Yesterday Senator Hagerty introduced the Bill for the U.S. Stablecoins (GENIUS) Act, in collaboration with co-sponsor Senators Tim Scott, Kirsten Gillibrand (Democrat) and Cynthia Lummis. The Bill allows state regulators to supervise payment stablecoins of under $10 billion, which was a bone of contention in previous attempts at legislation. A major concern was that states might compete to attract stablecoin issuers by lowering requirements, leading to a race to the bottom. The legislation addresses this by prescribing the requirements for reserve assets.

During a press conference, Senator Tim Scott who Chairs the Senate Banking Committee said he aimed to have the legislation ready for the President’s signature within 100 days.

“Stablecoins enable faster, cheaper, and competitive transactions in our digital world and facilitate seamless cross-border payments,” said Chairman Scott. “This legislation will expand financial inclusion and provide much-needed clarity to ensure the industry can innovate and grow here in the United States, while protecting consumers and promoting the U.S. dollar’s global position.”

Our observation is that the previous attempts at stablecoin legislation were not wasted as the key contentious issues appear to be largely neutralized by defining most of the critical design issues in the legislation, leaving less wiggle room for state regulators.

Sidestepping the Federal Reserve?

After a speed read, one potential concern was the limited role of the Federal Reserve if a stablecoin issuer were to create a systemic financial stability risk. However, the Bill covers that too. In exigent circumstances, the Federal Reserve can take enforcement action against a state regulated stablecoin issuer.

However, the draft legislation is highly protective of the issuer’s rights to object, including the ability of the issuer to apply to the Courts after ten days, without waiting for further back and forth with the Fed. The steps the Fed can take appear more related to the issuer siphoning money away, rather than blocking further stablecoin issuance. Plus, the Fed has to wait five days while it informs the State regulator.

Stablecoin reserve requirements

The reserve requirements limit the type of collateral to be held to those already adopted by more conservative stablecoins. Hence, long term Treasuries, corporate bonds and other riskier investments assets are not allowed. Supported assets include bank balances, short term Treasuries, repo and reverse repo involving short term Treasuries, similar money market funds and central bank reserve deposits. We assume for now that the central bank deposits are for bank issuers, which the Bill supports. But that remains to be seen.

The states are likely to remain the primary regulators of stablecoins in terms of the number of issuers. Instead of the Federal Reserve regulating larger ($10 billion upwards) non-bank stablecoin issuers, that responsibility falls on the Comptroller of the Currency. Bank or credit union issued stablecoins fall under the supervision of the institution’s usual regulator.

In mid 2023 a stablecoin bill passed out of the House Financial Services Committee, despite strong objections from Democrats. At the time, Democrat Ranking Member Maxine Waters noted that, “Texas, for example, would have no ability to stop coins from New York being issued in their State.” She continued, “The Bill undermines strong reserve requirements by allowing any federal and state payment stablecoin regulator to unilaterally expand the list of eligible reserve assets without restriction at any time.” The new Bill addresses this specific concern.

Other requirements include monthly reserve certification by an accountant, not just for larger stablecoins.

The responsibilities that are delegated to state or Federal regulators include:

• capital requirements
• liquidity and interest rate risk management standards
• operational, compliance and IT risks management standards.

Tokenized deposit carve out

Apart from allowing banks to issue stablecoins, the Bill also covers other bank related issues. Specifically, it allows banks to issue “digital assets that represent deposits”, commonly referred to as tokenized deposits. It allows banks to use DLT for intrabank transactions. Plus it explicitly allows banks to provide custody or manage reserves for stablecoins.

There is a notable absentee in the banking paragraph: it allows DLT for INTRAbank transactions between customers of the same bank, but fails to mention INTERbank transactions. That could potentially prevent banks from competing with stablecoins. Is that intentional?