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1 1 (July 12, 2023)

handle is hein.crs/govemey0001 and id is 1 raw text is: Stablecoin Policy Issues for the 118th Congress Stablecoins are digital financial instruments that use technology underpinning cryptocurrencies (e.g., Bitcoin and Ether) but attempt to eliminate volatility by pegging their value to a stable asset (e.g., one U.S. dollar). For more information, see CRS In Focus IF11968, Stablecoins: Background and Policy Issues. Stablecoins have garnered significant congressional attention because of the wider interest generated by cryptocurrencies and claims that they could improve payments. Recent instability and failures in stablecoin markets have also raised systemic risk concerns. This In Focus addresses current stablecoin-related policy issues and policymakers' efforts to regulate them. Reguiatory Framework In the absence of an explicit overarching regulatory framework, various federal and state regulatory agencies have improvised a de facto framework comprising guidance and enforcement actions, applying existing banking and capital market regulations to stablecoins where applicable. Today, stablecoin issuance remains the domain of state- licensed nonbank entities (e.g., money services businesses), which face limited federal oversight outside of registration requirements for anti-money laundering purposes. Federal bank regulators have established guidelines for potential bank stablecoin activity. In a series of interpretive letters in 2020 and early 2021, the Office of the Comptroller of the Currency (OCC) outlined various stablecoin activities permitted by banks, including custodying cryptocurrency and holding stablecoin reserves, among others. In late 2021, the OCC seemingly affirmed these previous views but imposed a requirement that a bank notify its regulatory supervisor of its intention to engage in such practices and not to engage until it receives written notification of non-objection. Similarly, the Federal Reserve Board issued a supervision and regulation letter mandating that banks confirm the permissibility of actions, establish appropriate risk management and other controls, and notify a point of contact prior to engaging in any crypto-related activity (including stablecoins). The Federal Deposit Insurance Corporation (FDIC) issued similar guidance. For more, see CRS In Focus IF12320, Crypto and Banking: Policy Issues. Some stablecoins may also fall under the jurisdiction of the Securities and Exchange Commission (SEC). In 2023, the SEC took legal actions against Terraform Labs, issuer of the UST algorithmic stablecoin, alleging it had, among other things, issued unregistered securities in the form of stablecoin UST and its balancer coin, LUNA. (Algorithmic stablecoins are generally not backed by any assets and use computer programs to monitor supply and demand and manage issuance of the stablecoins. For more, see CRS Insight IN 11928, Algorithmic Stablecoins and the Terra USD Crash.) According to the SEC, UST satisfied the Howey test, a legal standard it uses to identify a security with four prongs: (1) the investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) to be derived from the efforts of others. Stablecoins are not expected to appreciate or generate returns. However, the SEC cited Terraform's promotion of nearly 20% returns from the affiliated Anchor protocol as proof, in part, of the expectation of profits. Pol y Optons Congress may consider how the existing framework accommodates existing licensure and permissions for money service businesses and banks or whether legislation is needed requiring the former to acquire federal licenses and the latter to establish subsidiaries to continue engaging in such activity. Regulatory Jurisdction Legislation has generally considered stablecoins in their prospective capacity as payment instruments. The term payment stablecoin is sometimes used to define such instruments. However, for a variety of reasons, such distinctions do not exist in practice. Stablecoins have not been widely adopted for retail payments but are considered a crucial component of crypto trading. Also, stablecoins are currently not issued directly by issuers for retail use, a perk for which one requires a business account. To the extent that legislation focuses on payment stablecoins, Congress could consider how much clarity to provide in statute- potentially defining it broadly or narrowly-or whether to defer to regulators to provide a definition. Given that major stablecoins are not currently used primarily for retail payments, how legislation defines payment stablecoin could determine whether they are included in any new regulatory framework. Congress may also consider whether stablecoin issuers are able to opt in/out of a framework or whether existing issuers should be grandfathered out of the framework. As such, a key policy issue is regulatory jurisdiction. Congress can mandate that authorized stablecoins issuers be chartered or licensed at the federal level by one or more agencies, at the state level, or some combination thereof. In the absence of a dedicated federal payment regulator, bank chartering may serve as a model for such decisions. (For more information, see CRS Report R47014, An Analysis of Bank Charters and Selected Policy Issues.) In November 2021, the Treasury Department and regulators issued a Report on Stablecoins, which recommended that legislation should limit stablecoin issuance, and related activities ... to entities that are insured depository institutions_ such as banks July 12, 2023

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