Proposed Bill Would Require Stablecoins to Be Backed by Dollars, Government Securities

Rep. Trey Hollingsworth and Sen. Bill Hagerty presented the Stablecoin Transparency Act.

Remember all the fuss over Tether being just kind of backed by the US dollar?

Rep. Trey Hollingsworth (R-IN) in the House and Sen. Bill Hagerty (R-TN) in the Senate have sponsored legislation to ensure that this issue never arises again.

Stablecoins would have to be completely backed by a mix of US dollars and "government securities with maturities shorter than 12 months" under the Stablecoin Transparency Act (i.e., bonds). It would also require stablecoin issuers, such as Circle (USDC) and Tether (USDT), to produce audited reports confirming their reserves on a regular basis.

"Those in the cryptocurrency sector are negotiating tremendous uncertainty, from whether coins are securities or commodities to who is in charge of regulating them," says Sen. Hagerty, empathizing with customers wanting to know their assets are safe.

Stablecoins are digital assets that are tied 1:1 to a fiat currency, most often the US dollar. The notion is that there is a $1 note in the bank for every stablecoin in circulation, which can be redeemed by anybody.

Tether, on the other hand, was chastised by the New York Attorney General's Office for promoting this misconception, claiming that "Tether's assertions that its virtual currency was completely backed by US dollars at all times was a deception." Instead, when Tether finally released reports in 2021, they revealed a large portion of reserves held in cash or "cash equivalents," such as money market funds, as well as significant holdings in secured loans, bonds, or crypto assets.

While some of these assets helped Tether gain money, they may make it less liquid in the event of a digital "bank run." Furthermore, a drop in the price of Bitcoin or other crypto assets might lower the value of the company's reserves below the circulation value of USDT, putting the price at risk.

In terms of market value, Circle, the business that collaborates with Coinbase on USDC, is the second-largest stablecoin after USDT. It was chastised last year for having just 61 percent of its holdings backed by cash or cash equivalents as of July.

By August, however, it had indicated that it would only employ cash and short-term government bonds, in line with the Hagerty-Hollingsworth bill's restrictions. Circle today announced that it would keep its roughly $50 billion in reserves in mega-bank BNY Mellon, based on an attestation from accounting firm Grant Thornton in October of that year.

While the Stablecoin Transparency Act is aimed at protecting consumers, Sen. Hagerty claims that it would not place stablecoins in the hands of "unaccountable bureaucrats who threaten to suffocate innovation."

That is, assuming it ever comes up for a vote. Both chambers of Congress are controlled by Democrats, and while there is bipartisan interest in getting cryptocurrency legislation right, the duo will almost certainly require cross-party support to obtain a committee vote.