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Draft SEC Letter; Yellen Speech; Stablecoin Legislation the TRUST Act

Review our SEC Exchange Comment Letter


Comments in response to the SEC’s exchange rulemaking are due April 18, 2022. Here’s a link to our draft comment letter. If you’re interested, please review it and provide feedback that would improve our submission. We want it to be as broadly representative of the DeFi ecosystem as possible, so let us know if we’re missing anything.


More information on the rulemaking can be found at protectdefi.org. You can also use the site to submit your own comment letter to the SEC, which we definitely encourage you to do!


Secretary Yellen’s Speech on Digital Assets


What Happened?


On Thursday, Treasury Secretary Janet Yellen gave a speech on digital assets. In it, she outlined what she feels are the five most important lessons she has learned from years navigating the opportunities and challenges posed by emerging technologies. These five lessons were:

Bitcoin example.

  • The financial system benefits from responsible innovation.

  • When regulation fails to keep pace with innovation, vulnerable people often suffer the greatest harm.

  • Regulation should be based on risks and activities, not specific technologies.

  • Sovereign money is the core of a well-functioning financial system and the US benefits from the central role the dollar and US financial institutions play in global finance.

  • We need to work together to ensure responsible innovation.

As she spoke further about responsible innovation, Yellen highlighted the need for the financial system to innovate in ways that reduce the cost and time associated with processing transactions. She mentioned that a CBDC could contribute to a more efficient payment system and noted that the Treasury would be studying the implications of a CBDC — just as the President’s executive order on cryptocurrencies asked them to.


Yellen went on to discuss a few types of novel risk posed by digital assets. She mentioned the potential risks associated with a run on stablecoins; if too many people try to exchange their stablecoins at once, it could lead to the de-pegging of the stablecoin from its referenced asset. She called for a regulatory framework that can provide appropriate oversight of digital assets while still supporting responsible innovation going forward.


In Yellen’s view, a key aspect of such a regulatory framework is tech neutrality. Regulations should target the risks that come from using new technologies, and not the technologies themselves. This kind of approach will be key to balancing the demands of consumer and user safety with the urgent need to innovate. As Yellen said, “Continuing to update and improve our regulatory architecture will support US economic competitiveness and reinforce leadership in the global financial system.”


Yellen ended her speech by calling for a government-wide approach to regulation that can mitigate risks and support innovation. She highlighted the role that a range of actors should have and the need for public-private dialogue on these issues to inform government policy.


What does this mean?


As Kristin Smith laid out in a thread on the speech, “it is remarkable… that the Secretary of the Treasury spent so much time laying out her view on digital assets. There is truly no clearer sign of crypto’s growing role in the American economy than seeing those in the highest positions of power focused so heavily on figuring out how to effectively regulate it. Crypto is here to stay — and all the power players know it.”


And that seems like good news for DeFi. The tone and content of Yellen’s speech gives us hope that the approach the administration will take to DeFi and digital assets will be much more thoughtful and balanced than the approach we have seen regulators take towards crypto in the past.


We welcome the dialogue with regulators that Yellen called for and believe these conversations present a valuable opportunity to ensure that the interests of the DeFi ecosystem are well-represented.


Yellen’s interpretation of technological neutrality is also notable. “Tech neutrality” and “same business, same risks, same rules” are two regulatory maxims we often see discussed in the context of crypto, but the interpretation of them is varied. For example, SEC Chairman Gensler in a recent speech said that rules of the road for automobiles unleashed the growth of that industry because it provided consumers with confidence in them. Fair enough. But just because a new system or technology does the same thing as a legacy alternative—be it transporting people or effectuating payments—doesn’t mean they make it happen in the same way, create the same risks, and therefore necessitate the same rules. While both Boeing and Ford are in the business of manufacturing transportation systems, it would be nonsensical to apply the same regulatory requirements to both cars and airplanes or to have forced airplanes to be developed in a way such that they could comply with regulations designed for cars. It’s the same with crypto and DeFi, and it is encouraging to see the Treasury Secretary acknowledging this nuance.


The Stablecoin TRUST Act


What happened?


Senator Pat Toomey (R-PA), the ranking member for the Senate Banking Committee, released a draft of his proposed Stablecoin Transparency of Reserves and Uniform Safe Transactions Act. The bill would create a category of asset called “payment stablecoins” — defined (in part) as a convertible virtual currency used as a medium of exchange that can be redeemed for fiat by the issuer.


The bill would allow for issuance of payment stablecoins by certain licensed parties such as money transmitting businesses (authorized by state banking institutions), insured depository institutions (banks), and entities the bill defines as “national limited payment stablecoin issuers.” National limited payment stablecoin issuers would be licensed by and subject to the standards established by the Office of the Comptroller of the Currency.


Payment stablecoin issuers will be required to 1) publicly disclose the backing of the stablecoin on a monthly basis 2) publicly disclose policies for redeeming the stablecoin for fiat 3) publicly disclose the results of a quarterly audit; and 4) attest that the assets backing the stablecoin do not diverge from what has been disclosed.


The issuers would be required to back the stablecoin with asset reserves “that are cash and cash equivalents or level 1 high-quality liquid assets denominated in United States dollars.” Level 1 assets generally include cash, central bank reserves, and certain marketable securities backed by sovereigns and central banks. Importantly, the bill specifically exempts stablecoin issuers from regulation under the securities laws.


The bill also includes important privacy protections for users of stablecoins. These protections ensure that the Secretary of the Treasury may not collect nonpublic information about stablecoin transactions without a warrant, unless the information has been voluntarily provided by the customer to a third party to be held by that third party for a legitimate business purpose. The second clause is in line with restrictions on warrantless collection of cell-phone data outlined in the Supreme Court decision Carpenter v. United States.


What does this mean?


This is an incredibly well-designed bill that would provide regulatory clarity to the custodial stablecoin industry. It will also ensure that all consumers are able to verify that stablecoins are sufficiently backed by off-chain assets. Stablecoins already play a prominent role in DeFi markets. This bill will allow more parties to issue stablecoins safely, successfully and effectively.


It is important to note that this bill only covers stablecoins that are directly convertible to fiat currencies. That means that DeFi-native stablecoins like DAI are not covered by the bill. The disclosure and reporting requirements necessary for a stablecoin backed off-chain are significantly different from those backed by verifiable on chain assets.


Risks associated with custodial stablecoins are often cited as one of the key risks in the DeFi ecosystem. The sooner those risks are addressed, the better.