As cryptocurrency adoption increases, efforts to regulate the industry continue to accelerate, aiming to safeguard the interests of all parties involved. The Clarity of Payment Stablecoins Act of 2023 is one such law presented to the US Congress for debate and possible enactment. 

Read on to learn more about the US Government’s stablecoin bill, what it entails, and its potential impact on the market. 

What Is the Clarity for Payment Stablecoins Act? 

The Clarity for Payment Stablecoins Act of 2023 is a bill proposed by Partick Henry, US Congressman, and House Financial Services Committee Chairman.

The stablecoin bill seeks to regulate aspects like the legal authority for issuing stablecoins, regulatory oversight of issuers, the role of regulators, and the classification of stablecoins. 

Recent developments in the cryptocurrency space have led to increased adoption, yet despite the benefits of growth and utility, the space has also attracted thorough scrutiny from lawmakers. On the other hand, an influx of scams and crypto rug pulls over the last few years has emphasized the need for regulations.

The lack of consensus among the US political class led to the drafting of the McHenry bill, which addresses stablecoin matters and brings divergent parties to an agreement in advance of the upcoming week’s hearing. 

The stablecoin legislation passed the House committee with bipartisan support, leading its sponsors to express confidence in its enactment into law. Other efforts have failed to garner sufficient support to make significant headway into becoming law. 

In the Senate version of the McHenry bill, nonbanks would have the authority to issue stablecoins provided the nominal value is below $10 billion. An issuer with an amount exceeding that limit must be authorized as a depository institution to earn the right to become a national payment stablecoin issuer.

What Does the McHenry Stablecoin Bill Entail?

There are five standout issues highlighted in the US stablecoin bill that are likely to cause significant ripples in the cryptocurrency industry. 

  • Authority to Issue Stablecoins: The McHenry bills set out requirements for entities with the legal authority to issue payment stablecoins. In its current form, unpermitted payments stablecoin issuers would violate the law. 
  • Bank-Like Regulation: Federal-qualified nonbank payment stablecoin issuers would be subject to bank-like regulation. The regulation would entail risk management, liquidity, and capital requirements. With concerns over proof of reserves for some stablecoins, the law’s drafters hope to allay such fears. This will likely increase the influence of centralized financial institutions on stablecoins, a concern at the foundation of decentralized finance. 
  • Regulation at the State Level: If lawmakers enact the McHenry stablecoin bill, state regulators will play a vital role in enforcing and supervising stablecoin issuers. The Federal Reserve Board (FRB) would only step in in exigent circumstances where the state regulators lack the capacity. 
  • Classification as Securities: Unlike other proposed stablecoin bills, the McHenry one seeks to amend existing laws to allow interest-earning stablecoins to be classified as payment stablecoins, not securities.
  • Private Blockchains: Only stablecoins issued on public blockchains will be considered payment stablecoins. With the public ledger, such stablecoins would promote transparency as transactions would be available for anyone to verify.  

The Potential Impact of the McHenry Stablecoin Bill on Crypto Users

In prohibiting entities from issuing stablecoins without legal authority, the stablecoin bill that Congress is considering has failed to indicate an effective enforcement date. A situation that could ultimately affect stablecoins that are already in the market and potentially classify them as illegal.

However, the US Congress has yet to agree on the final draft that will make it to President Joe Biden’s desk for approval. That means the effective date issue may be resolved with the current stablecoin issuers given a grace period to comply with the law.  

The Senate version of the stablecoin bill contains an extraterritorial clause, which means companies outside the US would be subject to its provisions.

An example is Tether, whose USDt stablecoin has a market capitalization of $110 billion (with 70% of the stablecoin market share). The company is domiciled in the British Virgin Islands. However, for its assets to be legally issued to US residents, it must comply with the legislation. 

One of the key incidents that led to calls for regulation of the stablecoin sector was the collapse of TerraUSD, an algorithmic payment stablecoin whose 2022 depegging wiped over $50 billion worth of market value. 

Under the McHenry stablecoin bill, crypto users will benefit from better protection due to close oversight of issuers by regulatory bodies. For this reason, users won’t have to worry about issuers who fail to enact sufficient security measures.

Moreover, the bill proposes that law enforcement will act on everyone intending to act maliciously, particularly by executing rug pull schemes. Crypto users will also enjoy customer protection measures such as protecting their holdings from the issuer’s creditor claims. 

The Bottom Line

The McHenry stablecoin bill in the US Congress is the latest attempt at “reigning in” the digital asset markets.

The bill seeks to balance consumer protection and institutionalize the stablecoin sector, but how the bill will affect crypto users will largely depend on what makes it to the bill’s final draft.