A new bill aimed at adding clarification to the budding stablecoin market could see some serious opposition from the cryptocommunity. The bill dubbed the “Managed Stablecoins are Securities Act of 2019 H.R. 5197” was introduced to regulators last week. The goal of the new legislation is to amend the statutory definitions of the term security to include managed stablecoins.
Issues with Managed Stablecoins
Almost immediately, crypto analysts spotted issues with the wording of the new bill. For example, the new legislation states that “digital assets, known as managed stablecoins, are investment contracts and therefore are securities within the meaning given the term in section 2(a) of the Securities Act of 1933.” In this scenario, every stablecoin would fall under the new regulations.
The problem with such a blanket statement is that it has the potential to halt one of the most innovative sectors in the cryptocurrency market. The new legislation would be a death sentence for most of the stablecoins currently in existence. These negative effects would occur because this would require these tokens to trade exclusively on securities exchanges versus crypto exchanges.
Congress Drops the Ball
The new legislation was put forth in the wake of major tech firms such as Facebook seeking to launch stablecoins in the very near future. Regulators now believe that it will be easier to provide oversight to these projects if they fall under the securities laws. Unfortunately, the bill fails to accurately describe what is a “managed stablecoin.”
In essence, managed stablecoins are less about the token and more about the issuers’ actions. Only when a stablecoins issuer plays an active managerial role in adjusting the composition of assets that back the coin should the token fall under current securities regulations. This ruling would make sense as the company’s actions guarantee the token’s stability.
Hurt the Many to Regulate the Few
The problem with a broad categorization of stablecoins is the fact that most don’t have this active management as part of their strategy. In most instances, the digital asset represents a right in a trust. Basically, a company would peg the token to a real-world asset that represents a 1-to-1 exchange rate. Usually, this asset is some form of fiat currency.
Tether is the best example of a non-managed stablecoin. The firm holds dollars as a state-regulated trust company. This company adheres to trust regulations. Basically, the company can’t utilize these funds in any way which could detract from their 1-to-1 backing ratio. In this manner, Tether provides much-needed stability to the cryptospace without actively managing the value of the tokens.
You Can’t Douse the Stablecoin Fire
As regulators continue to explore ways to tackle the emergence of mega tech firm tokens, its interesting to see what concepts actually make it into regulations. The current Managed Stablecoins are Securities Act of 2019 H.R. 5197 lacks much of the clarification lawmakers sought to provide. As such, there is a good chance that this bill is only the start of a long regulatory battle to determine the future of these much-needed coins.