US Senators Introduce Comprehensive Stablecoin Bill

The bipartisan bill seeks to foster innovation and promote US dollar dominance while protecting consumers and mitigating illicit finance risks.

By Jenny Cieplak, Arthur Long, Yvette D. Valdez, Stephen P. Wink, Adam Fovent, and Deric Behar

On April 17, 2024, US Senators Cynthia Lummis from the Senate Banking Committee and Kirsten Gillibrand from the Senate Agriculture Committee introduced proposed legislation to create a US regulatory framework for stablecoins. The bipartisan Lummis-Gillibrand Payment Stablecoin Act (the Bill) seeks to promote responsible innovation and preserve US dollar dominance, while protecting consumers and digital asset market participants.

The Bill supersedes the pair’s 2022 proposed Responsible Financial Innovation Act (RFIA), at least with regard to stablecoins. The RFIA proposed a complete regulatory framework for digital assets more generally (for more information, see this Latham blog post), whereas the current Bill focuses on the comprehensive regulation of payment stablecoins.

As defined by the Bill, a “payment stablecoin” would be any crypto asset “that is, or is designed to be, used as a means of payment or settlement,” and the issuer of which is obligated to redeem the asset for a fixed amount of US dollars or “represents, or creates the reasonable expectation, that the crypto asset will maintain a stable value relative to the value of a fixed amount of United States dollars.” Accordingly, the Bill does not purport to regulate stablecoins denominated in or redeemable for non-US currencies or other assets.

Key provisions of the Bill are as follows:

Stablecoin Issuance

The Bill would make it unlawful to engage in the business of issuing a payment stablecoin in the US or to a US person unless via:
1. a state non-depository trust company that registers with the Federal Reserve Board (FRB), subject to a nominal value cap (discussed below); or
2. a depository institution chartered by the Office of the Comptroller of the Currency (OCC) or a state bank supervisor.
Non-depository state trust companies would only be permitted to issue payment stablecoins up to an outstanding nominal value of $10 billion, although this threshold would be subject to adjustment by the FRB not less frequently than every four years to account for inflation.
Depository institutions would be required to submit both (i) an application to their chartering authority (whether the OCC or a State bank supervisor) for authorization to issue a payment stablecoin and (ii) an application to the Federal Reserve Board (FRB) for authorization as a “national payment stablecoin issuer.”
In a clear response to the vulnerabilities underscored by the Terra-LUNA collapse, the Bill would make it categorically unlawful to engage in the business of issuing, creating, or originating an “algorithmic payment stablecoin.” An algorithmic payment stablecoin is defined as a crypto asset represented to or designed to be reasonably expected to maintain a stable value relative to the US dollar and which “relies on the use of an algorithm that adjusts the supply of the crypto asset in response to changes in market demand.”
The definition of “payment stablecoin” would specifically exclude, among other things, central bank money and securities issued by an investment company registered under Section 8(a) of the Investment Company Act of 1940.

Regulatory Requirements Applicable to Payment Stablecoin Issuers

Reserves. Payment stablecoin issuers would be required to maintain reserves of not less than 100% of the nominal value of their outstanding issued payment stablecoins as of the end of each business day. Reserves would be limited to US dollars, demand deposits at a depository institution, certain US Treasury Bills with a maturity of less than 90 days, certain repurchase agreements backed by US Treasuries and with a maturity date of seven days or less, and, for depository institutions, balances held at a Federal Reserve Bank.
Custody of Reserve Assets. A non-depository trust company engaged in the issuance of payment stablecoins would be required to use a depository institution as subcustodian to provide for the safekeeping of its reserves.
Prohibition on Rehypothecation. In general, rehypothecation of payment stablecoin reserves would be prohibited except for the purpose of creating liquidity to meet reasonable expectations of requests to redeem payment stablecoins.
Redemption. Payment stablecoin issuers would be required to honor customer redemption requests at par in legal tender within a day of the request.
Mandatory Disclosures. Payment stablecoin issuers would be subject to certain ongoing mandatory public disclosures, including a monthly summary description of the assets backing the payment stablecoin, the value of the assets, and the number of outstanding payment stablecoins, as of the last day of the month. This information would also need to be filed by the issuer’s CFO with the FRB under penalty of perjury. Payment stablecoin issuers would also be subject to penalties for misrepresentations in these disclosures and would be prohibited from asserting that their stablecoin is guaranteed by the US government, the Federal Deposit Insurance Corporation, or the National Credit Union Administration.
Bank Secrecy Act Obligations. The Bill would classify payment stablecoin issuers as a financial institution for purposes of the Bank Secrecy Act (BSA), and would therefore require issuers to comply with US anti-money laundering (AML), countering the financing of terrorism (CFT), and sanctions rules.
Privacy Matters. The Bill would classify payment stablecoin issuers as a financial institution for purposes of the Gramm-Leach-Bliley Act, and would therefore require issuers to comply with applicable customer privacy and nonpublic personal information protection standards.
Unauthorized Participants. The Bill would prohibit any person who has been convicted of any criminal offense involving insider trading, embezzlement, cybercrime, money laundering, or financing of terrorism, or of felony financial fraud from serving as an executive officer or controlling more than 5% of the shares of a payment stablecoin issuer.

Custody and Safekeeping of Payment Stablecoins and Other Digital Assets

The Bill would also address certain issues relating to custody services for payment services and other digital assets.
In particular, the Bill would provide that a person that provides custodial services for payment stablecoins must treat and deal with the payment stablecoins and customer cash belonging to the customer; and take appropriate steps to protect such payment stablecoins and customer cash from any claims of the custodian’s creditors.
In general, and subject to further rulemaking authority, commingling of customer payment stablecoins and cash in custody would be permissible, but never with the proprietary assets of the issuer.
The Bill would also clarify that crypto assets (a term not limited to payment stablecoins) properly held in custody shall not be considered assets or liabilities of the custodian for any purpose and must be maintained off-balance sheet for accounting purposes. The Bill would thus negate the SEC’s controversial 2022 Staff Accounting Bulletin 121 (SAB 121) which promulgated guidance to the effect that a firm holding a customer’s digital assets “should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users.” (Independent efforts are also underway in Congress to overturn SAB 121, although President Biden has vowed to veto any legislation.)

Supervision and Enforcement

The Bill would establish comprehensive supervision and enforcement powers for state bank supervisors, the OCC, and the FRB, including regarding the nature of the issuer’s operations; financial, operational, and other risks; and unsafe/unsound practices.
Regulators would have broad cease-and-desist authority, removal authority, and the ability to impose civil monetary penalties.
The OCC or state bank supervisor would, as part of the regular examination of the payment stablecoin issuer, verify the composition of the assets and the accuracy of the issuer’s mandatory disclosures.
The FRB or OCC/state supervisor would have the ability to take independent enforcement action against a depository institution issuer, but the FRB and state supervisor would be required to act jointly for non-depository trust companies with less than $10 billion in outstanding stablecoins.

Holding Company Supervision, Affiliates, Mergers, and Acquisitions of Payment Stablecoin Issuers

Under the Bill, a bank holding company or insured depository institution that has chartered a payment stablecoin issuer would be considered a “bank” for purposes of the Bank Holding Company Act.
The Bill would create a tailored holding company supervision framework for depository institution issuers that are not within a bank holding company.
In general, all subsidiaries and affiliates of a payment stablecoin issuer would be limited to activities that are “financial in nature” as defined in the Bank Holding Company Act.
A legal or natural person would not be able to obtain a controlling interest in a payment stablecoin issuer unless the person is engaged in activities that are predominantly “financial in nature.”
Payment stablecoin issuers would be subject to the same restrictions on transactions with affiliates as are applicable to a Federal Reserve member bank under Sections 23A and 23B of the Federal Reserve Act.
Under the Bill, any merger or acquisition pursuant to which a person would obtain a controlling interest in a payment stablecoin issuer would require the approval of the FRB and the applicable chartering authority (i.e., the OCC or state bank supervisor).

Conservatorship and Receivership

To promote confidence in payment stablecoin issuers and to give peace of mind to customers in the case of insolvency, the Bill would establish an FDIC conservatorship and receivership regime for payment stablecoin issuers and address issues such as priority of claims, validity of claims, disposition of assets, and related procedures and timing.
A payment stablecoin issuer would not be charged deposit insurance premiums, but the FDIC may use the issuer’s capital and return on reserves to fund the costs of a receivership or conservatorship.
The grounds for appointing the FDIC as conservator or receiver for a payment stablecoin issuer under the Bill would include the following:
- The issuer’s assets are less than the issuer’s obligations to its creditors and others
- Substantial dissipation of assets or earnings due to any violation of law or any unsafe or unsound practice
- An unsafe or unsound condition to transact business
- Willful violation of a cease-and-desist order
- Concealment of the institution’s books, papers, records, or assets, or any refusal to submit the institution’s books, papers, records, or affairs for inspection to any examiner or regulator
- The issuer is likely to be unable to pay its obligations or meet its customers’ demands in the normal course of business
- The issuer has incurred or is likely to incur losses that will deplete all or substantially all its capital, and there is no reasonable prospect for the institution to comply with applicable capital requirements
- Any violation of any law or regulation, or any unsafe or unsound practice or condition that is likely to cause insolvency or substantial dissipation of assets or earnings; weaken the issuer’s condition; or otherwise seriously prejudice the interests of the institution’s customers
- Criminal money laundering offenses
- The issuer, by resolution of its board of directors or its shareholders or members, consents to the appointment

Conclusion

Senators Lummis and Gillibrand stated that the Bill received multiple rounds of technical assistance from representatives of the FRB, the Department of the Treasury, the National Economic Council, the New York Department of Financial Services, the Wyoming Division of Banking, and the FDIC.

They noted that they are “confident [that the Bill] can earn the necessary support in the Senate and the House,” although that is unclear. A competing bipartisan bill has been progressing in the House Financial Services Committee for at least the past year, and has the co-authorship and support of Committee Chairman Patrick McHenry. Senators Lummis and Gillibrand, however, assert that their bill “gives the U.S. the best chance to maintain safety, soundness and our position as the world leader in financial innovation.”

The ramifications of stablecoins for the US economy and the reserve currency status of the US dollar in international commerce are complex, with stablecoins attracting both vocal proponents and vehement detractors. The Bill takes a constructive approach to grappling with these issues by seeking to regulate stablecoins in a comprehensive way, rather than ignoring them. The Bill may also bolster dollar strength in the global markets by encouraging innovation of dollar-backed assets by regulated financial institutions; and it would fence in a spectrum of risks that currently shadow the unregulated stablecoin market, such as those related to illicit finance, custody, reserves, insolvency, and privacy.

The Bill, if enacted, would have an effective date of the earlier of: (1) 540 days (approximately 1.5 years) after enactment; or (2) 90 days after the FRB completes all required rulemaking to implement the Bill.

See a section-by-section overview of the Bill and a one-page summary.