Crafting the Future: A Blueprint for Regulating Stablecoins in the United States

2024-05-22, 02:32

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## [TL; DR]
Hilary Allen, a law professor at American University, is calling for the ban of stablecoins while Marcelo M. Prates, a financial policy and regulatory expert, is advocating for the introduction of a suitable Federal cryptocurrency law.

The three pillars of a Federal stablecoin law are backup asset bankruptcy protection, issuing non-bank licenses and direct access to central bank accounts.

stablecoins should complement traditional financial services not competing with the Banks.

## Introduction 
Several prominent analysts who include Jeremy Allaire, Circle CEO, believe that the United States may pass its stablecoin crypto regulation this year, 2024, which may determine the future of digital payments. Already, a proposed bill for stablecoins, the Clarity for Payment stablecoins Act of 2023, is under consideration.

However, what may derail the assessment and approval of a stablecoin regulation could be the United States Presidential [election slated for November 5](https://www.gate.io/blog_detail/4135/as-the-us-presidential-election-approaches-is-trump-meme-becoming-a-best-loved-meme "election slated for November 5"). The aim of this article is to explore the progress which the United States has made towards the launch of a stablecoin legal framework.

## Debate on Stablecoin Regulation in the U.S.: Marcelo Prates vs. Hilary Allen
The viewpoints of Hilary Allen, a law professor at American University and Marcelo M. Prates, a financial policy and regulatory expert, regarding crypto regulations shows the division within our global society pertaining to digital assets.

For example, [Hilary Allen thinks that stablecoins pose a threat to the banking sector](https://go.skimresources.com/?id=100652X1574425&isjs=1&jv=15.5.0&sref=https%3A%2F%2Fwww.coindesk.com%2Fopinion%2F2024%2F05%2F09%2Fhow-the-us-should-regulate-stablecoins%2F&url=https%3A%2F%2Fpodcasts.apple.com%2Fus%2Fpodcast%2Fbanking-with-interest%2Fid1506774121%3Fi%3D1000654155074&xs=1&xtz=-120&xuuid=c2b55452016114d2809ff4aae8fbc6b2&xjsf=other_click__auxclick%20%5B2%5D "Hilary Allen thinks that stablecoins pose a threat to the banking sector") and therefore should be banned. Allen believes that the greater adoption of stablecoins will likely lead to the destabilization of banks to the point that they will require government bailout.

Allen’s comments have come in the wake of a new U.S Congress drive to introduce stablecoin laws at a Federal level which will determine the future of digital payments. Even if it may take more time for the Congress to approve the new bill, Allen thinks that such a stance gives the public time to back the proposed cryptocurrency regulation. Basically, she thinks that “stablecoins serve no important purpose and frankly just should be banned.”

On the other hand, Marcelo M. Prates thinks that stablecoins are important in the economy since they promote financial inclusion, are cost-effective and improve competitiveness in the global financial economic system.

To make his point of view clear he used an example of the development of [e-money in the European Union](https://www.gate.io/price/e-money-eur-eeur "e-money in the European Union"). According to Prates, electronic money (e-money) has been one of the greatest innovations during the past 25 years. Basically, e-money is the version of money issued by non-bank institutions [like PayPal](https://www.gate.io/hot_news/detail/88/what-you-need-to-know-when-buying-bitcoin-with-paypal "like PayPal"). Now, experts classify cryptocurrencies as e-money as they are not issued by banks. However, for them to function properly they may require clear regulation.

A good example is that of the European Union that devised the use of e-money since the year 2000. The EU found it essential to have e-money as it facilitates cheaper payments and easy access. It also makes payments faster across the entire globe. With that vision the EU developed financial regulation for e-money. As a result, FinTech companies that provide safe and regulated payment instruments came into existence.

The reason for the EU to allow e-money was to increase financial inclusion through  streamlined means of sending and receiving money. This is because these e-money transmitters do not require their customers to undergo complex procedures when sending or receiving money. Also, e-money services have less risks and complications than banks. For example, opening a bank account for the purpose of making electronic money transfers takes much time and the process is cumbersome.

On the contrary, it takes little time and effort to send money using non-bank financial services like PayPal. With e-money, the responsible institutions simply receive fiat money from the customers and convert it to digital money they can use for making virtual payments using credit or debit cards, among other methods. In the end, the e-money can easily be converted back to cash.

Therefore, Prates believes that [stablecoins work](https://www.gate.io/learn/articles/what-is-stablecoin/40 "stablecoins work") in modus operandi as e-money that has been in existence for decades and has been safely used to promote a vibrant global payment system. In simple terms, therefore, most if not all the existing [fiat currency-backed stablecoins](https://www.gate.io/learn/articles/what-are-the-main-stablecoins/99 "fiat currency-backed stablecoins") like USDT and [USDC](https://www.gate.io/learn/articles/what-is-usdc/113 "USDC") are a form of e-money.

Thus, the main argument in support of fiat currency-backed stablecoins is that they are “e-money 2.0” which can safely facilitate financial transactions just like traditional financial e-money. However, Prates suggests that the US federal government should establish three pillars of stablecoin regulation namely, backup asset bankruptcy protection, issuing non-bank licenses and direct access to central bank accounts which should promote financial inclusion and stablecoins payment systems. Such a regulatory framework will enable stablecoin providers to operate in a low risk, regulated financial environment.

Read also: [LST-Backed Stablecoins: A New Frontier in DeFi](https://www.gate.io/learn/articles/lst-backed-stablecoins-a-new-frontier-in-defi-innovation-and-opportunity/2200 "LST-Backed Stablecoins: A New Frontier in DeFi")

## Pillars of Effective Stablecoin Regulation
As hinted above, the three pillars of effective stablecoin regulations are backup asset bankruptcy protection, issuing non-bank licenses and direct access to central bank accounts. However, Prates advocates that there is a need for a Federal blockchain regulation rather than state-based money transmitter laws which are not uniformly crafted and enforced.

Granting of a Non-bank License: The government should grant licenses to stablecoin issuers which must keep sufficient liquid reserves for their stablecoins. The role of stablecoin issuers is to get cash from their customers, hold it and issue out digital assets that are commensurate with the amount of money they have received and hold. Since they do not lend money there is a need for digital currency safety through having 100% reserves.

Once the stablecoin providers maintain reserves at all times they can perform other functions. For example, they can promote cross border payments and stablecoin issuance as the demand for the coins rises. Through abiding by the Federal stablecoin legislation and protecting stablecoin users they will maintain a high reputation which creates confidence in the crypto market. Primarily, cryptocurrency regulation should enhance stablecoin market stability.

It is also important to note that e-money and digital assets are not supposed to compete with banks in the provision of international financial remittance. As such, central banks and stablecoins should complement each other. Therefore, stablecoin issuers in the United States should be granted non-bank licenses similar to what E.U., U.K and Brazil have done to e-money providers in their jurisdictions.

Central Bank Accounts for Backing Assets: To increase transparency and lower risk profile stablecoin issuers should keep their reserves with the central bank. With that, they will transfer their cash to the central bank accounts or invest in short-term low risk instruments like options. Therefore, the surest way to reduce risks associated with reserve assets is to keep them with the Federal Reserve.

Segregation and Protection of Customer Funds: An essential thing for stablecoin issuers to do to protect stablecoin users is to segregate the customer funds from the company’s funds. This will mean that if the stablecoin fails the company will not need to go under insolvency. Also, under liquidation the customers can quickly get their funds. This is because the creditors of the bankrupt issuer will not be able to seize the customers’ money.

Read also: [An Overview of the Global Regulatory Landscape](https://www.gate.io/learn/articles/an-overview-of-the-global-regulatory-landscape-for-virtual-assets/1043 "An Overview of the Global Regulatory Landscape")

## E-money Regulation in the EU and USA
Both the European Union and the United States are in the process of finalizing their stablecoin regulations. The EU has MiCA, a part of the digital finance package aimed at fostering the use of innovative technologies such as the blockchain and stablecoins. MiCA provides a clear regulatory framework which contains details on the nature of stablecoins and the responsibilities of the e-money issuers.

On the other hand, the United States has a proposed bill referred to as the Clarity for Payment stablecoins Act. If approved by the Congress the legislation will provide clearer guidelines on the operations of stablecoins. For instance, all stablecoin issuers will be required to register with the relevant authorities. Also, they will be subjected to bank-like regulation that requires them to keep sufficient reserves. Similarly state regulators like the Federal Reserve Board (FRB) will enforce the law and supervise them.

## Conclusion 
The United States and the EU are in the process of finalizing their stablecoin laws. While the EU has MiCA, the United States has a bill which the Congress is yet to approve, the Clarity for Payment stablecoins Act. Marcelo M. Prates, a financial policy and regulatory expert has stipulated that the best Federal stablecoin law should have three pillars - backup asset bankruptcy protection, issuing non-bank licenses and direct access to central bank accounts.

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<div>Author:* Mashell C.*, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
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