A couple of United States lawmakers are looking to classify stablecoins as securities. With Libra considering adopting fiat-pegged stablecoins rather than a single token supported by a basket of national currencies, the proposed crypto project might be facing yet another regulatory hurdle.
Meanwhile, lawmakers sponsoring the bill say stablecoins should be classified as securities to protect U.S. consumers. If passed, stablecoin projects like Libra will potentially fall under the purview of stringent U.S. securities regulations.
Critics of the move remark that such measures only serve to further dampen the country’s position in the emerging digital landscape. Some commentators have long accused regulators of chilling innovation in the U.S. crypto and blockchain space.
Libra maintains that its proposed stablecoin project is a commodity. The association is also moving forward with developing the payment system, recently releasing updates on the state of its testnet and detailing the number of transactions carried out so far.
U.S. lawmakers want “managed stablecoins” classified as a security
As previously reported by Cointelegraph, two Texas representatives — Lance Gooden and Sylvia Garcia — have proposed a piece of legislation that will classify stablecoins as securities. Named as the “Managed Stablecoins are Securities Act of 2019,” the bill, which is sponsored by representatives from both sides of the aisle, could place an even greater regulatory burden on stablecoin projects like Libra. In a statement quoted by The Hill, Rep. Garcia remarked:
“Managed stablecoins, such as the proposed Libra, are clearly securities under existing law. This legislation simply clarifies the statute to remove any ambiguity.”
A co-sponsor of the bill, Rep. Gooden, also echoed the sentiment that Congress should take the lead in shaping the legal landscape for cryptos and the digital space at large. According to Gooden, “It’s the responsibility of Congress to clarify the regulatory framework that will apply to stablecoins, especially now that mainstream institutions are offering them to consumers.”
It appears that consumer protection concerns are at the heart of lawmaker endeavors to put stablecoins under the security token paradigm. However, such a move increases the regulatory burden on stablecoins, as U.S. securities laws contain a litany of reporting and compliance requirements.
Cointelegraph reached out to the Libra Association for comments about the proposed bill. In its email response, Dante Disparte, the association’s head of policy and communications, remarked:
“We maintain that responsible financial services innovation and regulatory oversight are not in contest. The Libra payment system is designed from the ground up to serve as a payment infrastructure that can empower billions of people left on the margins of today’s networks. The Libra Coin is simply a proxy for an instantaneous payment system that is low friction and high trust.”
With Libra yet to launch, it remains unclear exactly what type of token the project will utilize. In October 2019, the association hinted that it might abandon its original plan of creating a single token supported by a basket of national currencies in favor of a fiat-pegged stablecoin.
The bill before Congress represents another development in the emerging trend of government authorities in Western countries looking to place stringent regulatory hurdles along the path of stablecoin projects. Several regulatory agencies in the U.S. as well as international organizations like the G-20 have expressed concerns about stablecoins.
Another potential regulatory hurdle for Libra
If passed, the bill could potentially serve as another regulatory impediment on the path of the Libra project in the U.S. In an email to Cointelegraph, crypto and blockchain legal expert Max Ambrose highlighted how much of a burden the proposed bill could have on Libra:
“It will require Libra to follow substantial regulatory requirements imposed by the SEC that they are hoping to avoid altogether. These regulatory requirements increase legal costs and will tie Libra’s hands on numerous investment-related issues, requiring them to operate within specific bounds which the SEC and lawmakers can carve out.”
The added compliance burden for Libra would be to such an extent that, as Ambrose remarked, “The bill may entirely prevent Libra from operating in the US,” but the likelihood of such will depend on whether the association chooses to follow local regulations. He added:
“Libra’s argument that it is not a security is further evidence of the hardships they will face if they are subjected to US securities laws and regulations.”
Joe DiPasquale, CEO of BitBull Capital — a crypto and blockchain hedge fund firm, echoed similar sentiments declaring that stablecoins being classified as securities in the U.S. could hurt Libra’s operation in the country. Writing to Cointelegraph, DiPasquale declared that classifying Libra as a security would limit the flexibility of the project’s operation in the U.S.
A security token designation might not be the only worry for Libra in the U.S.: Earlier in November, Kenneth Blanco, director of the U.S. Financial Crimes Enforcement Network, declared that businesses that conduct stablecoin transactions must register as money services businesses.
Since the release of the project’s white paper, Libra has been facing criticism from several regulatory stakeholders both within and outside the U.S. While much of the initial objection to the project appeared to stem from Facebook’s involvement in the Libra Association, recent events seem to point toward governments wanting to stake a firm stance against the project as a whole.
Are stablecoins securities?
With the bill already before Congress, part of the developing conversation is circling around whether stablecoins are securities. In the U.S., the Howey Test is the standard for classifying investment instruments as securities.
So far, the U.S. Securities and Exchange Commission has elected to utilize the Howey Test rather than create another standard specifically for crypto. According to Ambrose, Congress reserves the right to create a legal framework for determining whether crypto tokens should be seen as securities. As part of his email to Cointelegraph, Ambrose said:
“The legal basis to classify a cryptocurrency as a security is up to lawmakers (e.g., Congress) and regulatory agencies (e.g., the Securities Exchange Commission, aka SEC), so if this bill passes, Congress is effectively creating the legal basis for the classification. It becomes irrelevant whether Libra is or is not a security under current law, because it would be classified as a security under the new law.”
In summary, the Howey Test classifies an investment instrument as a security if it:
- Involves monetary investment
- The investment is in a common enterprise
- There is an expectation of profit from the investment
- There is an expectation of profit due to the efforts of the promoter or third-party
Sponsors of the bill argue that managed stablecoins constitute investment contracts and are therefore securities under the paradigm of the Securities Act of 1933. Earlier in November 2019, the International Organization of Securities Commission declared that some stablecoins might be securities.
According to the IOSCO, some stablecoin implementations possess certain features typical of securities. Thus, the international securities regulator maintains that regulators would be correct in classifying some stablecoins as securities.
However, the Libra Association maintains that while regulators and lawmakers have to consider consumer protection laws, the steps they take should not inhibit the growth of the digital asset space. Disparte remarked to Cointelegraph:
“We recognize that stablecoins are an emerging technology, and that policymakers must carefully consider how this fits into their financial system policies. However, we believe that it is important to regulate activities and not technologies, allowing for responsible innovation to flourish.”
It could be better…
Some U.S. crypto and blockchain stakeholders have lamented the current state of regulations governing the country’s digital asset space. Earlier in 2019, Jeremy Allaire, the CEO of Goldman Sachs-backed Circle — a crypto payments firm — declared that unclear U.S. crypto regulations were forcing companies to move their projects to other countries.
Indeed, during his recent appearance before Congress, Facebook CEO Mark Zuckerberg sounded a note of caution against stringent digital regulations in the U.S. According to the Facebook chief, such measures are handing over control of the emerging digital economy to China.