Senator Bill Hagerty (R-TN) has unveiled a discussion draft of new legislation designed to provide a clear regulatory framework for stablecoin issuers.
Hagerty, a member of the Senate Banking Committee, wants to remove regulatory uncertainty and unlock the full potential of stablecoins in improving payment systems and supporting demand for U.S. Treasuries.
Hagerty said in a statement:
“Stablecoins not only have the potential to improve transactions and payment systems, but also to help create new demand for U.S. Treasury bonds as we work to address our unsustainable deficit.”
He added that the lack of clear regulation has “hindered” the growth and “promise” of stablecoins in the US, and that his proposed legislation aims to create the framework needed to “realize the full potential of this technology for the benefit of the Americans.”
Key provisions
The draft legislation builds on the Clarity for Payment Stablecoins Act, introduced by House Financial Services Committee Chairman Patrick McHenry.
One notable provision exempts stablecoin issuers with less than $10 billion in total assets from federal supervision, allowing them to remain under state regulatory regimes. Issuers that exceed the $10 billion threshold can apply for a waiver to continue operating under state regulation.
The legislation requires stablecoin issuers to maintain reserves with the stablecoins they issue on a one-for-one basis. These reserves should consist of high-quality assets such as US currency, government bonds or other safe financial instruments.
Issuers are required to publicly disclose the composition of these reserves on a monthly basis to ensure transparency and provide consumers with the assurance that stablecoins are fully supported. Furthermore, it requires the development of interoperability standards for stablecoin transactions to promote seamless integration with other financial systems and international payment networks.
The legislation limits the issuance of stablecoins to approved entities, labeled as “permitted stablecoin payment issuers.” This includes insured depository institutions and approved non-bank entities that meet regulatory criteria. Issuers must also establish procedures for the timely redemption of stablecoins and maintain publicly available redemption policies.
The bill designates the Federal Reserve as the primary regulator for stablecoin issuers that are depository institutions. For non-bank issuers, the Office of the Comptroller of the Coin (OCC) will act as the primary regulator.
Both bodies will oversee the compliance, risk management and operational practices of these issuers to ensure they meet the required safety and soundness standards.
Consumer protection
The legislation also includes technical adjustments to strengthen the state-based regulatory pathway, focusing on consumer protection while promoting innovation. It aims to support innovation within the stablecoin space by providing clear regulatory guidance, reducing regulatory barriers and creating a tailored approach to supervision.
The legislation encourages cooperation between state and federal regulators, allowing state-regulated issuers to operate within federal guidelines under specific circumstances. It also includes provisions for reciprocal arrangements with foreign jurisdictions that have substantially similar stablecoin regulatory regimes to facilitate international transactions.
The bill requires stablecoin issuers to segregate customer assets and ensure that stablecoins, private keys, and other customer property are not commingled with the issuer’s own assets. This prevents misuse of customer funds and protects them in the event of insolvency or financial problems of the issuer.
The legislation explicitly prohibits issuers from pledging (repurposing) customer assets held in reserve, except under strictly controlled circumstances for liquidity purposes. This ensures that reserves backing stablecoins remain safe and available for redemption, further protecting consumer interests.
Entities that provide custody or custody services for stablecoins or private keys must meet strict requirements to ensure the security of consumer assets. They must handle and treat customer assets as if they were the customer’s property and protect them from the issuer’s creditors, ensuring that these assets remain safe even if the custodian faces financial difficulties.
This effort seeks to strike a balance between encouraging stablecoin adoption and ensuring financial stability, marking an important step toward integrating digital assets into the broader financial system.