Back in 2019, the US Congress had concerns about cryptocurrencies. They fear that these would pose a threat to national security through the aiding of terrorists while serving as a front for money laundering. This resulted in the non-inclusion of stablecoins until the various global risks they posed has been addressed. At the time, representative Garcia (D-TX) during a testimony as a witness had this to say about Libra and stablecoins
“This is a national security risk. We cannot afford to have terrorists…We cannot afford to have money laundering made easier by the app you have or the Libra Network that would make it much easier for them to access”.
Numerous security concerns and policy issues had come up as a result of a global stablecoin. This was stated in a press release by the G-20 in October 2019. The statement goes, “While acknowledging the potential benefits of financial innovation, we agree that global stablecoins and other similar arrangements with potential systemic footprints give rise to a set of serious public policy and regulatory risks. Such risks, including in particular those related to money laundering, illicit finance, and consumer and investor protection, need to be evaluated and appropriately addressed before these projects can commence operation.”
But this stance has changed in the last few months. A new bill which was proposed in November last year titled “Managed Stablecoins Are Securities Act of 2019” seemed to be a ray of hope. The bill sought to allow National banks and federal savings associations to hold reserve funds for stablecoin issuers. The Board of the International Organization of Securities Commissions (IOSCO) studied immensely the emerging global stablecoin proposals. The board found and confirmed that stablecoins had a feature that could be used to implement the necessary regulatory statutory.
Additionally, the Director of FinCEN, Kenneth Blanco, noted that stablecoins, are not a new currency. Rather they are a type of changeable virtual currency now referred to as ‘stablecoins’. Director Blanco further commented that the acceptance and transmission activities involving stablecoins can allow money transmission under the BSA. This is not limited to whether the stablecoins have any backing from a specific currency, commodity, or even algorithm. This means that the administrators of the stablecoins will have to register them as MSBs with FinCEN since the same rules apply to all.
The new six-page interpretive letter that introduced the bill gives guidelines on how stablecoin issuers may continue to work with stablecoins. This can be done by placing assets in reserve accounts with a national bank. This is also to ensure that the national bank can have the assurance that the issuer has assets that can sufficiently back the stablecoin in situations where a hosted wallet is present. Thus, national banks can hold stablecoins as a service to bank customers.
This new development follows the decision by the OCC’s to allow federally chartered banks to hold custody of cryptocurrencies. Industry observers and stakeholders cheered the move at the time. But others were contending that it represented a positive long-in-the-making, policy shift.
According to Brooks, national banks and federal savings associations are already engaging in stablecoin-related activities. This can sum up to billions of dollars daily. It provides an even greater regulatory way for banks within the federal banking system to be able to provide clients these stablecoin services in a safe and protected manner. In as long as stablecoins are hosted in a digital wallet. This allows the bank to verify at least daily that the reserve account balances meet or exceeds the number of the issuer’s outstanding stablecoins. It is therefore legal for national banks and federal savings associations to host stablecoin services by managing and storing reserve funds from stablecoin issuers.
The OCC has stressed the fact that they are at the time only dealing and supporting stablecoins that are hosted in a digital wallet. The letter addresses the use of stablecoin that is backed on a 1:1 basis by a single fiat currency. This means that the bank has to verify that the fund reserve account has balances that are equal or greater than the number of the issuer’s outstanding stablecoins. This should be done at least a daily basis. The role of the national banks is to ensure that these businesses strictly follow the anti-money laundering regulations. It also includes the Know-Your-Customer regulations and federal securities laws. The bank should take into consideration all relevant risk factors such as liquidity risks and compliance risks. This has to be done before they enter into any agreement with a stablecoin issuer.
A staff statement from the SEC’s FinHub unit was published alongside the SCC letter, whose major focus to some extent was the issues relating to digital assets. The statement said that the stablecoin can be considered as a security under the federal securities laws. Fundamentally, this a facts and circumstances determination. The statement went to stress that they did not represent guidance or a statement from the wider Commission. The determination of the stablecoin as a security, requires a systematic analysis of the rights it proposes. This should be the method it will be offered and sold. The staff statement continued to say that:
“We believe that market participants may structure and sell a digital asset in such a way that it does not constitute a security and implicate the registration, reporting, and other requirements of the federal securities laws. However, the label or terminology used to describe a digital asset or a person engaging in or providing financial activities or services involving a digital asset, may not necessarily align with how that asset, activity, or service is defined under the laws and rules administered by the SEC.”
In conclusion, the staff statement offered their readiness and willingness to engage with the market participants to assist them and will also consider providing a “no-action” position as deemed appropriate. This is about whether their activities concerning a specified digital asset may cause the enforcement of the federal securities law.