While cryptocurrency’s crash has grabbed headlines, the public’s understanding of the underlying technology remains limited. Only 4% of Americans were able to pass a 17-question quiz assessing their baseline knowledge of cryptocurrency, even though in a separate poll, 16 percent of Americans reported having purchased crypto.
Despite the lack of knowledge regarding how the technology works, cryptocurrency is becoming increasingly popular among policymakers and subject to federal regulatory efforts. Recently, Senator Pat Toomey (R-PA) introduced the Stablecoin Transparency of Reserves and Uniform Safe Transactions Act (TRUST), which seeks to simplify the regulatory structure and support the growth of stablecoins, a specific subcategory of cryptocurrencies. The bill is a promising first step in developing complementary regulations and should serve as a framework for other forms of cryptocurrency legislation.
Modern currencies exist in various forms, many with overlapping characteristics and each offering unique consumer benefits. Traditional fiat currencies offer wide use for the purchase of goods and relative price stability. Meanwhile, cryptocurrency provides an alternative to the conventional banking system, with faster and cheaper transactions, and the potential for high returns has made them an exciting investment opportunity. Stablecoins act as a middle ground and address many of the downsides of the original cryptocurrency offerings such as Bitcoin while also addressing the shortcomings of fiat currency.
Minted on blockchain technology, stablecoins’ value is pegged to specific assets such as a fiat currency, which allows for less price volatility. Additionally, since blockchain is decentralized, consumers who use stablecoins no longer rely on banks and third-party intermediaries to process transactions. As a result, financial transactions can occur much quicker and are often cheaper, saving consumers time and allowing more to participate.
Stablecoins have the potential to offer the best of both worlds in terms of crypto and fiat currency. According to the Federal Reserve, “with appropriate safeguards and regulations, stablecoins have the potential to provide a level of stability that is on par with traditional forms of safe value.” The use cases for stablecoins are potentially limitless but in addition to streamlined transactions and price stability, they could also contribute to the financial inclusion of those locked out of traditional systems.
Yet, stablecoins have not avoided the crypto pitfall of the current regulatory landscape. Specifically, the current U.S. regulatory system lacks clarity regarding which agencies have authority and over what aspects of cryptocurrencies.
When used as an investment, regulatory authority falls to the Securities and Exchange Commission (SEC). However, whether a transaction is an investment is determined primarily through the buyer’s intent, which is difficult to determine from a transaction alone. According to Chris Brummer, a professor at Georgetown University, if crypto does not fall under the SEC, then it tends to fall under the Federal Trade Commission (FTC). In addition to these two agencies, cryptocurrencies can also be covered by the Commodity Futures Trading Commission, the Internal Revenue Service, or the Financial Crimes Enforcement Network.
If passed, the Stablecoin TRUST Act would clarify some of the regulatory confusion for stablecoins by establishing that stablecoins are not securities, and would therefore not fall under the purview of the SEC. According to Brummer, this would put the stablecoins under the FTC’s jurisdiction. The bill also creates a federal license for Stablecoin issuers with specific requirements such as capital requirements, liquidity requirements, risk management, and reserve asset requirements to protect the value of stablecoins for the owners of the currency.
Clarifying regulatory confusion is essential as uncertainty inhibits the growth and widespread use. Telegram already announced in 2020 that it would discontinue operations in the U.S. due to regulatory uncertainty and disagreement over whether the company’s offerings were subject to the Securities Act. Telegram is not alone, with firms such as Ethereum and Shapeshift have also left the U.S. due to the uncertain regulatory environment. This environment makes it difficult for companies to ensure compliance and avoid costly legal disputes, ultimately meaning less choice for consumers.
The current debate and uncertainty regarding regulations creates an unstable regulatory environment that impedes the widespread adoption of financial innovations such as stablecoins. However, the Stablecoin TRUST Act, is the first step in addressing this problem by creating a regulatory structure on which stablecoins can grow.