596 REVIEW OF BANKING & FINANCIAL LAW VOL.

40

IV. Stablecoin: What It Takes to Make It Work

A. Introduction

Stablecoins, a type of cryptocurrency backed by assets in

reserve, 1 have recently attracted regulators’ attention. Examples of
stablecoins include the “Libra” project proposed by Facebook in 2019
and the “Gemini Dollar” issued by a New York trust company. 2
Although stablecoins could potentially function as a reliable alterna-
tive to cryptocurrencies such as bitcoin, they also pose significant
challenges for regulatory agencies and legislators. As stablecoins
continue to attract the market’s attention with their growing promi-
nence, regulators around the world are struggling to construct a
suitable regulatory framework for risk management while promoting
payment innovation. In the United States, the current financial regula-
tion framework predates the age of fintechs,3 and the regulatory
structure around fintechs is still under constant development. The
fragmented nature of U.S. fintech regulation extends to regulations on
stablecoins and may hinder their effectiveness.
This article explains the current regulatory framework that
federal regulators established around stablecoins, as well as the
ongoing efforts to improve oversight and provide consumer protection.
Part B provides the background information on stablecoins’ general
features, functionality, their potentials, and the challenges they pose to
regulators. Part C discusses the treatment of stablecoins under different
regulatory authorities and demonstrates that the fragmented and
undetermined nature of regulation on stablecoins undermines the
effectiveness of oversight and compliance. Part D proposes that
legislators, instead of regulators, should constitute the principal forces
1
Press Release, Off. of the Comptroller of the Currency, Federally Chartered
Banks and Thrifts May Engage in Certain Stablecoin Activities (Sept. 21,
2020), https://www.occ.gov/news-issuances/news-releases/2020/nr-occ-2020-
125.html [https://perma.cc/46J8-X8UD].
2
GEMINI TRUST COMPANY, LLC, THE GEMINI DOLLAR: A REGULATED
STABLE VALUE COIN (2018), https://www.gemini.com/static/dollar/gemini-
dollar-whitepaper.pdf (describing the Gemini dollar); Rory Copeland, A
Global Stablecoin: Revolutionary Reserve Asset or Reinventing the Wheel?
(Oct. 22, 2019), https://ssrn.com/abstract=3473692 (discussing the introduc-
tion of Facebook’s “Libra project,” a “global stablecoin”).
3
FIN. STABILITY BD., FINTECH AND MARKET STRUCTURE IN FINANCIAL
SERVICES 8 (2019), https://www.fsb.org/wp-content/uploads/P140219.pdf.
2020–2021 DEVELOPMENTS IN BANKING LAW 597

in setting guidelines to oversee stablecoins. It also discusses a recent

Congressional initiative to fit stablecoins into a regulatory framework,
although the initiative may ultimately not be fruitful. Part E concludes.

B. Background

1. What Stablecoins Are and How They Work

Stablecoins, as a sub-category of cryptocurrencies, function

with the support of blockchain technology, which provides a safe
mechanism for parties with no pre-existing relationship to transact
without the fear of being defrauded.4 The issuers of stablecoins usually
consist of accredited financial institutions, such as investment banks
and credit unions, and the value of stablecoins is backed by other
assets, which stabilize—as the name suggests—the price of stable-
coins. 5 Depending on their underlying assets, stablecoins are usually
divided into three types: (1) fiat or commodity-backed stablecoins,
(2) cryptocurrency-backed stablecoins, and (3) algorithmic-backed
stablecoins. 6 Fiat or commodity-backed stablecoins are backed by fiat
currency such as U.S. dollars or other low volatility assets such as
commodities or securities. 7 Cryptocurrency-backed stablecoins are
backed by other established crypto assets such as Bitcoins, Ethers, or
other cryptocurrencies. 8 Algorithmic-backed stablecoins are dependent

4
Copeland, supra note 2 (explaining how blockchain technology provides a
reliable mechanism for transaction).
5
Id. (“The role of the financial institutions, association or central bank is
merely to issue the crypto currency and perform an IT function.”).
6
Marissa Lee, Student Gallery, Stablecoin: Yet Another Layer of Crypto-
currency Complexity, ABI J., Sept. 2019, at 36 (“Stablecoin comes in three
types: fiat- or commodity-backed, cryptocurrency-backed and algorithmic-
backed”).
7
Id. at 36 (“[Fiat- or commodity-backed stablecoin] is backed by an asset
such as a fiat currency, gold or other commodity.”); Lene Powell, CFTC
Advisory Committee Delves into Stablecoins, JIMHAMILTONBLOG (Mar. 3,
2020), https://jimhamiltonblog.blogspot.com/2020/03/cftc-advisory-commit
tee-delves-into.html (“A class of virtual currencies that seek to offer price
stability against another asset, frequently by being ‘backed’ by that asset in
reserve, like fiat currency(ies) or certain physical commodities (e.g., precious
metals[.]”).
8
Lee, supra note 6, at 36 (“[Cryptocurrency-backed stablecoin] is backed by
another cryptocurrency, usually a top-ranked one with large market capitaliza-
598 REVIEW OF BANKING & FINANCIAL LAW VOL. 40

on “algorithms that expand and contract the supply of stablecoins in a

way that is similar to how central banks stabilize prices.” 9 Examples of
stablecoins include Paxos,10 Gemini Dollars, 11 Tether, 12 and the hotly-
debated Libra project announced by Facebook in 2019. 13
Stablecoins have a relatively simple issuing mechanism.
While the issuance of other types of cryptocurrencies mostly involves
a decentralized “mining” process, 14 stablecoins are usually issued by a
centralized association whose function resembles a central bank. 15
When customers purchase stablecoins, they are “minted” by the issu-
ing association; then, when the customer wishes to “redeem” or sell
the coins at a price depending on the underlying asset, they are
accordingly destroyed. 16 Additionally, software platforms that allow
for the development of decentralized applications, such as the
Ethereum network, 17 are required to store and transfer stablecoins.18

tion such as bitcoin or ether, or a blended portfolio of multiple cryptocurren-

cies.”).
9
Id.
10
Powell, supra note 7.
11
GEMINI TRUST COMPANY, LLC, supra note 2.
12
TETHER, TETHER: FIAT CURRENCIES ON THE BITCOIN BLOCKCHAIN (2014),
https://tether.to/wp-content/uploads/2016/06/TetherWhitePaper.pdf.
13
Oliver Read & Stefan Schäfer, Libra Project: Regulators Act on Global
Stablecoins, 55 INTERECONOMICS 392 (2020), https://www.interecono
mics.eu/contents/year/2020/number/6/article/libra-project-regulators-act-on-
global-stablecoins.html (discussing stablecoins and Facebook’s Libra project).
14
See Frequently Asked Questions, BITCOIN.ORG, https://bitcoin.org/en/faq#
what-is-bitcoin [https://perma.cc/ZRP2-3ZXY] (explaining the issuance of
bitcoin through “mining”).
15
See Read & Schäfer, supra note 13, at 392 (“[Stablecoins] rely on a set of
stabilization tools which are supposed to minimise fluctuations of their price
in such currency.”).
16
See id. at 393 (“Coins are minted when [authorised resellers] purchase
Libra and destroyed when they sell Libra.”); GEMINI TRUST COMPANY, LLC,
supra note 2, at 2 (“Gemini dollars are redeemed or ‘destroyed’ at the time of
deposit into the Gemini platform.”).
17
Jake Frankenfield, Ethereum, INVESTOPEDIA (Feb. 18, 2020), https://www.
investopedia.com/terms/e/ethereum.asp (explaining the Ethereum network).
18
See GEMINI TRUST COMPANY, LLC, supra note 2, at 2 (“Gemini dollar
require a network that allows for the development of decentralized appli-
cations … to store and transfer value ….”).
2020–2021 DEVELOPMENTS IN BANKING LAW 599

2. Why Stablecoins Matter

One of the most essential advantages of blockchain transac-

tions over traditional banking transactions is that they allow the
transfer of intangible assets (e.g., bonds, stocks) without having to
adjust various debt relationships between the participants, thereby
reducing transactional costs. 19 Additionally, well-functioning digital
currencies could increase the speediness of transactions, provide global
reach to investments, and allow smooth integration with other techno-
logical payment innovations such as digital wallets.20 As the costs of
cash present significant burdens to the financial system, alternative
payment system innovations like stablecoins have the potential to
reduce such costs and provide greater access to financial services.21
However, prominent cryptocurrencies, such as Bitcoin and Ether,
although recently seeing an overall increase in their market value, 22
fluctuate significantly in prices and are susceptible to market manipu-
lation.23 Although these qualities make Bitcoins and Ethers attractive
investments, they also make them unsuitable as means of transaction.24

19
See, e.g., Frankenfield, supra note 17 (“Ethereum is an open-source,
blockchain-based, decentralized software platform used for its own crypto-
currency, ether. It enables SmartContracts and Distributed Applications
(ĐApps) to be built and run without any downtime, fraud, control, or inter-
ference from a third party.”).
20
Tobias Adrian & Tommaso Mancini-Griffoli, Digital Currencies: The Rise
of Stablecoins, IMF: BLOG, (Sept. 19, 2019), https://blogs.imf.org/2019/
09/19/digital-currencies-the-rise-of-stablecoins/#:~:text=Low%20costs%2C
%20global%20reach%2C%20and,proprietary%20legacy%20systems%20of%
20banks (listing several potential benefits of stablecoins).
21
Bhaskar Chakravorti & Benjamin D. Mazzotta, The Cost of Cash in the
United States, INST. FOR BUS. GLOBAL CONTEXT 35 (2013), https://sites.tufts.
edu/digitalplanet/files/2020/06/Cost-of-Cash-US.pdf.
22
Bitcoin, COINDESK, https://www.coindesk.com/price/bitcoin [https://perma.
cc/PWB4-YDZ9] (exhibiting Bitcoin’s price trend); Ethereum, COINDESK,
https://www.coindesk.com/price/ethereum [https://perma.cc/X2QF-SKT2]
(exhibiting ethereum’s price trend).
23
Paul Krugman, Opinion, Bubble, Bubble, Fraud and Trouble, N.Y. TIMES
(Jan. 29, 2018), https://www.nytimes.com/2018/01/29/opinion/bitcoin-
bubble-fraud.html (explaining that the price of bitcoin is “almost purely
speculative, and hence incredibly volatile”).
24
XAVIER VIVES, OECD, DIGITAL DISRUPTION IN BANKING AND ITS IMPACT
ON COMPETITION 11 (2020), http://www.oecd.org/daf/competition/digital-
disruption-in-financial-markets.htm (“Digital currencies such as bitcoin have
600 REVIEW OF BANKING & FINANCIAL LAW VOL. 40

Stablecoins backed by fiat currency and low-volatility assets

could potentially address this shortcoming. Leading stablecoins
already have great popularization potential as the market capitalization
of 28 different stablecoins reached $20 billion by October 4, 2020. 25
With appropriate government oversight and regulation (discussed
below) to steer its operation and development, stablecoins have the
potential to realize the advantages of digital currencies.26

3. Challenges to Regulators

Federal regulators face significant challenges when attempting

to formulate an appropriate framework to fulfill the pre-requisite of
implementing a successful digital currency regulation. A well-func-
tioning system, according to a recent G7 report on stablecoins, should
be able to instill public confidence in the reliability of stablecoins and
“ensure fair and transparent pricing,” as well as exercise sufficient
oversight to prevent fraud and market manipulation when the current
system cannot effectively self-regulate. 27 The governance framework
should also institute risk management policies to strengthen cyber-
security and operational resilience.28
At the same time, the regulation should be conscious of the
relevant Anti-Money Laundering/Combat the Finance of Terrorism

inherent drawbacks … that make them a speculative investment instead of a

store of value and/or means to transact”).
25
Jamie Redman, Stablecoin Supply Doubles in 3 Months as Combined
Market Cap Surpasses $20B, BITCOIN.COM, (Oct. 4, 2020), https://news.
bitcoin.com/stablecoin-supply-doubles-in-3-months-as-cumulative-market-
cap-surpasses-20b/.
26
See Adrian & Mancini-Griffoli, supra note 20 (addressing the advantages of
stablecoins).
27
G7 WORKING GRP. ON STABLECOINS, INVESTIGATING THE IMPACT OF
GLOBAL STABLECOINS 9 (2019); see, e.g., Joseph Young, Tether Spotlight
Once Again: Controversy over 100% Peg to USD, NEWSBTC.COM, https://
www.newsbtc.com/news/tether-spotlight-once-again-controversy-over-100-
peg-to-usd/ (last visited Feb. 19, 2021) (mentioning the Department of
Justice’s criminal investigation of potential market manipulation of Tether, a
stablecoin, to drive up the prices of Bitcoin and the suspicion that the opera-
ting company of Tether maintained an insufficient U.S. dollars reserve to back
its value).
28
G7 WORKING GRP. ON STABLECOINS, supra note 27, at 8 (“Operational
resilience and cyber security are core aspects concerning the safety of pay-
ment systems”).
2020–2021 DEVELOPMENTS IN BANKING LAW 601

(AML/CFT) risks that arise because crypto-assets, due to their

anonymous nature, could easily facilitate terrorist financing and money
laundering. 29 Because blockchain technology allows quick exchange
between different virtual assets within a short timeframe, this “chain-
hopping” technique makes possible the “layering of illicit funds” and
creates great difficulties to trace its origins. 30 The extent of AML/CFT
mitigation measures, therefore, would determine the effectiveness of
the regulation. Additionally, with respect to global scale stablecoins
(GSCs), the regulators must be able to impose legal consequences in
cross-jurisdictional claims against failed payments or misappropriation
of tokens to support continuity of services. 31 This is especially true
when transactions are executed by a different entity than the issuing
association under some stablecoin models. 32
Finally, the regulators should strike a proper balance between
“protecting the public” and “allowing opportunities for innovation”
when formulating policies and regulations for stablecoins. 33 To create
a benign competitive environment and foster the growth of financial
service, the regulators must be able to preserve the integrity of the
payment system and ensure the safety of the stablecoin transactions.34
This may require increased oversight from governmental agencies and

29
Id. at 7 (“If not effectively regulated and supervised, cryptoassets, including
stablecoins, can pose significant risks to financial integrity and may create
new opportunities for money laundering, terrorist financing and other illicit
financing activities”).
30
FATF, FATF REPORT TO THE G20 FINANCE MINISTERS AND CENTRAL
BANK GOVERNORS ON SO-CALLED STABLECOINS 8 (2020), http://www.fatf-
gafi.org/media/fatf/documents/recommendations/Virtual-Assets-FATF-
Report-G20-So-Called-Stablecoins.pdf.
31
G7 WORKING GRP. ON STABLECOINS, supra note 27, at 11 (“Providing
appropriate levels of consumer/investor protection becomes more challenging,
as the cross-border nature of a GSC means it is subject to a variety of
regulatory frameworks in differing jurisdictions.”).
32
Id. at 11; Copeland, supra note 2 (“The Libra model involves an
unbundling of the traditional banking payments process whereby the operator
of the blockchain (which executes transactions) is not necessarily the same
entity as the reserve with which purchasers deposit money in return for
tokens.”).
33
Michael Segal, Cryptocurrency Regulation under US Securities Laws and
Proposed Amendments, 36 COMPUT. & INTERNET L., no. 9, 2019, at 13.
34
G7 WORKING GRP. ON STABLECOINS, supra note 27, at 7 (“Effective
regulation and oversight of stablecoin arrangements is critical to achieve the
public policy goals of payment system safety and efficiency.”).
602 REVIEW OF BANKING & FINANCIAL LAW VOL. 40

heightened disclosure obligations. Meanwhile, overregulation may

have chilling effects on market innovation if the relevant policies do
not take the unique characteristics of stablecoins into consideration. 35

C. Current Regulation of Stablecoins

The current regulatory framework of stablecoins predates the

age of cryptocurrencies, and it does not take into consideration the
unique issues brought by stablecoins. Instead, depending on their
characteristics and design, stablecoins could be treated as a security,
commodity, or derivative, which subjects them to different regulatory
regimes and authorities.36 This creates a lot of confusion and
significantly increases the compliance costs for stablecoins exchanges
and their bank partners.

1. Securities Law

According to a statement published by the President’s Work-

ing Group on Financial Markets (PWG), stablecoins could potentially
be treated as securities.37 If a stablecoin qualifies as a security, it must
comply with the various responsibilities under the Securities Act of
1933 (’33 Act), including that it should “either be registered under its
provisions or to qualify for an exemption from registration.”38
Accordingly, the “offers and sales” of stablecoin must comply with the
registration requirement of the ’33 Act, the “intermediaries and other
market participants” must comply with the Securities Exchange Act of
1934 (’34 Act), and “issuers and other market participants may be
subject to the provisions of the Investment Company Act of 1940 and

35
Segal, supra note 33, at 13 (“To avoid stifling innovation, that regulatory
system should not be overly cumbersome and should address the unique
nature of cryptocurrencies.”).
36
Press Release, U.S. Dep’t of the Treasury, President’s Working Grp. on Fin.
Mkts. Releases Statement on Key Regulatory & Supervisory Issues Relevant
to Certain Stablecoins (Dec. 23, 2020), https://home.treasury.gov/news/press-
releases/sm1223 (“Depending on its design and other factors, a stablecoin
may constitute a security, commodity, or derivative subject to the U.S. federal
securities, commodity, and/or derivatives laws.”).
37
Id. at 1.
38
Framework for “Investment Contract” Analysis of Digital Assets, U.S. SEC.
& EXCH. COMM’N (Apr. 3, 2019), https://www.sec.gov/corpfin/framework-
investment-contract-analysis-digital-assets (last visited Feb. 19, 2021).
2020–2021 DEVELOPMENTS IN BANKING LAW 603

the Investment Advisers Act of 1940.” 39 The ’33 Act requires the offer
or sale of securities to be “accompanied the ‘full and fair disclosure’
afforded by registration with the Commission and delivery of a
statutory prospectus” to allow investors to make an informed deci-
sion. 40 If stablecoins must comply with the registration requirement,
the issuing association may incur significant compliance costs, which
may have a prohibiting effect on the market.
To determine whether a particular stablecoin falls under the
definition of a security, courts would look to the ’33 Act and the test
developed in SEC v. W.J. Howey Co. (the “Howey test”) and evaluate
“whether a person invests his money in a common enterprise and is led
to expect profits solely from the efforts of the promoter or third
party.” 41 If a stablecoin, although not conceived as a security, possess
the properties of a security under § 2(a)(1) of the ’33 Act and the
Howey test, then it would still be subjected to the authority of the SEC
and the various duties under the ’33 Act. 42
When evaluating whether a cryptocurrency, including stable-
coins, is a security, courts would perform an “investment contract
analysis” and apply the Howey test.43 Under the § 2(a)(1) of the ’33
Act, “security” includes “the commonly known documents traded for
speculation or investment[,]” 44 “certificate of interest or participation
in any profit-sharing agreement,” and, most importantly, “investment
contracts.” 45 An investment contract means “a contract, transaction or
scheme” where (1) “a person invests his money” (2) “in a common
enterprise” and (3) “is led to expect profits” (4) “solely from the efforts
of the promoter or a third party.” 46
Both the courts and the SEC usually find no difficulty in
ruling that a cryptocurrency satisfies the first prong of the Howey

39
Press Release, U.S. Dep’t of the Treasury, supra note 36, at 2 n.3.
40
Report of Investigation Pursuant to Section 21(a) of the Securities
Exchange Act of 1934: The DAO, Exchange Act Release No. 81207 (July 25,
2017).
41
Segal, supra note 33, at 13.
42
Id. at 15 (“If [a cryptocurrency has the properties of a security,] then it
would be treated as a security and US securities laws would apply under the
current regulatory system.”).
43
Id. at 15–16.
44
SEC v. W.J. Howey, 328 U.S. 293, 297 (1946).
45
15 U.S.C. § 77b (a)(1).
46
W.J. Howey, 328 U.S. at 298–99.
604 REVIEW OF BANKING & FINANCIAL LAW VOL. 40

test.47 However, due to the unique characteristics of cryptocurrencies,

depending on their design, they may or may not be an investment in a
common enterprise. 48 Some cryptocurrencies are launched through the
process called Initial Coin Offerings (ICO), which allows investors to
contribute to the development of a cryptocurrency at its early stages. 49
These cryptocurrencies satisfy the common enterprise prong because
“the fortunes of the investor are interwoven with and dependent on the
efforts and success of those seeking the investment or of third par-
ties.”50 Similarly, because stablecoins are typically issued through a
central association, they are likely to satisfy Howey’s “common
enterprise” prong as the fortunes of digital asset purchasers are linked
to each other or to the success of the promoter’s efforts.51
The inquiry of whether stablecoins fall under the definition of
security thus focuses primarily on whether there is a reasonable
expectation of profits and whether a purchaser relies on the efforts of
others. The Securities and Exchange Commission (SEC) provided a
framework for analyzing whether certain digital assets are securities
but emphasizes that the analysis of stablecoins is “inherently a facts
and circumstances determination.”52 Profits realized, within the mean-
ing of the Howey test, could be “capital appreciation resulting from the
development of the initial investment or business enterprise or a
participation in earnings resulting from the use of purchasers’ funds[,]”
but exclude “[p]rice appreciation resulting solely from external market

47
Segal, supra note 33, at 16 (“[M]ost cryptocurrencies with ICOs will likely
meet the first prong of the Howley test.”). It is worth noting that the court
typically defines “money” more broadly in this context as long as an investor
gave something as consideration in return for a financial interest with the
characteristics of securities, this prong is satisfied. See United States v.
Zaslavskiy, No. 17 CR 647 (RJD), 2018 WL 4346339 (E.D.N.Y. Sept. 11,
2018) (finding that a person has invested his money even when the person put
in cryptocurrencies as their contribution to the project).
48
Segal, supra note 33, at 17 (explaining why cryptocurrencies such as
Bitcoin may not satisfy the common enterprise prong).
49
Id. at 13 (“[N]ew cryptocurrencies began launching through what became
known as Initial Coin Offerings (ICO), which allowed investors to participate
in the development of cryptocurrencies at their earliest stages.”).
50
Id. at 16.
51
Framework for “Investment Contract” Analysis of Digital Assets, supra
note 38 (“In evaluating digital assets, we have found that a ‘common enter-
prise’ typically exists.”).
52
Public Statement, SEC FinHub Staff, U.S. SEC. & EXCH. COMM’N, SEC
FinHub Staff Statement on OCC Interpretation (Sept. 21, 2020).
2020–2021 DEVELOPMENTS IN BANKING LAW 605

forces[.]” 53 The SEC listed some factors to consider when determining

the last two prongs of the Howey test.54 The more a stablecoin exhibits
those characteristics, the more likely it is for it to be deemed a
security. 55 For example, if there are “essential tasks or responsibilities
performed and expected to be performed by an [Active Participant
(AP)], rather than an unaffiliated, dispersed community of network
users,” and if a stablecoin’s “[p]urchasers would reasonably expect the
AP to undertake efforts to promote its own interests and enhance the
value of the network or digital asset,” then it is likely for a court to find
that the stablecoin satisfies the last two prongs of the Howey test. 56
However, because stablecoins vary in characteristics and because no
authorities have definitively ruled on the treatment of any specific
stablecoins, it is uncertain whether any prominent stablecoins, such as
Tether and the proposed Libra project, would satisfy the Howey test. 57

2. Commodity Exchange Act

Stablecoins could also potentially be treated as commodities

or derivatives and subject to the relevant regulations under the
Commodity Exchange Act (CEA). 58 Because some stablecoins are
backed by commodities or derivatives rather than fiat currencies, they
may assume the regulation imposed on its underlying asset.59 Because

53
Framework for “Investment Contract” Analysis of Digital Assets, supra
note 38 (footnote omitted).
54
Id.
55
Id. (“Although no one of the following characteristics is necessarily deter-
minative, the stronger their presence, the more likely it is that a purchaser of a
digital asset is relying on the ‘efforts of others’[.]”).
56
Id.
57
Press Release, U.S. Dep’t of the Treasury, supra note 36; see, e.g., Simon
Chandler, Will Tether Be Classified as a Security and Sued by the SEC?,
CRYPTOVANTAGE (Jan. 12, 2021), https://www.cryptovantage.com/news/will-
tether-be-classified-as-a-security-and-sued-by-the-sec (explaining why the
current regulation “leaves the door open for Tether to be classed as either a
commodity or derivative, rather than a security.”).
58
Press Release, U.S. Dep’t of the Treasury, supra note 36, at 2 (“Depending
on its design and other factors, a stablecoin may constitute a security, commo-
dity, or derivative ….”).
59
COMMODITY FUTURES TRADING COMM’N, Customer Advisory: Understand
the Risks of Virtual Currency Trading, https://www.cftc.gov/LearnAnd
Protect/AdvisoriesAndArticles/understand_risks_of_virtual_currency.html
606 REVIEW OF BANKING & FINANCIAL LAW VOL. 40

certain cryptocurrencies, such as Bitcoin, have been determined to be

commodities, it is very likely for stablecoins to fall under the authority
of the CEA. 60 Additionally, any virtual currency-based futures con-
tracts must comply with the regulation of the CEA. 61
If a stablecoin constitutes a commodity or derivative under the
CEA, then the offers and transactions of that stablecoin “may be
subject to swap transaction-level requirements” of the CEA. 62
Additionally, the intermediaries that facilitate the trading of stable-
coins, namely the issuing association and potential promoters, may
constitute “futures commission merchants,” “commodity pool opera-
tors,” or “commodity trading advisor” 63 and be “subject to various
registration requirements” of the CEA. 64 In addition, “derivatives
involving non-eligible contract participants” (non-ECPs) are subject to
the rules made by the Commodity Futures Trading Commission
(CFTC) of a CFTC-registered designated contract market. 65
Further, “CFTC maintains general anti-fraud and manipulation
enforcement authority” over stablecoins that are classified as a
commodity under the CEA. 66 The anti-manipulation and anti-fraud
rules of the CFTC prohibit the use of any manipulative and deceptive
devices and contrivances “in connection with any swap, or contract of

[https://perma.cc/VV3Z-PEDP] (“The [CFTC] primarily regulates commodity

derivatives contracts that are based on underlying commodities.”).
60
Id. (“Bitcoin and other virtual currencies have been determined to be
commodities under the [CEA].”).
61
Id.
62
Press Release, U.S. Dep’t of the Treasury, supra note 36, at 2 n.4.
63
7 U.S.C. § 1a (28) (defining futures commission merchants as any “indivi-
dual, association, partnership, corporation or trust” that engages in “soliciting
or accepting orders” of various commodities, derivatives, and swaps); § 1a
(11) (defining commodity pool operator); § 1a (12) (defining commodity
trading advisor).
64
Press Release, U.S. Dep’t of the Treasury, supra note 36, at 2 n.4. Under
the CEA, a futures commission merchant must be registered with the CFTC
and comply with the various duties of a futures commission merchant.
7 U.S.C. § 6d (a).
65
Press Release, U.S. Dep’t of the Treasury, supra note 36, at 2 n.4. Under
the CEA, eligible contract participants (ECPs) are often financial institution,
corporations, or organizations that satisfy a minimum asset requirement and
are allowed to engage in high-profile transactions that are not available to
average investors. 7 U.S.C. § 1a (18). Non-ECPs typically can only trade on
designated contract markets that are registered with the CFTC. 7 U.S.C.
§ 7(a).
66
COMMODITY FUTURES TRADING COMM’N, supra note 59.
2020–2021 DEVELOPMENTS IN BANKING LAW 607

sale of any commodity in interstate commerce, or contract for future

delivery on or subject to the rules of any registered entity[.]” 67

3. Banking Secrecy Act

A recent remark of the director of the Financial Crimes

Enforcement Network (FinCEN) revealed that transactions using
stablecoins are classified as money services businesses (MSB) under
the Banking Secrecy Act (BSA). 68 The Director noted that whether
“the stablecoin is backed by a currency, a commodity, or even an
algorithm” is not relevant to the characterization of MSBs so long as
the institution engages in “accepting and transmitting activity
denominated in stablecoins[.]” 69
Institutions and business that are MSBs must register the
business with the Secretary of the Treasury 70 and must comply with
the various reporting duties to the FinCEN. 71 For example, MSBs must
file a Currency Transaction Report (CTR) with the FinCEN if a
transaction or a series of transactions “involve[d] a transaction in
currency of more than $10,000.” 72 Aside from federal regulation, they
may also have to “seek licenses from the various state money
transmitter regulators as a payment instrument issuer.” 73
Additionally, all MSBs are required to develop and implement
an Anti-Money Laundering/Combating the Financing of Terrorism
(AML/CFT) compliance program. 74 The program requires a system of

67
17 C.F.R. § 180.1(a) (2011).
68
Kenneth A. Blanco, Director, Fin. Crime Enf’t Network, Prepared Remarks
of FinCEN Director Kenneth A. Blanco at Chainalysis Blockchain Sympo-
sium (Nov. 15, 2019) (clarifying the classification of stablecoins). MSB
includes “[a] person doing business …” as a (1) currency dealer or exchanger,
(2) check casher, (3) issuer of traveler’s checks, money orders or stored value,
(4) provider of prepaid access, (5) seller or redeemer of traveler’s checks,
money orders or stored value, (5) money transmitter, and/or (6) U.S. Postal
Service. 31 CFR 1010.100(ff).
69
Blanco, supra note 68.
70
31 U.S.C.A. § 5330 (a)(1).
71
31 U.S.C.A. § 5331 (outlining the activities that would trigger reporting
responsibilities to FinCEN).
72
31 C.F.R. § 1010.311.
73
Gary DeWaal & Lee A. Schneider, Summary Overview of Stablecions and
the Law Regarding Stablecoins (Oct. 3, 2019).
74
31 C.F.R. § 1020.210 (mandating an AML/CFT compliance program for
MSBs).
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internal control, designation and training of compliance personnel, and

customer due diligence review for banks that provide services in
support of a stablecoin project. 75

4. Office of the Comptroller of the Currency

While the Office of the Comptroller of the Currency (OCC)

does not have direct authority over stablecoins, it could impose
regulations on banks’ transactions with stablecoins. In an interpretive
letter released in October 2020 (the “Interpretive Letter”), the OCC
addressed the authority of national banks and federal saving associa-
tions to hold stablecoins.76 However, the OCC only allowed national
banks and federal saving associations to hold stablecoins “as a service
to bank customers.” 77 Furthermore, banks and federal saving associa-
tions holding must comply with various compliance requirements.
First, banks that hold stablecoins must verify “at least daily”
that they have sufficient balances in their reserve account that are
equal to or greater than the outstanding stablecoins issued to ensure the
redeemability of stablecoins and protect the banks’ customers from
default.78 The OCC emphasized that banks must comply with “all
applicable laws and regulations,” including, for example, deposit
related regulations and the due diligence requirements mandated by the
BSA. 79 Additionally, they must also institute appropriate control and
conduct “sufficient due diligence commensurate with the risks
associated with maintaining a relationship with a stablecoin issuer.”80
On the other hand, although the OCC’s Interpretive Letter
provides some compliance guidance to stablecoins issuers, the
guidance is limited in scope and at best general in nature. Although the
OCC acknowledged the other types of stablecoins in the Interpretive
Letter, the letter only addressed concerns related to fiat currency
75
31 C.F.R. § 1020.210(a)(2) (listing requirements of an adequate AML/CFT
program).
76
Off. of the Comptroller of the Currency, Interpretive Letter 1172, OCC
Chief Counsel’s Interpretation on National Bank and Federal Savings Asso-
ciation Authority to Hold Stablecoin Reserves 1–2 (Sept. 21, 2020) (“This
letter addresses the authority of a national bank to hold deposits that serve as
reserves for certain ‘stablecoins.’”).
77
Id. at 1.
78
Id. at 1–2.
79
Id. at 4 (outlining deposit related compliance considerations such as deposit
insurance coverage and risk monitoring).
80
Id. at 2.
2020–2021 DEVELOPMENTS IN BANKING LAW 609

backed stablecoins.81 Further, these instructions only pointed to several

common areas of compliance that would apply to any other services
that banks provide. This makes these instructions unlikely to address
the specific issues that stablecoins brought, such as those associated
with global scale stablecoins (GSCs), which cannot be treated simply
like deposits.82 Adding more to the uncertainties, Brian Brooks, the
new Comptroller of Currency, hinted that the OCC may accept
applications for national bank charters from payments companies,
including cryptocurrency exchanges. 83 This may allow stablecoin
exchanges to obtain national bank charters and operate like traditional
banks.

D. Legislative Initiatives and Potential

As discussed in Part C, although many regulatory agencies

voiced their position on regulating stablecoins, there have not been any
uniform answers or definitive guidelines on the treatment of stable-
coins, leaving uncertainties for their compliance efforts. Overlapping
regulation may create confusion for market players, as regulatory
uncertainties create difficulties in estimating management risks,
thereby increasing operational and compliance costs. Additionally, the
current framework of stablecoin regulation largely depends on
regulators’ reinterpretation of their authorities under their respective
enabling Acts, 84 while legislators largely remained silent. This placed
great pressure on regulators who then scrambled to fit stablecoins
under their respective authorities within the last two years, resulting in

81
Id. at 1–2 (“[T]his letter only addresses the use of stablecoin backed on a
1:1 basis by a single fiat currency ….”).
82
G7 WORKING GRP. ON STABLECOINS, supra note 27, at 11 (discussing
regulatory problems associated with GSCs).
83
Victoria Guida, Top Regulator Pushes Ahead with Plan to Reshape
Banking, Sparking Clash with States, POLITICO (Aug. 31, 2020, 6:52 P.M.),
https://www.politico.com/news/2020/08/31/currency-comptroller-reshape-
banking-406393 (summarizing the statements of Brian Brooks, the new
Comptroller of Currency).
84
See, e.g., Framework for “Investment Contract” Analysis of Digital Assets,
supra note 38 (SEC’s framework on regulating cryptocurrencies); COMMO-
DITY FUTURES TRADING COMM’N, supra note 59 (CFTC’s statement on
stablecoins); Off. of the Comptroller of the Currency, supra note 76 (OCC’s
statement on stablecoins).
610 REVIEW OF BANKING & FINANCIAL LAW VOL. 40

wide speculations by experts, leaving potential investors in the dark. 85

Further, because the existing framework of financial instruments
regulation predates the era of cryptocurrency, regulators’ ability to
address the issues brought by the unique characteristics of stablecoins,
such as cross-border transactions, is greatly limited. 86
Due to these limitations, the regulation of stablecoins is not
optimal if left completely in the hands of the regulators. To address
these shortcomings, legislators should assume a more active role and
design a more definitive and suitable framework for regulating stable-
coins.

1. Congressional Initiatives

Representatives in Congress recently introduced House Bill

8827, also known as the proposed Stablecoin Classification and
Regulation Act of 2020 in October 2020 to amend the Federal Deposit
Insurance Act (FDIA) and “provide for the classification and
regulation of stablecoins.”87 Although the bill did not receive a vote in
the House, 88 it is nevertheless illuminating to look at its conception of
the stablecoins regulation.
Perhaps the most important and aggressive proposal of the bill
was to integrate stablecoins into the definition of “deposit.”89 In the
proposed amendment, stablecoins are defined as any cryptocurrencies
that are “pegged to the United States dollar,” “another national or state
currency,” or a “functional monetary equivalent” and are issued either
with a nominal redemption value, with the intent of establishing an
expectation of nominal redemption value, or in a manner that would
create an expectation of nominal redemption value. 90 This proposed
definition incorporated stablecoins within the realm of deposits and
would allow issuers of stablecoins to obtain deposit insurance and

85
See, e.g., Chandler, supra note 57 (describing speculation on the possibility
of SEC’s action against Tether for selling unregistered security).
86
FIN. STABILITY BD., supra note 3, at 9 (“[T]he cross-border application of
different regimes may hinder global business operations.”).
87
H.R. 8827, 116th Cong. (2019–2020).
88
H.R. 8827 (116th): Stablecoin Classification and Regulation Act of 2020,
GOVTRACKS.US, https://www.govtrack.us/congress/bills/116/hr8827 (last
visited Feb. 19, 2021).
89
H.R. 8827, § 3(a)(1).
90
H.R. 8827, § 3(a)(2).
2020–2021 DEVELOPMENTS IN BANKING LAW 611

further ensure stablecoins’ stability. 91 If the proposal is approved, it

could greatly strengthen the market’s confidence in the reliability of
stablecoins.
On the other hand, the proposed amendment to the FDIA also
would impose significant restrictions on the issuance and operation of
stablecoins. The amendment would prohibit the issuance of stablecoins
unless the issuer is “an insured depository institution that is a member
of the Federal Reserve System[.]” 92 It would also be unlawful to issue
any “stablecoin-related product” or “provide any stablecoin-related
service … without obtaining written approval” from the applicable
regulatory agencies under the Federal Reserve system. 93 The issuing
associations must also comply with the various approval requirements
under the proposed section 52, including that they submit “ongoing
analysis” reports to prudential authorities outlining the “potential
systemic impacts … of the stablecoin.” 94
Additionally, the amendment would impose a rigid constraint
to safeguard stablecoins against volatility, requiring issuers of a
stablecoin to “take all possible actions” to guarantee the redemption
value of the stablecoin and maintain its redeemability.95 These restric-
tions could place the stablecoins under the regulatory framework of
banks and potentially change the big picture in the stablecoins market.
The report on systemic impacts or monetary policy implications
required here is particularly interesting, as it recognizes the dynamic
nature of the stablecoins market and demands involvement and
expertise from practitioners.
The bill represents a recent attempt to capture stablecoins
under a relatively uniform regulatory framework. However, the bill did
not spark any significant attention in the House, and this, again, may
suggest that Congress still lacks the requisite understanding of stable-
coins and prefers to remain passive before a fuller picture on the
development of stablecoins emerges. Whatever the reason may be, at
least in the near future, Congress may be reluctant to take up the role
of defining the regulatory framework around stablecoins.

91
12 U.S.C. § 1815(a)(1) (outlining the advantages of becoming an insured
depository institution).
92
H.R. 8827, § 3(b).
93
Id.
94
Id.
95
Id.
612 REVIEW OF BANKING & FINANCIAL LAW VOL. 40

E. Conclusion

Stablecoins present a tempting model for an alternative

payment system, and regulators must be able to exercise oversight and
regulate their operation for their benefits to be fully exploited.
Although attempts have been made by many regulators to place
stablecoins under their regulatory regime, without a uniform and defi-
nitive framework, the effectiveness of these attempts may be severely
undermined. The legislators, who may be the best governmental body
to provide an answer to this complex question, should take an active
role to study and address the issues brought by the uncertainties.

Yangzhiwei Bi 96

96
Student, Boston University School of Law (J.D. 2022).