Senator Hagerty unveils stablecoin regulation framework to boost US Treasury demand

Senator Bill Hagerty (R-TN) 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, aims to remove regulatory uncertainty and unlock stablecoins’ full potential in enhancing payment systems and supporting US Treasury demand.

Hagerty said in a statement:

“Stablecoins have the potential not only to enhance transactions and payment systems but also to help create new demand for US Treasuries 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 his proposed legislation aims to create the framework needed to “unlock this technology’s full potential for the benefit of Americans.”

Key provisions

The draft legislation builds on the Clarity for Payment Stablecoins Act introduced by House Financial Services Committee Chairman Patrick McHenry.

One of its notable provisions exempts stablecoin issuers with less than $10 billion in total assets from federal oversight, allowing them to remain under state regulatory regimes. Issuers exceeding the $10 billion threshold may request a waiver to continue operating under state regulation.

The legislation mandates that stablecoin issuers maintain reserves on a one-to-one basis with the stablecoins they issue. These reserves must consist of high-quality assets such as US currency, Treasury bills, or other secure financial instruments.

Issuers are required to publicly disclose the composition of these reserves monthly to ensure transparency and provide consumers with assurance that stablecoins are fully backed. Additionally, it requires the development of interoperability standards for stablecoin transactions to promote seamless integration with other financial systems and international payment networks.

The legislation restricts stablecoin issuance to approved entities, labeled as “permitted payment stablecoin issuers.” This includes insured depository institutions and approved nonbank entities that meet regulatory criteria. Issuers must also establish procedures for the timely redemption of stablecoins and maintain publicly available policies on redemptions.

The bill designates the Federal Reserve as the primary regulator for stablecoin issuers that are depository institutions. For nonbank issuers, the Office of the Comptroller of the Currency (OCC) will act as the primary regulator.

Both agencies will oversee the compliance, risk management, and operational practices of these issuers to ensure they meet the required standards of safety and soundness.

Consumer protection

The legislation also includes technical adjustments to strengthen the state-based regulatory pathway, emphasizing consumer protection while fostering innovation. It aims to support innovation within the stablecoin space by providing clear legal guidelines, 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 conditions. 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, ensuring that stablecoins, private keys, and any other customer-owned property are not commingled with the issuer’s own assets. This prevents the misuse of customer funds and protects them in case of the issuer’s insolvency or financial difficulties.

The legislation explicitly prohibits issuers from rehypothecating (reusing) customer assets held in reserve, except under tightly controlled circumstances for liquidity purposes. This ensures that the reserves backing stablecoins remain secure and available for redemption, further protecting consumer interests.

Entities providing custodial or safekeeping services for stablecoins or private keys must comply with stringent requirements to ensure the security of consumer assets. They must treat and handle customer assets as belonging to the customer and protect them from the issuer’s creditors, ensuring that these assets remain safe even if the custodian faces financial troubles.

This effort seeks to strike a balance between encouraging stablecoin adoption and safeguarding financial stability, marking a significant step toward integrating digital assets into the broader financial system.

Mentioned in this article