On April 8, the acting comptroller of the currency, Michael J. Hsu, discussed many aspects of stablecoins (we previously discussed the President’s Working Group report on stablecoins and Hsu’s comments here). In his speech at the Georgetown University Law Center, Hsu remarked that stablecoins are a “hot topic” among policymakers and posed three considerations that speak to the architecture of stablecoins.

  • Stability. Hsu asked whether there should be a requirement for all stablecoin issuers to comply with a fixed set of safety and soundness-like requirements (as is the case with banks), or to let them pick from a wider set of licensing options, each with distinct risk-reward tradeoffs. Hsu generalized that the wider the variability across stablecoins, the higher the risk it would be to hold the stablecoin.
  • Interoperability. Hsu explains that there are two levels of interoperability to consider. First is interoperability within a stablecoin across blockchains. Different blockchains are not interoperable. For example, a user is not able to buy something on one blockchain with a stablecoin native to another blockchain. Second is interoperability across stablecoins. Interoperability between stablecoins would help ensure “openness and inclusion” and “facilitate broader use of the U.S. dollar—not a particular corporate-backed stablecoin—as the base currency for trade and finance in a blockchain-based digital future.”
  • Separability. Hsu explained that blockchain-based money holds the promise of being “always on,” irreversible, programmable, and settling in real-time. However, these advantages present unique risks because occasionally a financial transaction needs to be reversed (for example, a refund). To mitigate these unique risks, Hsu suggests that blockchain-based activities could be conducted in a standalone bank or a chartered entity that is separate from the insured depository institution subsidiary and other regulated affiliates.

Putting It Into Practice: These statements should be viewed in light of the recent push to regulate the use and transmission of virtual currencies (we previously discussed this recent trend in earlier Consumer Finance & FinTech Blog posts here, here, here, and here). The regulatory frameworks that apply to stablecoin issuers and service providers are viewed by many to be inconsistent, creating opportunities for regulatory arbitrage and uncertainty among stablecoin users. Institutions engaging in stablecoins issuance or custody should be aware of the unique legal issues that are presented.