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How US Government Redefined Stablecoins and Why This Is a Good Thing

Last Updated March 12, 2024 12:52 PM
Guest Writer
Last Updated March 12, 2024 12:52 PM
By Guest Writer
Verified by Ana Alexandre
Key Takeaways
  • The definition of a payment stablecoin was slightly modified in June 2022.
  • The idea of a payment stablecoin won bipartisan support in H.R. 4766: Clarity for Payment Stablecoins Act of 2023.
  • Clarifying and focusing on the scope of a concept like a stablecoin should not be underestimated.

In the winter of 2021/2022, a silent transformation occurred in the arguments over stablecoins. And, oddly enough, the source of this change was the highest reaches of the U.S. government.

Before this time, stablecoins were seen as some form of nebulous digital currency existing in the shadows or threatening the monetary system, such as at the hands of Facebook/Meta.

After this time, stablecoins became seen as a legitimate alternative payment system, existing in the retail environment.

What happened was the rise of the term “payment stablecoin” in U.S. government reports and Congressional legislation. These sources redefined stablecoins from a potential threat to a potential boon in payments, legitimizing and maybe even supporting stablecoins.

The Basis of the Term “Payment Stablecoin”

The term “stablecoin” has appeared in various pieces of U.S. Congressional legislation, receiving its first substantial definition in the Stablecoin Classification and Regulation Act of 2020  (STABLE Act) in November 2020.

Here, a stablecoin is any cryptocurrency available to “investors, financial institutions, or the general public.” It is denominated or pegged to a national currency and has a fixed nominal redemption value. And it has the intent of establishing “a reasonable expectation among the general public” that the nominal value will be retained until redemption.

In its description, the STABLE Act blurs the distinction between what is sometimes referred to as wholesale and retail stablecoins. Wholesale stablecoins are ones that work in enclosed loops and are not meant for use by the general public.

For example, a bank or a blockchain company may create its own stablecoin for use in its own network. So, JP Morgan has the JPM Coin and Celo has the Celo Dollar (CUSD).  These are used for transferring value internally and are not meant for use by the general public in transactions.

Facebook’s Libra or Diem stablecoin was meant to be a retail stablecoin for the general public to use in everyday transactions. While they have not yet become ubiquitous in transactions, Circle (USDC) and Tether (USDT) no doubt have goals to become used for payments by the general public.

So, while the STABLE Act seeks to encompass all stablecoins, including those meant for use in institutional (wholesale) and public settings (retail), its focus on the “general public” suggests that it is specifically talking about retail stablecoins. And this appears to be the basis of the later term “payment stablecoin.”

The Advent of Payment Stablecoins

The term “payment stablecoin” first appears in the President’s Working Group’s Report on Stablecoins  of November 2021. A payment stablecoin is defined “as those stablecoins that are designed to maintain a stable value relative to a fiat currency and, therefore, have the potential to be used as a widespread means of payment.”

This definition is refined a bit in a later statement  on key regulatory and supervisory issues. Here, the President’s Working Group states that its concern is with stablecoins that “have a U.S. nexus and are intended primarily for retail payments use.” In sum, a payment stablecoin is a retail stablecoin issued in the U.S.

In early April 2022, the term was incorporated into a discussion draft of a bill known as the “Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022 .”

Introduced by Senator Pat Toomey of the Senate Banking Committee, the legislation defines a payment stablecoin as a virtual currency designed to maintain a stable value against a fiat currency, is convertible into fiat currency, “is designed to be widely used as a medium of exchange,” is issued by a centralized entity, does not pay interest, and is recorded on a public ledger.

The definition of a payment stablecoin was slightly modified in June 2022 in the “Lummis-Gillibrand Responsible Financial Innovation Act .” Here, a payment stablecoin is pegged to the dollar, redeemable on demand, legal tender, “issued by a business entity,” and “intended to be used as a medium of exchange.”

By the autumn of 2022, the term was routinely appearing in various drafts of bills appearing in the Senate and especially in the House Financial Services Committee.

Payment Stablecoins Become Mainstream

By 2023, no one was debating what a stablecoin was or whether it was even a good thing. A stablecoin was now popularly defined as a payment stablecoin, which was now taken for granted as a future payment system that just needed regulation. This was a dramatic change from the panic caused by Facebook’s idea for a Libra or Diem retail stablecoin.

The idea of a payment stablecoin won bipartisan support in H.R. 4766: Clarity for Payment Stablecoins Act of 2023 . This bill was introduced by the House Financial Services Committee on July 20, 2023, and was the culmination of early draft bills that were developed in cooperation with the Democratic side of the committee.

It passed the Financial Services Committee on July 27 on a vote of 34 to 16 in favor.  The basic elements of this bill have a very good chance of becoming law in the near future.

The definition of payment stablecoin that may well become law is a digital asset “that is or is designed to be used as a means of payment or settlement; and the issuer of which […] is obligated to convert, redeem, or repurchase for a fixed amount of monetary value; and represents will maintain or creates the reasonable expectation that it will maintain a stable value relative to the value of a fixed amount of monetary value; and that is not […] a national currency; or a security issued by an investment company.”

A Good Thing

Certainly, just redefining a retail stablecoin as a payment stablecoin was not the only factor in changing the perspective on stablecoins on Capitol Hill. After all, legislators had two years to get used to and learn about cryptocurrencies.

But, the importance of clarifying and focusing on the scope of a concept like a stablecoin should not be underestimated. The term “payment stablecoin” allowed government officials to understand and conceptualize what a retail stablecoin is and what it can do if it is allowed to develop.

Thus, a knee-jerk reaction to banning mystifying stablecoins was replaced with a desire to regulate a novel payment technology.

About the author: Franklin Noll , PhD, is a Lead Payments Specialist in the Payment Strategies Group at the Federal Reserve Bank of Kansas City. His focus is on cryptocurrencies, stablecoins, central bank digital currencies, and cash. Noll is a recognized authority on the history of monetary technology and was elected to the Association of Cryptocurrency Journalists and Researchers and the Digital Euro Association. Any opinions expressed are his own and not necessarily those of the Federal Reserve.

Disclaimer: The views, thoughts, and opinions expressed in the article belong solely to the author, and not necessarily to CCN, its management, employees, or affiliates. This content is for informational purposes only and should not be considered professional advice.

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