U.S. Publishes Regulatory Framework on Stablecoins

Crypto Regulation Nov 05, 2021

Despite the enormity of this news, it seems to havelargely went ignored since its release.

This isn't too surprising, however, when you consider the numerous conflicts of interest laden within the blockchain space.

CoinDesk Won't Compromise their Parent Company's Investment

That nebulous 'investment' referred to in the title above is the cryptocurrency exchange, Coinbase.

Their parent company, 'Digital Currency Group', also own the publication CoinDesk - thus, creating a deep conflict of interest for any writer that alleges to have any semblance of "journalistic integrity" on that platform.

Furthermore, Coinbase, as an exchange, founded another large crypto outlet ('The Block'), whom has shamelessly advocated on the exchange's behalf since their inception.

All this information above notwithstanding, let's go ahead and carve into the 'steak and potatoes' of this regulatory framework that the U.S. Treasury posted on its website on November 2nd, 2021.

Getting Up to Speed on U.S. Regulatory Stance for Stablecoins

Here's the press release on the Treasury's site - https://home.treasury.gov/news/press-releases/jy0454

Gensler also published a statement on the SEC's website about it as well - https://www.sec.gov/news/statement/gensler-statement-presidents-working-group-report-stablecoins-110121

On the Treasury's website it also states:

"Today, the President’s Working Group on Financial Markets (PWG), joined by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), released a report on stablecoins.  Stablecoins are a type of digital asset generally designed to maintain a stable value relative to the U.S. dollar. While today stablecoins are primarily used to facilitate trading of other digital assets, stablecoins could be more widely used in the future as a means of payment by households and businesses."

Link to the actual Report (pdf) - https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf

In that PR on the Treasury's website, it recommends, "That  Congress act promptly to enact legislation to ensure that payment  stablecoins and payment stablecoin arrangements are subject to a federal framework on a consistent and comprehensive basis"

Specifically, they ask Congress to:

Address risks to stablecoin users and guard against stablecoin runs (what does a 'stablecoin run' look like if there are no redemptions for certain popular ones like...USDT?)

Address Concerns about Payment System Risk

Address additional concerns about systemic risk and concentration of economic power

Going back to #1 in this list in the prior message, its worth noting the language attached to that action item.

Specifically, these federal agencies (Treasury, PWG, FDIC, et. al.), recommend that Congress enact legislation that, "Should require stablecoin issuers to be insured depository institutions."

Interpreting the Treasury's Language in their Request

In the U.S., its not really helpful to know the "general gist" of things  when it comes to legalese & legislation. Terms, roles, &  anything else that's labeled is usually done so meticulously. So having a concrete, quoted definition from a .gov site that tells us verbatim  what X & Y are help in disseminating "FUD", disinformation, etc.

So, for our edification, here's a link to the FDIC's site where they define what constitutes an, "Insured depository institution" -  https://www.fdic.gov/regulations/laws/rules/1000-400.html

According to the FDIC's link (FDIC = agency responsible for providing such insurance), "The term 'insured depository institution' means any bank or savings association the deposits of which are insured by the Corporation pursuant to this Act."

What Would be Considered a 'Savings Assocation'?

Here's how we got here:

A) Treasury recommends Congress pass some legislation on stablecoins

B) One of those recommendations is to pass legislation that, "Require stablecoin issuers to be insured depository institutions."

C) To get a better sense for what impact that would/wouldn't have on the  space currently if Congress were to take the Treasury's heed, we need to know what qualifies as an "insured depository institution*"

D) According to the FDIC,  "The term 'insured depository institution' means any bank or savings association the deposits of which are insured by the Corporation pursuant to this Act."

E) That gets us closer, but we need to figure out what qualifies as a  "savings association" (this isn't being nitpicky; you'll see where I'm  going with this)

Turning to USDC for a Second Here

Tether is obviously not even in the question in terms of legitimacy & legality, so let's skip that for a second.

USDC is the second largest stablecoin (with a sizable # in circulation).  Circle + Coinbase collaborated in the manifestation & release of  USDC.

When they did announce the release of USDC, they made it clear that users wouldn't receive the benefit of FDIC-insurance on their USDC holdings,  but that their USDC was held in accounts which DO provide FDIC insurance.

You can read about that here on Coinbase's site.

Significant Disclosure by Coinbase

They state:

"To the extent U.S. customer funds are held as cash, they are maintained in pooled custodial accounts at one or more banks insured by the FDIC. Our custodial accounts have been established in a manner to make available  pass-through FDIC insurance up to the per-depositor coverage limit then  in place (currently $250,000 per individual). FDIC pass-through  insurance protects funds held on behalf of a Coinbase customer against  the risk of loss should any FDIC-insured bank(s) where we maintain  custodial accounts fail. FDIC insurance coverage is contingent upon  Coinbase maintaining accurate records and on determinations of the FDIC  as receiver at the time of a receivership of a bank holding a custodial  account."

Wordy as fuck, I know. But the main point here is  that Coinbase's may be forced to jump through several additional  regulatory hoops if Congress were to enact such legislation, which could make things...interesting in this crypto space to say the least. This  also could have implications for them (as well as other exchanges) that  are offering / providing unregulated, illicit stablecoins like Tether/USDT.

What Would be Considered a 'Savings Assocation'?

Let's cut to the point here.

The nitty gritty wordy, legalese breakdown of a 'savings association' - https://www.occ.treas.gov/publications-and-resources/publications/banker-education/files/key-diff-among-nat-bank-fsa-covered-savings-asso-requirements.html

Simplified breakdown - https://www.bankrate.com/glossary/s/savings-and-loan-association/

In short, "savings associations" is to "commercial banks" as "lite wallets/nodes" are to "full nodes".

Essentially, 'Savings Associations' are supposed to be like smaller  community-ran/funded quasi-banks that have the ability to handle small  time loans for residents in the area looking for mortgage/car loans etc.

Coinbase Doesn't Qualify as a 'Savings Association'

Ironically, they removed all doubt on this issue back in September.

Remember when there were a ton of reports coming out about the SEC potentially suing Coinbase for something?

That was related to a product called 'LEND' that Coinbase was looking to release. [If you're curious, you can read about it here.

tl;dr on that = "Pre-enroll today to earn interest on USD Coin (USDC), with rates more than 50x the national average of a traditional savings account.¹ Best of all, your  USDC is guaranteed by Coinbase, giving you peace of mind while you earn  interest.² Watch your interest grow in real-time through the lifetime  rewards ticker in your portfolio and receive monthly payouts, all with  no fees or withdrawal limits."

Super sleuths can view the original promo for the lending product here (Wayback Machine)

Why This is Relevant

In response to Coinbase's announced plans to launch this product, the SEC sent them a "Wells Notice". That's a, "Notification issued by regulators to inform individuals or companies of completed  investigations where infractions have been discovered. It usually takes  the form of a letter, which notifies recipients both of the broad nature of the violations uncovered as well as the nature of the enforcement  proceedings to be initiated against the recipient."

Coinbase announced that it received this notice from the SEC in September - https://blog.coinbase.com/the-sec-has-told-us-it-wants-to-sue-us-over-lend-we-have-no-idea-why-a3a1b6507009

The Real Issue Here

Coinbase positioned the SEC's opposition to their launch of the product in a way that made it seem like the SEC's qualm was over whether $USDC was  considered to be a security or not.

But that's not really the crux of the issue.

Coinbase Could Not Launch Lend Because They Aren't a Bank / Savings Association

This was self-admitted by Coinbase directly in the footer of their marketing promo for this lending product.

Specifically, they noted, "Coinbase is not a bank. Your loaned crypto is not protected by FDIC or SIPC insurance."

This, effectively, became the crux of their issue with the SEC.

This article on CoinDesk by Frances Coppola breaks down the meat of this issue in a really great way -

source: https://www.coindesk.com/policy/2021/09/14/the-sec-to-coinbase-crypto-banking-is-still-banking/

In that piece, Frances dissects the issue at-hand with angelic clarity with the following dissection:

"Borrowing at a fixed rate, lending at a higher (possibly variable) rate and  pocketing the difference is the business model of a bank. But there is  as yet no specific regulation for crypto banks. As previously noted, the Securities Acts are intended as the catch-all for bank-like services  provided by non-banks. Coinbase has fallen foul of the SEC because it  wants to do bank-style deposit-taking and lending using cryptocurrency."

So its not necessarily the fact that USDC would be leveraged in a way that would restrict its categorization to a security that's the issue, but  rather that Coinbase is not a chartered bank / savings association that makes it an issue.

The reason why this is an issue is because their status as a non-bank /  non-'Savings Association', makes it so they must provide the disclaimer, "Your loaned crypto is not protected by FDIC or SIPC insurance."

Making Deductions Based on What We Know

Because the USDC would not be backed by FIDC insurance (as a security), their offering was a no-go. Coinbase obv. doesn't want to jump through the regulatory hoops  necessary to receive that designation as the accompanying regulations  that come w that status would likely wipe many of the benefits they were looking to gain as a crypto exchange.

This is the tug-of-war  that's been going on behind the scenes between exchanges & banks.  Exchanges realize they're very close to being able to operate like  banks, in effect, without having to carry a fraction of the regulatory burdens placed on chartered financial institutions if they wish to engage in the same activities.

Tying This All into the Big Picture

This all started with us mentioning that press release on the Treasury's website re: guidance on stablecoins + proposed regulatory framework by the U.S. government.

This is the most substantial response by the U.S. gov't addressing  stablecoins, to date. Before we saw little quips / quotes / statements  by various regulators, Fed. Reserve chair, SEC head, New York OAG, CFTC, etc., but today, we have a full-blown framework that the U.S.  government has just published today.

Again, press release is here & [the actual framework / guidance (pdf) can be found here.

Potential Significant Impact on Coinbase via USDC

As noted in that press release, the Treasury stated, "Congressional action is urgently needed", to reign stablecoins in. The first proposed recommendation by the Treasury / President's Working Group (PWG), was for Congress to pass legislation that is meant to "Address risks to stablecoin users and guard against stablecoin runs."

In specific, it was proposed that the legislation enacted should, "Require stablecoin issuers to be insured depository institutions." We've just carved out (in excruciating detail), how and why we know Coinbase does NOT fit that definition.

Coinbase is responsible for the minting, management, distribution, 'banking', etc., related to USDC. Coinbase is in the United States (obviously; publicly traded company on NASDAQ under $COIN), so its not up for discussion whether they'd be  subject to U.S. regulation or not, regardless of them claiming to be  "nowhere" on their S-1 form.

U.S. lawmakers in Congress have already attempted to pass legislation targeted at stopping entities like Coinbase (specifically), from launching products like $LEND (they all but named 'Coinbase' in that proposed legislation).

This was done in the form of the 'STABLE Act', proposed Nov/Dec. 2020:   https://tlaib.house.gov/media/press-releases/tlaib-garcia-and-lynch-stableact

How the STABLE Act Died

There was a ton of coverage about this bill when it was first proposed, but since then? We've only heard crickets. Fortunately, that hasn't been due to the bill's fate being impossible to source.

STABLE Act Obituary

As we know, there was a presidential election last November (Trump lost;  Biden won). This bill was submitted on November 30th, 2020 in the midst  of impeachment proceedings being conducted by the 'House'.

This  was during the 116th Congress, which met from Jan 3, 2019 to Jan 3,  2021. If legislation is not passed by the end of Congress' term, then it gets cleared from the books. So that bill is no longer relevant.

source: https://www.govtrack.us/congress/bills/116/hr8827

New Proposed Stablecoin Regulation - H.R. 4741

This was introduced to the House July 28th, 2021. More info on that here - https://www.congress.gov/bill/117th-congress/house-bill/4741/text?r=1&s=1

Thus far, its been referred to a couple committees in the 'House'. Brushing  up on 'Schoolhouse Rock' lessons, when a bill is introduced, the Speaker typically refers it to the appropriate committee(s) for further  discussion & mark-ups, before that bill is sent to the "floor" for  debate, and eventual voting (if proposed in the "House", first).

This bill, like the 'STABLE Act', proposes requiring that stablecoin issuers to effectively become chartered financial institutions if they wish to  continue issuing stablecoins (punishment is retroactive)



Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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