Maxine Waters of the US and Patrick McHenry from Canada are working together on a bill to impose strict bank-like rules for stablecoins. The Wall Street Journal Reported July 20.
According to the law, stablecoin issuers will be required to ensure that their reserves are backed by conservative assets such as cash and US Treasury bonds. This would prevent market panics.
Stablecoin vulnerability is a concern for lawmakers
The US lawmakers are worried that stablecoins are vulnerable to bank runs if doubts about their issuer’s ability to redeem their tokens 1:1 for the US dollar emerge.
Tether, the USDT-issuer, was hit by a mini-bank panic in May. It had to honour roughly $10 billion worth of withdrawals within two weeks.
According to the WSJ this could result in a situation in which a stablecoin issuer has to liquidate its reserves. This would increase the downward pressure on the wider financial industry.
Treasury Secretary Janet Yellen previously raised the concern that stablecoins must be properly regulated to mitigate against any “current and future risks.”
Stablecoin issuers will be treated the same as banks
New legislation calls for stablecoin issuers to be treated more like banks than money market funds.
Banks in the US face tougher regulatory oversight and are mandated to comply with federal agencies to protect their customers’ funds.
The report suggests that stablecoin issuances should adhere to federal supervision along with capital and liquidity rules.
Meanwhile, the bill also seeks to restrict non-financial companies from being able to issue stablecoins — a move designed to separate financial firms and commercial businesses or technological firms.
Federal Reserves to act as regulator
The report said the bill positions the Federal Reserve as the regulator of “payment stablecoins issuers.”
Because of its better track record in managing financial stability risks, the Fed was preferred to the Securities and Exchange Commission (SEC).
Wall Street Journal reported that in the past 12 years, the Fed has intervened twice to prevent money-fund crises.
According to the report, the SEC expressed concern that the bill did not address stablecoin trading. It also suggested that it might not provide enough regulatory oversight to ensure that these transactions are properly monitored.
Gary Gensler, the chief of SEC has spoken out about stablecoins in a number of interviews. He has also compared them to poker chip chips.