Report: US Stablecoin Bill Could Displace USDT’s Position in the US If Passed
S&P Global Ratings released a report last Wednesday analyzing the potential impact of the bipartisan Stablecoin Act, also known as the Lummis-Gillibrand Payment Stablecoin Act, which was proposed by the US Senate earlier this month. The bill allows non-bank financial institutions registered with the Federal Reserve System (also known as the Fed) to issue stablecoins, with a maximum issuance limit of $10 billion. However, there is no such limit for banking institutions. Additionally, the bill establishes strict asset reserve and operational transparency requirements.
The report suggests that this legislation will not only promote the wider use of stablecoins in daily and institutional transactions, stabilizing the market and increasing user confidence, but it will also provide a competitive advantage to banks by encouraging their entry into the stablecoin market and creating a fair competitive environment for banks entering the stablecoin market.
However, the $10 billion threshold may not be good news for Tether, the issuer of the largest stablecoin USDT, which currently has a market capitalization of $110 billion. According to analysts Mohamed Damak and Andrew O’Neill, who wrote the report, Tether does not meet the definition of a payment stablecoin in the proposed bill as it is not issued by a registered entity in the US. This means that US institutions will not be able to hold or transact with USDT, reducing its demand in the US and weakening its dominant position in the global stablecoin market, while increasing the issuance of stablecoins by US institutions. However, the report also notes that USDT’s trading activity is mainly concentrated in emerging markets outside the US, driven by retail users and international remittances, so the impact may not be as significant as expected.
Is the bill really beneficial for US institutions? On the other hand, does this bill really benefit US institutions? Currently, Circle’s USDC is the second-largest stablecoin with a market capitalization of around $34 billion, but according to the bill, Circle is classified as a non-bank financial institution and is subject to the $10 billion threshold, which means it will have to find another solution. Paxos, the issuing entity that includes PYUSD, a stablecoin in collaboration with Paypal, has a financial services department license from New York, but the combined market value of all its stablecoins is far less than $10 billion, making regulation less significant.
The report concludes by affirming the potential impact of the stablecoin bill: “The passage of the stablecoin bill will accelerate institutional blockchain technology innovation, especially in tokenized on-chain payments or the issuance of digital bonds. The growth in institutional demand for stablecoin use will create opportunities for banks as stablecoin issuers.”
Why is regulation crucial for maintaining the US dollar’s dominance? On October 17, US Senators Cynthia Lummis, a Republican from Wyoming, and Kirsten Gillibrand, a Democrat from New York, jointly introduced a bipartisan stablecoin bill aimed at regulating stablecoin operations in the US. The Lummis-Gillibrand Payment Stablecoin Act defines “payment stablecoin” as any digital asset pegged 1:1 to the US dollar and used for payment or settlement, with the issuer obligated to convert the tokens into dollars, and the asset not classified as a security. In addition to clearly defining the scope of application, the bill extensively regulates the reserves and operational obligations of payment stablecoin issuers, with the following five key points:
1. Payment stablecoin issuers need to register with the Federal Reserve Board as “non-depository trust companies” (non-bank financial institutions) or as “depository institutions authorized to be national payment stablecoin issuers” (banking institutions).
2. Payment stablecoin issuers need to establish subsidiary companies dedicated to issuing payment stablecoins.
3. Payment stablecoin issuers need to ensure that their tokens have full reserve assets, which can be cash or equivalent cash assets, and have the obligation to publicly disclose reserves.
4. Payment stablecoin issuers and their users must comply with US anti-money laundering and sanction regulations and must not use stablecoins for illegal or unauthorized purposes.
5. Payment stablecoin issuers need to hire a non-depository trust company as a custodian for reserve assets, with the custodian using a depository institution as its sub-custodian (a dual safeguard mechanism).
However, the bill also sets a $10 billion limit for non-depository trust companies, meaning that if a stablecoin issuer exceeds this amount, they must become a depository institution authorized to be a national payment stablecoin issuer. The bill also prohibits algorithmic stablecoins that maintain price stability through algorithms and have incomplete reserves, possibly to prevent a repeat of the Terra-Luna collapse.
Senator Gillibrand, the Democratic senator who proposed the bill, stated in a statement that a clear stablecoin regulatory framework is “absolutely crucial” for maintaining the dominance of the US dollar. She believes that the legislation, which establishes a 1:1 reserve requirement, prohibits algorithmic stablecoins, and requires stablecoin issuers to comply with anti-money laundering and sanction regulations, will maximize consumer protection and receive necessary support from the Senate and the House of Representatives. Co-sponsor Senator Lummis, a Republican, added that the bill also “meets the needs of the rapidly expanding financial industry” and reiterated the importance of the US dollar’s dominant position.
Countdown to the Presidential Election! Stablecoin bills in both houses of Congress are stalled. In addition to the recent Lummis-Gillibrand Payment Stablecoin Act, Lummis and Gillibrand have previously introduced multiple bipartisan bills aimed at regulating and addressing issues in the digital asset market, including a bill that clearly defines decentralized finance and outlines the jurisdiction of federal agencies such as the Commodity Futures Trading Commission (CFTC) in the crypto market.
Although stablecoins have long been considered the most likely category of cryptocurrencies to have dedicated legislation in the US, the House Financial Services Committee started drafting its own version of the stablecoin bill in 2022 and submitted it for review. However, after 20 months, there has been no progress. According to the US legislative process, once a legislative proposal is passed in one house, it is sent to the other house for review. Typically, related or identical proposals are passed in both houses and then sent to the President. However, due to the upcoming presidential election and the uncertain political situation, these bills, like many others, are currently on hold and have not made any progress.
Sources: Coindesk, Bitcoin.com, The Block
Proofread by: Gao Jingyuan
