Breaking Down the TRUST Act, a New Stablecoin Regulation Framework
The proposed TRUST Act of 2022 would define stablecoins, outline who can offer them to the public, and the requirements for doing so
A new regulatory framework named the “TRUST Act of 2022” seeks to regulate the creation and offering of payment stablecoins.
This section from a recent article on CoinDesk will get us up to speed:
“A leading member of the Senate Banking Committee introduced a bill Wednesday to create a three-pronged regulatory framework for stablecoin issuers in the U.S.
Sen. Patrick Toomey (R-Pa.), the ranking member of the committee, announced the "Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022," dubbed the Stablecoin TRUST Act for short, as part of an effort to specify how the U.S.'s different regulatory agencies could approach companies issuing cryptocurrencies whose prices are pegged to the U.S. dollar or other assets.” [CoinDesk]
(One would have to assume that this proposal resulted from Biden’s executive order on cryptocurrencies last month.)
The first thing to note is the bill’s proposed definition of a “Payment Stablecoin” as a “convertible virtual currency that is designed to maintain a stable value relative to fiat currency or currencies; is convertible directly to fiat currency by the user; is designed to be widely used as a medium of exchange; is issued by a centralized entity; does not inherently pay interest to the holder; and, is recorded on a public distributed ledger.”
This is a relatively uncontroversial definition, but the subsection excluding interest-paying stablecoins stands out.
Here’s where things get more controversial. The TRUST Act opens with this section:
“(a) IN GENERAL. — Except as provided in subsection (b), it shall be unlawful for any person to issue a payment stablecoin.”
Subsection (b) then defines the exclusions to this sweeping regulation, which we’ll get to in a second.
Note the framework that’s being established here. The TRUST Act establishes a ban on stablecoins, with provisions to create allowances for institutions and registered entities that the U.S. government deems fit to create and offer stablecoins.
In my opinion, this framework is backward. (But it is entirely predictable why regulators would take this approach). Instead of establishing stablecoin issuance as unlawful and then making allowances, a more open framework would incentivize projects to seek licensing (and the reporting oversight that comes with that licensing) in exchange for specific benefits that state authorities can offer.
Any new crypto regulation should aim to offer pathways to show trust but avoid stifling innovation, which might necessarily come from outside of a stringent regulatory system.
This excerpt from CoinDesk’s article highlights the benefit of a carrot-vs-stick approach.
OCC-licensed issuers would also have access to the Federal Reserve's master account system, which would give them the ability to tap the broader financial system and larger amounts of liquidity in transacting. [CoinDesk]
To incentivize oversight, allow stablecoin issuers the option to register with the OCC to unlock access to the Fed’s master system instead of requiring registration with the OCC and outlawing everyone else.
On to subsection (b), which outlines the exceptions to subsection (a) (which bans everyone except the following from issuing stablecoins):
(b) EXCEPTIONS. — Subsection (a) shall not apply to — (1) a money transmitting business or any other person that is authorized by a State banking or similar authority to issue stablecoins; (2) a national limited payment stablecoin issuer; or (3) an insured depository institution.
These are the only entities that would be able to create and offer payment stablecoins to the public.
So what is good about the TRUST Act? The bill lays out a requirement that any entity which offers a stablecoin will have to make monthly attestations to the backing of that stablecoin. This is arguably one of the strongest ideas in the proposal. Trust in stablecoins is largely dependent on the assurance that the stablecoin is backed appropriately and that the backing is maintained over time.
The TRUST Act would require any entity issuing a stablecoin to subject themselves to monthly reporting of the assets backing the coin.
Clearly, there is a long way to go before reaching a passable bill regulating stablecoins. What stands out most of all from the TRUST Act is that stablecoins are emerging as the most likely focus for a fully regulated crypto payment option in the U.S.
If we can get intelligent, pro-innovation regulation passed on stablecoins, that only bodes well for the rest of the regulation needed to fully integrate crypto into the U.S. financial system.
The full text of the “Stablecoin TRUST Act of 2022”:
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