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1 1 (November 10, 2021)

handle is hein.crs/goveeuf0001 and id is 1 raw text is: Congressional Research Service SIna r in the Cklative debate ne y Stablecoins: Background and Policy Issues Stablecoins are digital assets generally designed to maintain a stable value by linking the value to a national currency or other reference assets. The term stablecoin does not affirm that a particular coin actually achieves a stable value. Some consider terms such as private asset-linked tokens as better descriptors considering the nature of the instruments. The top four stablecoins by value (Tether, USD Coin, Binance USD, and Dai) reached around $128 billion in market capitalization as of November 10, 2021, according to CoinMarketCap. Many stablecoins have different operational structures and reserve compositions (Figure 1). Reserve assets backing stablecoins could include fiat currencies, traditional financial assets, or other digital assets and algorithms. Many stablecoins at the current stage of development are primarily used for payments functions to facilitate digital asset trading and lending. Although stablecoins represent a small fraction (5%) of the digital asset industry's total value, they facilitate more than 75% of trading on all digital asset trading platforms as of October 31, 2021. Stablecoin- related policy concerns include issues related to market integrity, investor protection, financial stability, monetary policy, payments, and illicit activity prevention. Figure I. Stablecoin Reserve Composition csh/Ba depshs/Commerciai Corporate Tetur bnis paper bonds Tether j ($63b) USD Coin ($27b) Sinance UsD ($12b) DA [$6Ub) Coij 0% 25% 50% 75%6 100% Source: CRS based on data from International Monetary Fund, Global Financial Stability Report Chapter 2, October 2021, p. 8, https://www.imf.org/-/media/Files/Publications/GFSR/202 I/October/ English/ch2.ashx. Functions and Structures Stablecoins' use could find parallels in traditional payment systems, banking, or other forms of financial infrastructure service. In addition, stablecoins' management and structuring of the reserve funds resemble existing practices at money market mutual funds (MMFs) and exchange- traded funds (ETFs). November 10, 2021 Stablecoins' Investment Fund-Like Structure Stablecoins often have reserve asset portfolios that hold assets backing the coins' values. Many industry observers and some regulators believe that the general processes involving stablecoins' creation, distribution, and redemption and the mechanism of keeping the stablecoin price in line with the value of the reserve basket is similar to certain common types of investment structures, such as ETFs and MMFs, which are regulated by the Securities and Exchange Commission (SEC). Some stablecoins' perceived investment fund structure has captured congressional attention in recent years. For example, the Meta Platforms-backed stablecoin Diem (formerly known as Facebook-backed Libra) has attracted congressional inquiries since its announcement in 2019. At related congressional hearings, Facebook received multiple questions regarding whether Libra was an ETF and how it should be regulated. Facebook argued at the time that Libra was a payment tool instead of an investment vehicle because you cannot use an ETF for payments and believed it did not meet the legal criteria used to determine if a financial instrument is a security. In the ensuing years, the firm also launched its digital wallet pilot program (Novi) and paired it with USDP, an existing stablecoin from Paxos. Five Senators wrote a letter to Facebook in October 2021 to urge the company to immediately discontinue your Novi pilot and to commit that you will not bring Diem to market. If a stablecoin were to be deemed an ETF or MMF (either through interpretation of the existing legal frameworks and SEC authorities or the creation of new frameworks and authorities through legislation), it would be required to comply with the SEC's regulatory regime governing securities, investment advisors, and investment companies. In this case, SEC approval would be required to launch stablecoin projects. Stablecoins' Money and Payment Features Some observers also consider stablecoins to offer parallels to money and payment systems. They view stablecoins as a new form of private money that closely resembles the wildcat banknotes of the mid-19th century. During the wildcat or free banking era (1837-1863), state- chartered banks issued their own currencies and sometimes refused to redeem the currency for precious metals as they had promised they would. This era ended with the National Bank Act of 1863, which established the Office of the Comptroller of the Currency (OCC) and charged it with responsibility for nationally chartered banks and a uniform national currency. When discussing stablecoins, some regulators reference the wildcat era, questioning the long- term viability for five or six thousand private forms of https://crsreports.congress~gov

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