Stablecoin regulation is one of the most controversial topics in cryptocurrency. Previous proposals sought to regulate transparency, issuance, and licensing of stablecoins, although no legislation has yet been passed. This debate, however, may be missing an important point: The issuance of redeemable notes by private banks, in paper or electronic form, appears to already be legal in the United States.
Private banknotes were widely used as a medium of exchange for the majority of U.S. history. Prior to the establishment of the Federal Reserve in 1913, banks issued paper notes redeemable for the equivalent amount of some asset, usually gold. Even after the end of the gold standard in 1933, notes issued by national banks continued to circulate, dwindling to around $20 million in circulation by 1970. Electronic stablecoins are the modern analog to paper banknotes.
In 2001, U.S. Department of the Treasury economist Kurt Schuler found that the issuance of private banknotes is technically legal in the United States. The tax on state-chartered notes, which effectively prohibited the practice, was repealed in 1976. If Schuler is correct, then no law or regulation currently restricts the issuance of private banknotes. The Clearing House, a bank association, supports this view, noting that stablecoin-related activities "clearly fall within the existing legal authority of banks." Further, they write, "no legislative change is required to permit banks to issue digitized deposits" in the form of stablecoins.
For regulatory purposes, redeemable stablecoins would presumably be treated like banknotes or other non-interest-bearing liabilities. They would not be subject to reserve requirements, which apply only to transaction accounts and were lowered to zero in 2020. Prior to 1994, national banknotes were required to be fully collateralized, but that requirement is no longer in effect. Bank-issued stablecoins would also not be subject to insurance from the Federal Deposit Insurance Corporation (FDIC), which applies only to specific types of accounts, such as checking and savings accounts.
State-chartered banks would likely enjoy more regulatory flexibility in issuing stablecoins. States like New York have deterred the crypto industry with restrictive regulatory regimes, but others including Wyoming have welcomed crypto and might provide a regulatory environment amenable to stablecoins. Prior legislative proposals sought to clarify the legal requirements for issuing stablecoins. Sen. Bill Hagerty's Stablecoin Transparency Act, Sen. Pat Toomey's Stablecoin TRUST Act and the Responsible Financial Innovation Act by Sens. Cynthia Lummis and Kirsten Gillibrand would each have required stablecoins issued by depository institutions to be fully collateralized and redeemable for U.S. dollars.
Another question is whether anti-money laundering (AML) laws, such as know-your-customer (KYC) requirements, would apply to bank-issued stablecoins. Some might argue that holding a stablecoin is like having a bank deposit, but a more accurate comparison is to personal or cashier's checks, which require only the check writer to have an account at the issuing bank. Signed checks can be passed on to other users who eventually redeem them. AML and KYC laws do not apply to intermediate holders of the check, only the check writer and possibly the redeemer. This standard should apply to stablecoins as well.
As the law currently stands, no legislation appears to be necessary for banks to issue stablecoins. The practice is not legally prohibited. If Congress or regulatory agencies wish to prohibit the issuance of stablecoins by U.S. banks, they must pass new laws or regulations to do so. Congress can help clarify the current legal ambiguity and ensure that safe, transparent stablecoin issuance continues to be allowed.
In 2012, I calculated that U.S. banks could earn billions in profits by issuing their own private notes. Banks can issue stablecoins, the question is whether they should.
– Thomas Hogan is a senior fellow at the American Institute for Economic Research. He was formerly the chief economist for the U.S. Senate Committee on Banking, Housing, & Urban Affairs. This article is part of CoinDesk's "Policy Week"
