecoins, proposing their own regulatory guidance, while the emergence and advancement of FIT 21 make the future regulatory landscape for stablecoins increasingly clear. Additionally, this article discusses different state-level regulatory policies and legislative developments, including specific implementation policies from Wyoming and New York.
The continued scrutiny of stablecoins by FIT 21 and federal agencies is accelerating the advancement of a comprehensive regulatory framework for stablecoins in the United States. In the future, it is expected that the US will further strengthen regulatory measures for stablecoins to ensure their stability and security in the financial system. Regulatory agencies may continue to refine the legal framework to address evolving market needs and technological innovations.
References
[1]. The House Committee on Financial Services. (2020). H.R.8827-Stablecoin Classification and Regulation Act of 2020.
[2]. Tsinghua University PBC School of Finance MBA 2023. (2024). Pricing Analysis and Future Trends of Digital Stablecoins – Taking USDT as an Example.
[3]. GLOBAL LEGAL INSIGHT. (2024). The regulation of stablecoins in the United States.
[4]. TEXAS DEPARTMENT OF BANKING. (2019). Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act.
[5]. LATHAM & WATKINS LLP. (2023). Wyoming Stable Token Act Enacted into Law.
[6]. OFFICIAL NEBRASKA GOVERMENT. (2022). Nebraska Revised Statute 8-3024.
[7]. COINTELEGRAPH. (2023). Stablecoins and Ether are ‘going to be commodities,’ reaffirms CFTC chair.
