Definition of Payment Stablecoin; Prohibition on Interest Payments
Both the GENIUS Act and the STABLE Act would define a payment stablecoin as a digital asset that is designed to be used as a means of payment or settlement where the issuer is either obligated to convert, redeem or repurchase the digital asset for a fixed amount of monetary value or represents (or creates a reasonable expectation) that the digital asset will maintain a stable value relative to the value of a fixed amount of monetary value. The definition would exclude assets that are themselves national currencies, deposits (including deposits tokenized on a distributed ledger) and certain securities.
Both bills provide that payment stablecoins will not be backed or guaranteed by the U.S. government or insured by the Federal Deposit Insurance Corporation (“FDIC”) or National Credit Union Administration, and both bills would prohibit the payment of interest or yield to holders of payment stablecoins. The prohibition on interest and yield will be an important area to watch as the bills move forward in Congress given the significant commercial interest among issuers to use rewards programs to incentivize consumer adoption of an issuer’s stablecoin.
Who Can Be a Payment Stablecoin Issuer and Who Would Regulate Them?
Both bills would prohibit issuance of stablecoins in the United States without a federal or state license. Both nonbank entities and subsidiaries of insured depository institutions (“IDIs”) would be eligible to be approved to issue payment stablecoins under a federal licensing regime, and both bills would allow for a parallel state licensing regime for stablecoin issuers, subject to the relevant state regulatory framework being comparable to the federal framework.
For federally licensed issuers, the relevant federal regulator would be the Office of the Comptroller of the Currency (“OCC”) for federally approved nonbank issuers, and the federal banking regulator of the parent IDI (e.g., the OCC, FDIC or Federal Reserve) for subsidiaries of IDIs.
State-licensed issuers would primarily be regulated by the relevant state regulator of stablecoin issuers, which could choose (but would not be required) to enter into a memorandum of understanding with a federal regulator (either the Federal Reserve or another federal banking regulator, depending on the bill) to allow the latter to participate in the examination, supervision and enforcement of state-regulated issuers. Federal regulators would also have back-up enforcement authority over state-regulated issuers in unusual and exigent circumstances.
Federal and State Standards for Stablecoin Issuers
Both bills would require regulators to establish federal standards for payment stablecoin issuers. Issuers would be subject to reserve requirements (described in more detail below), capital and liquidity requirements, reserve asset diversification standards and interest rate, operational, compliance, IT and cybersecurity risk management standards.
Issuers would be deemed to be financial institutions under the Bank Secrecy Act and would be required to comply with U.S. sanctions and to maintain risk-based anti-money laundering (“AML”) programs, including a customer identification program, appropriate records of payment stablecoin transactions and procedures to file suspicious activity reports (“SARs”), as established in regulations to be adopted by the Department of the Treasury’s Financial Crimes Enforcement Network. The GENIUS Act, which includes more detail than the STABLE Act on AML compliance issues, would also require issuers to have the technological capacity to comply with lawful orders issued by federal courts or federal agencies that require the issuer to seize, freeze, burn or prevent the transfer of payment stablecoins it has issued (“Lawful Orders”).
Issuers would also be subject to activity limitations such that a payment stablecoin issuer would only be authorized to issue and redeem payment stablecoins; manage related reserves, including purchasing, selling and holding reserve assets; provide custodial or safekeeping services for payment stablecoins, stablecoin reserves and their private keys; and perform other functions that directly support the aforementioned activities (unless authorized for further activities by the appropriate federal or state regulator). Neither bill would limit the activities of affiliates of a stablecoin issuer, although affiliates of stablecoin issuers that are part of a bank holding company or a savings and loan holding company group would remain subject to the restrictions of the Bank Holding Company Act or the Home Owners’ Loan Act to the same extent as before.
Payment stablecoin issuers would be subject to supervision by the relevant federal or state regulator, as described above. The federal regulator would have the power to suspend or revoke registration, enter cease and desist orders, impose civil monetary penalties and enter removal and prohibition orders against a federally licensed issuer and its institution-affiliated parties.
For issuers operating under a state license, states would be required to have a state-level regulatory framework that is “substantially similar” to (under the GENIUS Act) or “meets or exceeds” (under the STABLE Act) federal standards, which would require a certification by the relevant state payment stablecoin regulator to the Secretary of the Treasury.
Reserve Requirements
Both bills specify that issuers would be required to maintain reserves backing their outstanding payment stablecoins on a one-to-one basis, and issuers would be prohibited from pledging, rehypothecating or reusing these reserves except in limited circumstances. In general, reserves would be limited to (i) U.S. cash and currency or money standing to the credit of an account with a Federal Reserve Bank; (ii) funds held as demand deposits at an IDI; (iii) short-term Treasury bills, notes or bonds with a remaining maturity of 93 days or less; (iv) repurchase and reverse repurchase agreements on short-term Treasuries; and (v) securities issued by an investment company that operates as a money market fund and invests only in the assets listed in (i) – (iv) above.
Issuers would be required to publicly disclose their redemption policies, establish procedures for timely redemption of outstanding payment stablecoins and publish a monthly reserve report detailing the total number of outstanding payment stablecoins issued and the amount and composition of reserves. The Chief Executive Officer and Chief Financial Officer of an issuer would be required to certify the accuracy of each month’s report, and prior month reserve reports would be subject to audit by a registered public accounting firm.
Standards for Custody of Payment Stablecoin Collateral and Reserves
Both bills would require that custodians and wallet providers for payment stablecoins be regulated financial institutions supervised by a federal banking agency, the Securities and Exchange Commission (“SEC”), the Commodity Futures Trading Commission (“CFTC”) or a state banking supervisor that makes certain information relevant to customer protection available to the Federal Reserve. Only these entities would be permitted to provide custodial or safekeeping services for payment stablecoins, stablecoin reserves or the private keys of payment stablecoins, and these entities would be required to comply with customer protection requirements that require the custodian to treat customer stablecoins as the property of the customer, take steps to ensure the assets are protected from the claims of creditors of the custodian and avoid commingling of customer assets in most cases.
Issuer Insolvency and Bankruptcy
Both bills would give priority to stablecoin holders’ claims against an issuer’s reserves in insolvency or bankruptcy, although the GENIUS Act includes more detailed provisions carving out stablecoin reserves from a bankruptcy estate and addressing various issues that could arise in insolvency proceedings. Neither bill currently provides a specialized bankruptcy regime for stablecoin issuers.
Interoperability
Both bills direct relevant federal and state regulators to consider prescribing standards to promote compatibility and interoperability of payment stablecoins with other permitted stablecoin issuers and the broader digital finance ecosystem.
Clarifying Stablecoin Status Under Other Federal Laws
Both bills would amend federal securities laws to clarify that payment stablecoins issued by permitted issuers would not be classified as “securities.” The GENIUS Act would also amend the Commodity Exchange Act to explicitly exclude payment stablecoins from the definition of “commodity,” thereby removing them from the jurisdiction of the CFTC, and would clarify that permitted payment stablecoin issuers are not considered investment companies.