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Stablecoins become the new banks

Stablecoins become the new banks

The Federal government's concern - almost fright - about stablecoins is coming to an inevitable conclusion. Regulate stablecoins. Perhaps, regulate stablecoins as we know them, out of existence. And, I must say that I expected this.

Stablecoins are known as crypto coins designed to closely mimic real (fiat) currencies. Stablecoin prices are tied (pegged) to a currency because they are backed by holdings These are assets traded on blockchains and now have a market capitalization of $186 billion. Issuers design them to be a pure substitute for a dollar, but they are not regulated by monetary authorities.

Federal Reserve officials and others have described the regulation of stablecoins as urgent. One result of this is the creation of a piece of draft legislation in Congress. The financial markets are not giving full credence to this discussion draft. It is my belief that we should expect Congress to pass some form of this legislation largely as currently composed. And stablecoins will become banks to survive.

Payment stablecoins

The proposed legislation is the ‘‘Stablecoin TRUST Act of 2022” from Sen. Patrick Toomey (R-Pa.). The legislation regulates national limited payment stablecoin issuers. These regulated individuals issue “payment stablecoins.” But only those issuers who are licensed or regulated by the Office of the Comptroller of the Currency are allowed by the proposed legislation to issue payment stablecoins. These authorized issuers include national and state-chartered banks.

So, what is a payment stablecoin? This is a virtual currency that is convertible to a fiat currency by the issuer. The payment stablecoin is intended to be a medium of exchange. It is a record on a public distributed ledger. It is issued by a “centralized entity” and does not “inherently” pay interest to the holder.

Regulators will fill out the details of the law should it be passed. On its face, the legislation would exempt private ledgers not available to the public. In addition, the law would not regulate the issuance of interest-paying cryptocurrencies. Crypto bonds would be exempt.

Who can issue stablecoins?

The proposal states it is unlawful for any person to issue a stablecoin except for a few circumstances, including: a “money transmitting business,” a “national limited payment stablecoin issuer,” or an “insured deposit institution.”

A money transmitting business “provides check cashing, currency exchange, or money transmitting or remittance services, or issues or redeems money orders, travelers’ checks, and other similar instruments.”

The issuers, of course, were those registered by State and Federal authorities and banks. In the end, I would expect the banks – insured depository institutions – who are the providers of stablecoin networks to be the major issuers of stablecoins.

The stablecoin proposal is designed to bring clarity to the stablecoin business. Stablecoin issuers would be required to meet a high level of audited disclosure on the security of the coins. Stablecoin issuers would have to disclose the security and liquidity of the coin with regular audits.

Stablecoins are not securities and would not be subject to securities rules. Current tax rules would be expected to be applied. Very importantly holding stablecoins by anyone is allowed.

The proposal is intended to result in a final bill that would be expected to look very much like this one. Final rules would be expected to apply to current coins and coin issuers. I would not expect any special grandfathering rules, but a reasonable period of time would be provided for them to seek registration.

Investor implications

The market is adjusting to an expectation of regulation. Some stablecoins are now being registered. Indeed, some will become fully registered banks. The market is bifurcating between those who are prepared to disclose the audited contents of their security for the coin and those who are not.

While we can expect that an evolved, safer, and registered form of the current stablecoin market will continue, it will undergo a significant transition.

1. Expect regulated coins to trade at a premium to those which are not.

2. Transitions to regulations are the key to pricing in legacy coins.

3. Watch for the emergence of Central Bank Digital Currency as a challenge to the survival of stablecoins.

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This article is not intended as investment, tax, or financial advice. Contact a licensed professional for advice concerning any specific situation.