The TLDR on the Clarity for Payment Stablecoins Act of 2023

US proposed legislation aims to provide regulatory clarity and oversight for stablecoins, impacting the future of payments and the Web3 ecosystem.

9 min readJul 30, 2023

“US Congress in the Age of Stablecoins” by Midjourney AI (Credit: .blackcrypto)

The Clarity for Payment Stablecoins Act of 2023 is a proposed legislation in the United States that aims to provide regulatory clarity and oversight for stablecoins, particularly those used for payment purposes. Stablecoins are cryptocurrencies that are designed to maintain a stable value by pegging their price to a specific asset, such as a fiat currency or a basket of assets. These digital currencies have gained significant popularity in recent years, with the potential to revolutionize the way payments are made and settled.

The main proposals of the Clarity for Payment Stablecoins Act include:

Definition and Regulation of Stablecoins. The act seeks to define stablecoins and establish a clear regulatory framework for their issuance and operation. It aims to classify stablecoins as a new type of financial instrument and subject them to appropriate regulatory oversight.
Licensing and Supervision of Stablecoin Issuers. The act proposes that stablecoin issuers obtain licenses from state regulators, such as the Office of the Comptroller of the Currency (OCC) or the Federal Reserve, to ensure compliance with relevant laws and regulations. It also calls for ongoing supervision and reporting requirements for stablecoin issuers.
Reserve Requirements. The act requires stablecoin issuers to maintain reserves equal to the value of the stablecoins in circulation. These reserves should be held in a manner that ensures the stability and liquidity of the stablecoin.
Consumer Protection. The act aims to protect consumers by requiring stablecoin issuers to disclose relevant information about the stablecoin, including its underlying assets, reserve holdings, and any potential risks. It also establishes mechanisms for resolving disputes and addressing consumer complaints.
Anti-Money Laundering (AML) and Know Your Customer (KYC) Requirements. The act includes provisions to prevent money laundering and terrorist financing by requiring stablecoin issuers to implement robust AML and KYC procedures. This would involve verifying the identity of users and monitoring transactions for suspicious activities.
Coordination with International Standards. The act emphasizes the need for coordination with international regulatory bodies and standards to ensure consistency and interoperability in the global stablecoin ecosystem.

Current Legislative Journey

The Clarity for Payment Stablecoins Act of 2023 has made significant progress in the legislative process but still faces challenges and opposition. The bill was voted out of the House Financial Services Committee with a 34–16 vote, indicating bipartisan support for the proposed legislation. However, the advancement of the bill was marred by partisan disagreements, with Democrats expressing concerns about the bill’s provisions and the lack of compromise from the White House.

Key supporters of the bill argue that it is necessary to provide regulatory clarity and oversight for stablecoins, which currently operate in a regulatory gray area. They believe that the lack of clear regulations poses risks to consumers and the financial system as a whole. Supporters also argue that the bill will help foster innovation and competition in the stablecoin market by establishing a level playing field for all participants.

Opponents of the bill, including the North American Securities Administrators Association (NASAA), argue that the proposed legislation would undermine the authority of state regulators and create an uneven playing field. They believe that stablecoins should be subject to the same regulatory framework as money market funds (MMFs) and should not be exempt from federal securities regulation. Opponents also express concerns about the potential risks and systemic implications of stablecoins, particularly in the event of a market downturn or a run on stablecoin reserves.

The outcome of the Clarity for Payment Stablecoins Act remains uncertain, as it would need to pass the House, Senate, and receive a presidential signature to become law. The bill’s progress will likely depend on the ability of lawmakers to address the concerns and objections raised by opponents and reach a consensus on the regulatory framework for stablecoins.

Deep-Dive Into Impact on Stablecoins

The Clarity for Payment Stablecoins Act of 2023, if enacted, would have significant implications for the future of stablecoins in the United States and globally. Here are some potential effects of the proposed legislation:

Increased Regulatory Clarity. One of the main objectives of the bill is to provide regulatory clarity for stablecoins. By defining stablecoins as a new type of financial instrument and subjecting them to specific regulations, the act aims to reduce uncertainty and promote transparency in the stablecoin market. This could attract more participants, including institutional investors, who may have been hesitant to enter the market due to regulatory concerns.
Enhanced Investor Protection. The act includes provisions to protect consumers and investors by requiring stablecoin issuers to disclose relevant information, implement AML and KYC procedures, and establish mechanisms for dispute resolution. These measures could help build trust and confidence in stablecoins, making them more attractive to a broader range of investors.
Increased Stability and Liquidity. The act’s requirement for stablecoin issuers to maintain reserves equal to the value of the stablecoins in circulation aims to ensure stability and liquidity. This could help mitigate the risk of a stablecoin losing its peg to the underlying asset and provide reassurance to users that their stablecoin holdings can be redeemed at any time.
Potential Impact on Stablecoin Issuers. The proposed licensing and supervision requirements could impose additional compliance costs and administrative burdens on stablecoin issuers. Smaller issuers may find it challenging to meet these requirements, potentially leading to consolidation in the market. However, larger issuers with the resources to comply with the regulations could benefit from increased market confidence and a more level playing field.
Impact on Stablecoin Innovation. The regulatory framework established by the act could influence the development and innovation of stablecoins. While the act aims to foster innovation by providing clarity and oversight, it could also impose certain limitations and requirements that may hinder the introduction of new features or business models. Balancing innovation and regulatory compliance will be a key challenge for stablecoin issuers.
Global Implications. The Clarity for Payment Stablecoins Act could have implications beyond the United States, as stablecoin issuers and users operate in a global market. The act’s provisions, particularly those related to AML and KYC requirements, could set a precedent for other jurisdictions considering stablecoin regulation. This could lead to increased harmonization and coordination among regulators globally.

Implications for DeFi and Broader Web3 Ecosystem

The Clarity for Payment Stablecoins Act could have significant implications for the legality and operation of decentralized finance (DeFi) platforms and the broader Web3 ecosystem. Here are some potential effects:

Regulatory Challenges for DeFi Platforms. DeFi platforms, which operate on blockchain networks and provide decentralized financial services, could face regulatory challenges under the proposed legislation. The act’s requirements for licensing, supervision, and AML/KYC procedures may not align with the decentralized nature of DeFi platforms, which often operate without intermediaries. This could create compliance challenges and potentially limit the growth and innovation of DeFi.
Impact on Stablecoin Liquidity Providers. DeFi platforms often rely on stablecoins as a key source of liquidity. The regulatory framework established by the act could impose additional requirements and compliance costs on liquidity providers, potentially reducing their participation in the market. This could impact the availability and cost of liquidity on DeFi platforms, affecting the overall efficiency and functionality of the ecosystem.
Potential Ripple Effects on Other Web3 Applications. The Clarity for Payment Stablecoins Act’s impact on stablecoins and DeFi could have broader ripple effects on other Web3 applications and services. Stablecoins are often used as a medium of exchange and a unit of account in various Web3 applications, such as decentralized exchanges, lending platforms, and decentralized autonomous organizations (DAOs). Any restrictions or limitations on stablecoin issuance and usage could impact the functionality and adoption of these applications.
Need for Regulatory Innovation. The proposed legislation highlights the need for regulatory innovation to accommodate the unique characteristics of DeFi and the broader Web3 ecosystem. Regulators will need to strike a balance between protecting investors and consumers and fostering innovation and competition. This may require collaboration between regulators, industry participants, and other stakeholders to develop flexible and adaptive regulatory frameworks that can keep pace with the rapidly evolving Web3 landscape.

Strategic Considerations for Web3 Players

Based on the potential implications of the Clarity for Payment Stablecoins Act, different stakeholders in the Web3 industry, including developers, investors, and users, should consider the following strategic responses:

Developers. Web3 developers should closely monitor the progress of the proposed legislation and actively engage with regulators to ensure that their concerns and perspectives are taken into account. They should also explore alternative approaches, such as decentralized governance models and self-regulatory initiatives, to address regulatory challenges and promote responsible innovation.
Investors. Investors in the Web3 industry should conduct thorough due diligence and risk assessments before making investment decisions. They should consider the potential impact of stablecoin regulation on their investment portfolios and diversify their holdings to mitigate risks. Investors should also stay informed about the evolving regulatory landscape and engage with policymakers to advocate for balanced and innovation-friendly regulations.
Users. Web3 users should be aware of the potential regulatory risks and uncertainties associated with stablecoins and DeFi platforms. They should exercise caution and conduct their own research before using these services. Users should also consider diversifying their holdings across different platforms and assets to mitigate the risk of regulatory changes impacting their investments.
Collaboration and Advocacy. Web3 industry participants, including developers, investors, and users, should collaborate and advocate for regulatory frameworks that balance innovation and consumer protection. They should engage with policymakers, industry associations, and other stakeholders to provide input and feedback on proposed regulations. By working together, industry participants can help shape the regulatory landscape in a way that supports responsible innovation and the long-term growth of the Web3 ecosystem.

Forecasting the Future

The Clarity for Payment Stablecoins Act of 2023 is part of a broader trend towards increased regulatory scrutiny of stablecoins and the broader cryptocurrency ecosystem. As stablecoins and DeFi platforms continue to gain popularity and pose potential risks to financial stability and consumer protection, regulators are likely to continue exploring and implementing regulatory measures.

The outcome of the proposed legislation will depend on various factors, including the ability of lawmakers to address the concerns and objections raised by opponents, as well as the broader political and economic context. It is possible that the bill may undergo further revisions and amendments before it becomes law, reflecting the need for compromise and consensus-building among stakeholders.

Looking ahead, it is likely that stablecoin regulation will continue to evolve, both in the United States and globally. Regulators will need to strike a balance between fostering innovation and protecting consumers and investors. This will require ongoing collaboration and dialogue between regulators, industry participants, and other stakeholders to develop regulatory frameworks that are adaptable, technology-neutral, and supportive of responsible innovation.

In conclusion, the Clarity for Payment Stablecoins Act of 2023 represents a significant step towards the regulation of stablecoins in the United States. The proposed legislation seeks to provide regulatory clarity and oversight for stablecoins, while also addressing concerns related to investor protection, financial stability, and money laundering. The act’s potential implications for the Web3 industry, including stablecoin issuers, DeFi platforms, and other Web3 applications, highlight the need for collaboration, innovation, and responsible engagement with regulators. By working together, industry participants can help shape the regulatory landscape in a way that supports the long-term growth and sustainability of the Web3 ecosystem.

About the Author

Robby Greenfield has over a decade of experience in blockchain and financial engineering. He has served as an industry leader in deploying decentralized applications in emerging markets, such as Sub-Saharan Africa, the Asia Pacific, and LATAM. Robby has worked with renowned blockchain firm ConsenSys, co-deploying innovative solutions and collaborating with organizations like the U.S. State Department, the World Bank, the UNOPS, Oxfam International, and Care International. Currently, he is the CEO of Umoja Labs, a Coinbase and Mercy Corps-backed Web3 fintech providing payments and credit infrastructure across Sub-Saharan Africa.