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Why the Stable Act undermines innovation in the crypto space

Every year, the United States government introduces more crypto regulations. As blockchain develops and its potential impact becomes more apparent, Congress introduced the Stable Act (the “Act”) in effort to regulate stablecoin issuers. Stablecoins are a type of cryptocurrency that peg their value to an external reference, such as the US dollar.

Congress introduced the Act to protect consumers from predatory practices and risks posed by digital payment instruments. And of course, Congress will not hesitate to regulate Facebook and its emerging digital currency system, Libra. These are definitely good reasons motivating Congress to act. However, a closer look at the Act and its clauses caused the broader blockchain space to rightfully worry.

The Stable Act creates restraints in the crypto ecosystem.

Despite good intentions, the Act could have negative effects on not only blockchain innovation but also on the crypto ecosystem. First, it requires “any prospective issuer of a stablecoin to obtain any banking charter” and “any company offering stablecoin services must follow the appropriate banking regulations under their respective jurisdictions.” Essentially, the Act outwardly bans any and all stablecoins not issued by a federal bank. Among others, this would affect (1) Gemini Dollars, (2) USDCs, a consortium of state-licensed money transmitters, and (3) DAI, Ethereum-based smart contracts powering decentralized finance or DeFi.

The Act wrongfully distinguishes stablecoins from other more traditional money transmitters.

Importantly, the Act does not treat all money transmitters fairly. For instance, the Act leaves out non-bank dollar denominated liabilities held by PayPal, Venmo, Apple Pay etc. It also leaves out more traditional entities such as Western Union. The Act only ultimately regulates money transmitters if they are stablecoins. The risk of liabilities held by PayPal and Apple Pay compare to the risk stablecoins pose. Many argue that stablecoins may even be safer. Public blockchains reduce risk by using decentralized and verifiable accounting tools.

Jeremy Allaire, the CEO of Circle, the company that led the effort to use stablecoins to help Venezuelan workers (more on this here) criticized the Act. He claimed it was a huge step backwards because it curtails blockchain and fintech progress. What would actual enforcement look like? How can you regulate a space intended to be decentralized? Despite the policy goals the bill attempts to address, there may be collateral consequences for distributed ledger technology.

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