How Does the U.S. Government Regulate Stablecoins? A Study Based on the FIT21 Act and State Legislation
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How Does the U.S. Government Regulate Stablecoins? A Study Based on the FIT21 Act and State Legislation
Currently, there is no national comprehensive regulatory framework for stablecoins.
Navigating Web3 tides with focused insightsAuthor: Athena
1. Definition of Stablecoins
1.1. Academic Definition
The Bank for International Settlements (BIS) defines digital stablecoins as encrypted digital currencies designed to maintain a stable value relative to a specific asset or basket of assets. Stablecoins are token-based; their validity is verified based on the token itself rather than the identity of a counterparty, i.e., account-based payments.
There are two mechanisms for price stability in digital stablecoins: one based on algorithms and another backed by collateral. Algorithmic stablecoins have no underlying assets as backing but rely solely on algorithms that adjust supply and demand according to the current market price of the stablecoin to maintain exchange rate stability—for example, Basis adjusts supply to target $1. The second type is collateral-backed digital stablecoins, where fiat currencies, gold, digital assets, or other assets serve as collateral. This mechanism offers greater certainty compared to algorithmic models.
1.2. U.S. Regulatory Definition (H.R.8827 – Stablecoin Classification and Regulation Act of 2020)
(1) The term “stablecoin” means any cryptocurrency or other privately issued digital financial instrument that:
(A) is directly or indirectly distributed to investors, financial institutions, or the public;
(B) is
(i) denominated in or pegged to the U.S. dollar; or
(ii) denominated in or pegged to the currency of another country or state; and
(C) at issuance
(i) has a fixed nominal redemption value; or
(ii) intends to establish among the public a reasonable expectation or belief that the instrument will retain a stable nominal redemption value, effectively fixing such value; or
(iii) regardless of intent, operates in a way that leads the public reasonably to expect or believe the instrument will retain a stable nominal redemption value, thereby making it practically fixed.
(2) Nominal Redemption Value
(A) In general, for purposes of stablecoins, “nominal redemption value” refers to the value at which the stablecoin can be redeemed on demand into U.S. dollars or the functional equivalent of any foreign or state currency at the time of issuance, or otherwise accepted for payment or settlement of debts denominated in U.S. dollars or any other national or state currency.
(B) Treatment of instruments pegged to the U.S. dollar: For purposes of subparagraph (A), the value of a stablecoin pegged to the U.S. dollar or its functional equivalent, redeemable on demand at issuance, shall be calculated using the express or implied exchange rate at the time of issuance.
(C) Treatment of instruments denominated in or pegged to another national or state currency: For purposes of subparagraph (A), the value of a stablecoin denominated in or pegged to another national or state currency or its functional equivalent, redeemable on demand into U.S. dollars at issuance, shall be calculated using the express or implied exchange rate at the time of issuance.
(D) Definition of functional currency equivalent:
(i) Deposits as defined in section 3 of the Federal Deposit Insurance Act;
(ii) Electronic money and remittance balances;
(iii) Other stablecoins;
(iv) Any other financial instrument issued for use as currency, payment, or settlement of obligations denominated in U.S. dollars or any other national or state currency.
According to the H.R.8827 definition, a stablecoin refers to any cryptocurrency or privately issued digital financial instrument that is directly or indirectly distributed to the public, pegged to or denominated in the U.S. dollar or another national/state currency, and possesses a fixed nominal redemption value at issuance—or whose design and effect lead the public to reasonably believe its redemption value is stable.
2. Federal-Level Regulatory Framework
Currently, there is no comprehensive nationwide regulatory framework specifically targeting stablecoins. Historically, regulation surrounding stablecoins has been characterized by uncertainty and confusion.
One key feature of U.S. stablecoin regulation is the ambiguity over which federal agency holds authority over these products. Over recent years, this has been a persistent issue within the crypto market—particularly between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC)—regarding whether certain technologies should be regulated as securities, commodities, or both. SEC Chair Gary Gensler stated that crypto products “fall under securities laws and must operate within our securities regime,” while the CFTC declared that “Bitcoin and other virtual currencies” qualify as commodities. This jurisdictional battle has extended to stablecoins, with Gensler asserting that many stablecoins resemble money market mutual funds and therefore may fall under SEC oversight.
Both the SEC and CFTC agree that stablecoins require regulation to minimize risks to the financial system. The CFTC has gone further by taking enforcement actions against stablecoin issuers for violations of the Commodity Exchange Act (CEA). For instance, the CFTC reached a settlement with the company behind Tether, alleging misrepresentations regarding reserves backing the stablecoin. The order required them to pay a $41 million penalty and cease future CEA violations. Additionally, the CFTC rejected any attempt by the SEC to claim exclusive jurisdiction and asserted in a separate lawsuit against Binance that BUSD qualifies as a commodity.
Recently, a proposed bill—the Financial Innovation and Technology for the 21st Century Act (“FIT 21”)—has provided guidance for future stablecoin regulation. The bill passed the House of Representatives and awaits Senate vote.
The bill clearly divides regulatory responsibilities between the SEC and CFTC: centralized stablecoins fall under SEC jurisdiction, while decentralized stablecoins are subject to CFTC oversight.
Centralized cryptocurrencies are considered “securities” because they often involve investor expectations about management and operations by a central entity, aligning with traditional definitions of securities. Under the Howey Test, a transaction may be deemed a security if it involves an investment of money in a common enterprise with an expectation of profits derived solely from the efforts of others. Centralized digital assets typically involve a central organization or issuer exhibiting characteristics similar to traditional securities—such as reliance on the issuer’s reputation and profit expectations. Therefore, the SEC, as the regulator of securities markets, oversees these centralized digital assets.
Decentralized cryptocurrencies are classified as “commodities” because they do not depend on centralized control or operation but instead rely on decentralized technologies like blockchain, maintained collectively by network participants. Their value primarily depends on market supply and demand rather than the reputation or effort of a single centralized entity. Decentralized cryptos usually lack a central issuer and operate via distributed ledger technology (e.g., blockchain), governed collectively by network participants. These assets resemble commodities because their value stems from market dynamics rather than issuer credibility. Thus, the CFTC, as the regulator of commodity markets, oversees these decentralized digital assets.
The bill defines decentralization specifically: aside from other requirements, no individual holds unilateral control over the blockchain or its usage, and no issuer or affiliate controls 20% or more of the digital asset or voting rights. If enacted, this would significantly clarify stablecoin regulation.
2.1. Potential SEC Regulatory Direction
On April 4, 2022, SEC Chair Gary Gensler spoke at the University of Pennsylvania’s Capital Markets Association Annual Conference, raising three policy issues related to stablecoins. First, he noted that stablecoins raise public policy concerns involving financial stability and monetary policy—issues already addressed in SEC regulations concerning money market funds and other securities. These include how stablecoins are backed and the potential systemic impact if a stablecoin loses its peg or an issuer fails. Second, Gensler highlighted concerns about stablecoins being used for illicit activities. Specifically, he expressed concern that stablecoins might facilitate evasion of public policy goals tied to traditional banking and finance systems—such as anti-money laundering, tax compliance, and sanctions enforcement. Third, he raised investor protection issues that could benefit from enhanced oversight. Gensler voiced concern about potential conflicts of interest and market integrity issues arising from stablecoins held on crypto trading and lending platforms, given the counterparty relationship between customers and platforms.
2.2. Potential CFTC Regulatory Direction
At a Senate hearing on March 8, 2023, CFTC Chair Rostin Behnam reiterated that stablecoins and Ether are commodities and should fall under CFTC jurisdiction.
During a Senate Agriculture Committee hearing, Senator Kirsten Gillibrand questioned Behnam about differing views between the CFTC and SEC following the CFTC’s 2021 settlement with Tether. Behnam responded, “Despite ongoing debates around regulatory frameworks, I believe stablecoins remain commodities.” He added, “Our enforcement team and the commission are clear—Tether is a commodity.” The CFTC previously asserted that certain digital assets—including Ethereum, Bitcoin, and Tether—are commodities, notably in its mid-December 2022 lawsuit against FTX founder Sam Bankman-Fried.
2.3. Potential Treasury Department Regulatory Direction
In a September 2022 report, the U.S. Treasury noted that the impacts of stablecoins and their payment systems may be “difficult to predict.” The collapse of TerraUSD drew the attention of Treasury Secretary Janet Yellen, who quickly began discussing the need for stablecoin regulation. Yellen emphasized the necessity of a regulatory framework to mitigate stablecoin-related risks.
Alex McDougall, CEO of Stablecorp, stated: “We’ve allowed experimental projects like TerraUSD to dominate, growing far beyond their inherent risk profiles.” For various reasons, Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced a bipartisan bill in June called the Responsible Financial Innovation Act (RFIA). Among other provisions, the bill aims to regulate “payment stablecoins.” Fedenia explained: “It includes tax requirements for various digital assets and imposes stricter rules on stablecoins—according to Gillibrand, this would prevent something like TerraUSD from being issued again.” The bill also contains cybersecurity provisions, proposes the creation of a self-regulatory organization, and includes disclosure requirements.
In July 2023, an updated version of the bill was reintroduced in the Senate. The revised bill explicitly states that stablecoins will be overseen by state and federal banking regulators, primarily issued by depository institutions, and are neither commodities nor securities. However, it provides a pathway for entities seeking only to issue stablecoins to obtain a limited charter from the Office of the Comptroller of the Currency (OCC). Notably, the new bill classifies algorithmic stablecoins as hybrid instruments under CFTC supervision. Furthermore, issuers of algorithmic stablecoins would be prohibited from labeling these products as “stablecoins.”
Stablecoin legislation is also advancing in the House. Led by Representative Patrick McHenry, House Republicans introduced the Clarity for Payment Stablecoins Act, which recently passed the House Financial Services Committee largely along party lines. Non-bank issuers would face bank-like requirements, including capital, liquidity, and risk management standards. The bill excludes digital assets created by banks to represent deposits and imposes a two-year moratorium on new algorithmic stablecoins (termed “endogenously collateralized stablecoins”), directing the Treasury to conduct further study.
3. State-Level Regulatory Policies and Legislative Developments
Amid federal uncertainty between the SEC and CFTC, various state-level regulatory frameworks for stablecoin issuers have emerged. Currently, many states regulate virtual currency activities through money transmission laws, though few offer specific guidance on stablecoins.
3.1. Texas Regulatory Policy (Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act)
Texas law considers stablecoins backed by sovereign currencies subject to its money transmission regulations. Under Texas law, stablecoins “may be viewed as claims convertible into money, thus falling within the definition of money or monetary value.”
Money Transmission
Stablecoins pegged to sovereign currencies may be seen as claims redeemable for currency and thus fall under the definition of money or monetary value per Section 151.301(b)(3) of the Texas Finance Code. If a stablecoin is backed by reserves in sovereign currency and holders possess redemption rights, then holders have a claim on that sovereign currency, as the issuer is obligated to deliver it upon request in exchange for the stablecoin.
Policy Statement
Under the Money Services Act, sovereign-backed stablecoins may constitute money or monetary value. Therefore, receiving stablecoins in exchange for a promise to transmit or deliver them later or elsewhere may qualify as money transmission. Licensing determinations will depend on whether the stablecoin grants holders redemption rights into sovereign currency, creating a claim convertible into money or monetary value—whether explicitly granted or implicitly understood.
3.2. Nebraska Regulatory Policy (Nebraska Revised Statute 8-3024)
The statute specifies that digital asset custodians may engage in one or more of the following digital asset business activities:
(1) Providing digital asset and cryptocurrency custody services. Such custody services may not be offered unless the digital asset or cryptocurrency:
(a) Has been publicly traded for more than six months prior to the provision of custody services; or
(b) Was created or issued by any bank, savings bank, savings and loan association, or building and loan association organized under state law or U.S. federal law and operating in the state;
(2) Issuing stablecoins and holding deposits in a Federal Deposit Insurance Corporation (FDIC)-insured financial institution—with its main charter office located in the state, any branch in the state, or any branch of a financial institution that previously had its main charter office in the state—as reserves for the stablecoin; and
(3) Conducting payment activities using independent node validation networks and stablecoins.
3.3. Wyoming Stable Token Act
Bill Summary:
-
Each stable token represents one virtual dollar.
-
A stable token is redeemable on demand for one U.S. dollar (unless short-term U.S. Treasury rates fall below zero or the value of assets held in the trust account drops below $1 per token).
-
The full nominal value of all circulating tokens will be held 100% in a newly established Wyoming Stable Token Trust Account (though no fiduciary duty arises between the state and token holders).
-
Trust funds will be invested exclusively in low-risk, short-term U.S. Treasury securities.
-
Any investment returns exceeding 102% of the circulating token value will go into the Wyoming Stable Token Administration Account to cover operational costs and fund other state initiatives.
-
The bill establishes the Wyoming Stable Token Commission responsible for issuing and overseeing the program.
-
The bill requires the commission “to make a good faith effort to issue at least one Wyoming stable token by December 31, 2023.” The state treasury will provide $500,000 in seed funding, expected to be repaid from projected interest income.
3.4. New York Stablecoin Regulation (DFS Guidance)
On June 8, 2022, the New York Department of Financial Services (DFS) issued the “Guidance on Dollar-Supported Stablecoin Issuance” (“DFS Guidance”), outlining general requirements for DFS-regulated issuers launching dollar-supported stablecoins.
Regarding redeemability, the DFS Guidance requires, among other things, that stablecoin issuers adopt “clear, conspicuous redemption policies pre-approved in writing by DFS,” granting holders the right to timely redemption at par value. “Timely” redemption is defined as fulfillment within two business days of the redemption request, although exceptions may apply if DFS determines that immediate redemption could jeopardize reserve asset coverage or orderly liquidation.
With respect to reserves, the DFS Guidance mandates that stablecoins must be fully backed by reserve assets, which may only include: (1) short-term U.S. Treasury securities; (2) reverse repurchase agreements with approved counterparties; (3) government money market funds, subject to DFS-approved caps; and (4) deposit accounts at U.S. state or federally chartered depository institutions, subject to DFS-approved limits on allowable amounts per institution. DFS also expects issuers to manage liquidity risk so that the market value of reserve assets equals or exceeds the total value of outstanding stablecoin units at the end of each business day.
Regarding attestation, the DFS Guidance requires issuers to publish monthly reports to DFS and the public, audited by an independent U.S.-licensed certified public accountant (CPA), detailing: (1) the value and composition of reserves; (2) the number of outstanding stablecoin units; (3) whether reserves are sufficient to fully back outstanding stablecoins; and (4) compliance with all DFS reserve conditions. The Guidance also requires annual submission to DFS of a report validating management’s assertions regarding the effectiveness of internal controls, structures, and procedures related to monthly reporting, due within 120 days after the covered period, though issuers are not required to make this report public.
4. Key Legal Case: Terraform Labs – Crypto Asset Securities Fraud
LUNA is the governance token of the Terra blockchain network, a delegated proof-of-stake blockchain designed to issue and maintain UST, a stablecoin intended to trade precisely at $1. To incentivize long-term holding and use of UST, Terraform Labs (the creator of the Terra blockchain) launched Anchor, a purportedly low-risk, high-yield savings protocol offering a guaranteed 20% annual yield on UST deposits.
To maintain UST’s peg, the protocol employed a mechanism known as “seigniorage,” theoretically encouraging arbitrage trades that exert upward or downward price pressure. Since UST could always be swapped exactly for $1 worth of LUNA (and vice versa) at the protocol level—regardless of UST’s market price—arbitrageurs were incentivized to buy UST when it traded below $1 and sell when above $1. This mechanism functioned until it failed. Once UST broke its peg in May 2022, a bank run ensued as users rushed to exchange UST for LUNA, further destabilizing the peg and triggering a death spiral that drove LUNA’s price to zero.
On February 16, 2023, the SEC sued Terraform Labs and its founder Do Kwon, alleging unregistered securities offerings of UST and LUNA. (Note: At the time, no definitive regulatory policy existed; the SEC treated both UST and LUNA as securities. Had this case occurred after FIT 21’s passage, LUNA—as an algorithmic stablecoin—would likely fall under CFTC jurisdiction.) On July 31, 2023, the district court denied Terraform Labs’ and Kwon’s motion to dismiss, ruling that their marketing of the Anchor protocol as a revenue-generating tool constituted an investment contract and thus a security. While the court found that BUSD and similar stablecoins alone are not securities—since fixed-value assets lack “reasonable profit expectations”—Terra’s promotion and sale of stock derivatives (via Mirror Protocol) and interest-bearing products (via Anchor) in connection with UST deposits amounted to unregistered securities offerings.
5. Conclusion
This article thoroughly examines the U.S. regulatory framework and definitions for stablecoins. According to the Responsible Financial Innovation Act (RFIA) and the Clarity for Payment Stablecoins Act, stablecoins are now more clearly defined: any cryptocurrency or privately issued digital financial instrument pegged to the U.S. dollar or other legal tender and possessing a fixed nominal redemption value. These bills require stablecoin issuers to meet specific capital, liquidity, and risk management standards and to obtain charters from the Office of the Comptroller of the Currency (OCC). Federal agencies such as the SEC and CFTC continue to assert jurisdiction over stablecoins, each promoting distinct regulatory approaches. The advancement of FIT 21 brings increasing clarity to the future of stablecoin regulation. Additionally, this article explores diverse state-level regulatory policies and legislative developments, including detailed implementation frameworks in Wyoming and New York.
FIT 21 and sustained attention from federal agencies are accelerating the maturation of the U.S. stablecoin regulatory landscape. Going forward, the U.S. is expected to strengthen regulatory measures for stablecoins to ensure their stability and safety within the financial system. Regulators are likely to continue refining the legal framework to address evolving market demands and technological innovation.
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