A bill focused on stablecoins has been introduced in Congress

It intends to cover “managed” stablecoins, but it probably covers them all

The bill, titled the “Managed Stablecoins are Securities Act of 2019” (H.R. 5197), was introduced last week. It defines the term “managed stablecoins” and makes clear that products meeting the definition are securities. If this bill were to pass as drafted, it would be an effective ban on such stablecoins because, as securities, they would only be able to trade on national securities exchanges, and not on cryptocurrency exchanges. So what is a “managed stablecoin”?

It seems likely that the authors of the bill intend the term to cover only stablecoins that have an issuer who plays an active managerial role in adjusting the composition of assets that back the coin and guarantee its stability. Most stablecoins, however, do not have this active management component; instead the issuer holds—one-to-one—dollars that back each stablecoin issued. For example, the issuers of the Paxos Standard hold dollars as a state-regulated trust company; they are bound by their New York State charter from doing anything with those dollars that could endanger their users who are their trustees. This kind of non-managed stablecoin should probably not be regulated as a security because its stability is not dependent on the efforts of a promoter. The asset represents a right in a trust, not a promise of profits from the issuer (the paradigmatic security).

Unfortunately, the current definition of “managed stablecoin” specified in H.R. 5197 inadvertently sweeps broadly and would almost certainly cover non-managed stablecoins as well as managed ones. That would be unfortunate, not only because it could inadvertently quash an innovative financial service, but also because it would likely lead Americans to use overseas-issued stablecoins that are potentially riskier than those issued by companies regulated in the US.

A simple solution would be to clarify the definition of “managed stablecoin” in the bill such that it includes active management of the stablecoin’s reserve as a necessary component. Congress should consider incorporating the term “investment discretion” into the definition. “Investment discretion” is already defined in the securities laws and reaches exactly the kind of active management role that seems a reasonable trigger for securities regulation.