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With the US moving towards federal stablecoin legislation, two bills have emerged as the leading contenders to be enacted, but lawmakers say both contain “loopholes” that could give foreign issuers an easy ride.
Earlier this month, the House Financial Services Committee passed the Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act, clearing it for a vote on the House floor.
The bipartisan STABLE Act was passed in a 32-17 vote, with support from all but six Republicans and support from six Democrats on the committee.
Representative Bryan Steil (R-WI), lead sponsor of the bill, said the STABLE Act aims to usher in a “golden age” for stablecoins in the US.
“Our bill sets clear rules for asset-backed payment stablecoins and protects consumers and the broader financial system from unnecessary risks,” he said.
“The STABLE Act will enhance market confidence, limit volatility and provide much-needed consumer protection.”
At the same time, however, a similar bill is making its way through the Senate.
Last month, the Senate Banking Committee passed the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act in an 18-6 vote, clearing it for a vote on the Senate floor.
Senator Tim Scott (R-SC), committee chair and co-sponsor of the bill, also sees the GENIUS Act as laying the foundations for a new era in US payments innovation using stablecoins.
Key considerations
Although both bills have bipartisan support and passed comfortably through the committee stage, they are not without their critics.
For the Democrats who opposed the two bills, one of the key problems is their disparate rules for US-based and foreign-based stablecoin issuers respectively.
Under the GENIUS Act, the “loophole” offered to foreign issuers — as described by Senator Elizabeth Warren (D-MA) — is broader, and could result in extremely light-touch regulation for these issuers.
Although US-based issuers will need to be approved by either a federal or state authority, foreign issuers will face no such requirements.
Instead, the only requirement that a foreign issuer must demonstrate to access the US market is that it has the “technological capability” to comply with the terms of any “lawful order”.
Under the STABLE Act, the “loophole” offered to foreign issuers is more subtle, and would at least result in a stronger supervisory framework for these issuers than under the GENIUS Act.
However, it would still result in foreign issuers potentially being less regulated than their US counterparts, despite having the same access to the US market.
Under the STABLE Act, foreign issuers are exempted from having to obtain authorisation from state or federal authorities, but they must be “subject to regulation by a foreign payment stablecoin regulator”.
The foreign jurisdiction must also have in place a regulatory regime for stablecoins that the Secretary of the Treasury deems “comparable” to that of the US.
Foreign issuers or foreign regulators can request that the Secretary of the Treasury work with other federal authorities to assess the regime in question, or the Secretary of the Treasury can make this assessment on his own initiative.
Finally, foreign issuers must consent to reporting and examination requirements “as determined” by the Office of the Comptroller of the Currency (OCC) (for non-banks) or by the Federal Reserve Board (for banks).
The bigger picture
Given the rhetoric of the White House, certain Congressmen and some in the digital asset and banking industries, it is not unreasonable to expect to see a surge in stablecoin usage and innovation once a US regulatory framework is in place.
At present, as noted by the Federal Reserve, stablecoins are used mostly for crypto trading purposes.
In 2022, the Fed found that more than 80 percent of trades on crypto-asset trading platforms are executed using stablecoin pairs.
As such, the current payments volume of stablecoins is negligible, but stablecoin promoters see it rising exponentially in future, thanks to regulation and to competition with central bank digital currencies (CBDCs).
As covered by Vixio, the Trump administration has banned the US from issuing, developing or even researching a CBDC, but has come out emphatically in favour of US dollar stablecoins.
Both the White House and some in Congress see “lawful and legitimate” stablecoins as a means to “protect the sovereignty” of the US dollar and to promote its usage worldwide.
Why should you care?
The entry of any new payments instrument to the payments landscape poses compliance challenges for incumbent firms.
With stablecoins, this is even more the case, given that their evolution to date has been so closely linked to that of the crypto-asset world — a largely unregulated sector that has produced some of the largest criminal and civil enforcement actions in US history.
Firms need to be especially mindful of counterparty risk as stablecoins enter the mainstream, given the crypto-asset sector’s history of AML failures, poor know-your-customer (KYC) controls and other compliance shortcomings.
Although incumbents such as Circle, PayPal, Paxos and Ripple have invested in global licensing and transparency, their stablecoins remain minor compared with Tether’s USDT, which still accounts for more than 60 percent of the world’s stablecoins.
Nevertheless, the impact of upcoming US regulations on Tether remains uncertain.
Under the GENIUS Act, Tether could continue to serve the US market from offshore, with no clear regulator and with its reserves unaudited.
Under the STABLE Act, it would need to come into compliance with a similar regulatory framework in another jurisdiction — a prospect that seems unlikely.
But perhaps the incumbent issuers will be pushed aside by larger and more established financial institutions that look set to move into stablecoins.
Bank of America CEO Brian Moynihan, for example, has said that if Congress passes legislation to regulate stablecoins, it is “clear” that the bank will launch its own stablecoin.
From a compliance perspective, the entry of large, regulated depository institutions into the stablecoin market would be much easier to handle for other payments firms.
The entry of these players is also likely to be a gradual process, giving firms time to plan ahead and hire subject matter experts to support the transition to processing large volumes of stablecoin payments while maintaining regulatory compliance.
Earlier this year, Senator Scott promised that stablecoin legislation will be enacted within 100 days of Trump taking office (by April 30, 2025).
If Congress succeeds, then firms should familiarise themselves with the finalised legislation and put plans in place as quickly as possible.
Talk of a “golden age” for stablecoins may be premature, but a major shift in the payments landscape seems likely.
