A Bill Being Introduced Would Require Stablecoins to be Backed by Dollars or Government Securities
Rep. Trey Hollingsworth and Sen. Bill Hagerty presented the Stablecoin Transparency Act.
In a nutshell, the Stablecoin Transparency Act would require stablecoins to be completely backed by dollars or short-term government debt. Additionally, stablecoin issuers would be required to submit audited reports. Remember all the hullabaloo about Tether only being partially backed by the US dollar?
Two legislators—Rep. Trey Hollingsworth (R-IN) in the House of Representatives and Sen. Bill Hagerty (R-TN) in the Senate—have sponsored legislation to ensure that never happens again.
Stablecoins would be required to be completely backed by a mix of US dollars and “government securities having a maturity of less than 12 months” under the Stablecoin Transparency Act (i.e., bonds). Additionally, it would require stablecoin issuers — such as Circle (USDC) and Tether (USDT) — to produce audited reports confirming their reserves on a regular basis.
“From determining whether coins are securities or commodities to determining who is responsible for regulation, participants in the cryptocurrency market face substantial uncertainty,” Sen. Hagerty observes, empathising with customers anxious to know their assets are secure.
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Stablecoins are digital assets that are tied 1:1 to a fiat currency, most often the US dollar. The concept is that for every stablecoin in circulation, a $1 note is kept in the bank; anybody may redeem such coin.
However, the New York Attorney General’s Office chastised Tether for perpetuating this idea, claiming that “Tether’s assertions that its virtual currency was completely backed by US dollars at all times were a fraud.” Rather than that, when Tether finally released reports in 2021, they revealed a big portion of reserves held in cash or “cash equivalents,” such as money market funds, as well as significant holdings in secured loans, bonds, and crypto assets.
While some of these investments aided Tether’s profitability, they may have reduced the company’s liquidity in the event of a digital “bank run.” Additionally, a decrease in the price of Bitcoin or other cryptocurrencies might push the company’s reserves below the circulation value of USDT, thus destabilising the market.
Circle, the firm that collaborates with Coinbase on USDC, is the second-largest stablecoin by market value, behind only USDT. It came under fire last year when it revealed that just 61% of its assets were backed by cash or cash equivalents as of July.