Crypto’s New Villain: Meet the Legal Scholar Behind the STABLE Act

In letter

  • Rohan Gray worked on the STABLE Act, which required stable coin issuers to obtain a banking license.
  • The law has been criticized by many in the cryptocurrency industry.
  • Gray told Decrypt that stable coin issuers like banks need to be regulated as they pose a systemic risk.

Rohan Gray, the law scholar who helped design the project Controversial Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act with Congressman Rashida Tlaib wants you to know he cares about anonymous digital cash – but he’s not going to give a free pass to those he believes pose a systemic risk to the U.S. monetary system.

Gray, an assistant professor at Willamette University College of Law, has worked with Rep. Tlaib to develop key financial oversight reform bills, including the Public Banking Act, which was introduced in late October, and the Automatic Communities Act, a COVID -Emergency cash relief plan that instructed the Treasury Department to invest in an open source digital wallet that can process anonymous transactions.

Their most recent collaboration is the STABLE Act. Among other things, the proposed legislation would require issuers of stablecoins – digital assets designed to hold their value – to receive a banking charter as well as approval from the Federal Reserve and FDIC. Stablecoin issuers would also need to be FDIC insured or have sufficient reserves.

However, if the law were to be passed, it would have the consequence (unintentional or unintentional) of bringing criminal accountability to those who help validate and maintain the public, decentralized networks such as Ethereum that operate stablecoins. This includes node operators.

This affected Peter Van Valkenburgh, Research Director of the Crypto Advocacy Group Coin Center.

While the bill doesn’t criminalize wise contracts, he does wroteInstead, it’s illegal to run the software – the Ethereum network – that may process smart contracts for stable coins like Dai. “By targeting stablecoins, this bill would also destroy the larger Ethereum network and any other public blockchain with smart-contract-enabled functions as necessary collateral damage,” he said.

Said Gray Decrypt in a telephone interview that the bill is not about tracking decentralized networks like Bitcoin or ether. In fact, it shares some of the same privacy-focused goals as these open networks – but stable coins are different, he said.

“We think it’s more important to maintain anonymous decentralized privacy when it comes to public money than it is to forms of private money,” he said. “The idea that we don’t care about privacy is bullshit … It matters so much to me that I think the only fight worthwhile is for public money, and that all of this DeFi stuff is just a mistake in terms of attention and focus. “

And Gray insisted that his bigger message concerns the systemic risk that stablecoins pose. As they got bigger, crypto companies don’t necessarily differ from the big financial institutions that are trying to oust them. The more money is involved, the more the risk is transferred from individual consumers and transferred to the larger financial system.

“This is the difficult lesson from banking history: all types of actors have developed business models or reasons why they believe that their particular approach to asset collateralization and risk or whatever is unique or different and therefore does not pose a systemic risk The way others do, and historically it hasn’t, ”said Gray.

“Every time it goes, ‘Oh, deposits are different from banknotes. Banknotes are different from checks. Checks are different from mobile money. Mobile money is different from money market funds. ‘The recurring pattern is that actors who do not understand their own story and do not understand the systemic impact of their activities downplay the risks of their activities until there is a moment of crisis, at that moment they come up with a handout in which ask them for public assistance on behalf of the consumer interest. ”

In other words, a rescue operation. “The way you are going about this,” said Gray, “is by getting government support and recognizing that acquisition deposits that act as money are an extension of the public monetary system and must be regulated as such.”

But are not stablecoins indeed different?

Not after Gray.

“What stablecoins are promising, a deposit promises. A deposit is like this: you put your money somewhere and can get it out again when needed. You can then use it to make payments as if it were money, ”he said. “You can think of all sorts of fancy ways to back it up with an algorithm that adjusts the amount of a balance and blah blah blah. That’s all on the assets side that enforces the commitment. The commitment itself is very simple. “

And, according to Gray, someone is always in control when something goes wrong – ideally, regulation helps ensure that it is the group that holds responsibility.

“I believe … that decentralized networks are not a crowd where no one is liable – that there are actors that you can point out who operate and regulate and make decisions about important parts of that infrastructure,” he said.

But here too, interest groups like the Coin Center are getting nervous. That’s because decentralized financing, the innovative (mostly) Ethereum-based protocols, are increasingly interwoven with stablecoins.

“When you tell people, ‘You can’t validate blocks with Dai [stablecoin] Transactions in them, “and the Ethereum client is an unauthorized client that anyone can use to write any kind of software to be validated across the network. Then you will cause everyone to be criminally at fault in validating this blockchain”, said Van Valkenburgh Decrypt.

On his blog, he wrote: “Let’s not pretend the bill simply says that only banks should support consumer-held dollar bills when it actually involves the bulk search and seizure of computers running free and open software in American households becomes.”

Gray said that was an exaggeration – from his point of view, the law as it was written resembled fake laws.

“Counterfeiting is counterfeiting money. The issue of unlicensed bank deposits is the issue of unlicensed bank deposits. This is different from saying that once you have a law like this in place, the next step is to have people thrown out of their beds, ”he said. “What is going to happen is that there will be pressure on the industry and the big players, and then the whole industry will move forward and people will not be able to be at risk for it.”

These big players include Facebook’s Diem (née Libra), name-checked in the bill, as well as others who “receive fees through the OCC for special payments that are specifically designed to increase their oversight of the Fed and US regulators. Federal Reserve to decrease FDIC. “

But Van Valkenburgh did tell Decrypt that the fake metaphor does not pursue. “Counterfeiting is always illegal. Running an Ethereum node is only illegal if it passes that bill if the block contains a Dai transaction that is not even your own Dai transaction, but that of someone else you are validating. ”

He also said, “Counterfeiting is different because it is actually something that people shouldn’t be doing. It is morally wrong to try to pass $ 1 off as something that is not $ 1. There is nothing morally wrong with participating in a computer network. Hence, criminalizing this activity as you are in order to criminalize counterfeiting is totally inappropriate. “

Regardless, this bill would in some ways give cryptocurrency advocates a clearer sense of where they stand – something industry players have been asking for. Just not in the way they’d hoped.

“The idea is that even an instrument issued on a decentralized network,” said Gray, “if that instrument tries to walk and speak like money and therefore has systemic risk, it should be regulated like money . “