Fed Proposes Stablecoin Rule With 48-Hour Liquidation Trigger

Fed Unveils Strict Stablecoin Regulation

The Federal Reserve’s proposed regulations for stablecoin issuers supervised by the central bank include a rapid response mechanism for reserve deficiencies. An issuer whose reserves dip below the value of outstanding tokens has 24 hours to notify the Fed and present a remediation plan. Unless full backing is restored or the Fed approves the plan, liquidation of reserves and token redemption must begin by 5 p.m. the next business day – a window the Fed estimates to be less than 48 hours in many cases.

The 392-page proposal also addresses the potential for on-chain visibility to exacerbate a run on a stablecoin. The Fed allows issuers to continue minting new tokens during the remediation period, reasoning that an abrupt halt to issuance would be readily apparent on the blockchain and could trigger further sell-offs. Comments on the proposal are open for 60 days following its publication in the Federal Register.

Reserve Requirements and Daily Calculations

The proposed rules mandate that reserve assets must equal or exceed outstanding tokens at all times. Issuers are required to record the fair value of their reserves at least daily, and those operating with minimal excess reserves may need to perform this calculation multiple times per day. The breach clock begins when liquidation commences, and the process itself can extend beyond the initial 48-hour window.

Once liquidation begins, minting is suspended, and redemption fees are prohibited. Outside of crisis conditions, issuers must honor redemption requests within two business days. The Fed illustrated the impact of redemptions with a hypothetical $100 million stablecoin backed by $95 million in reserves, demonstrating how successive redemptions erode the backing per remaining token.

Comparison to OCC Proposal and Lessons from SVB

The Federal Reserve’s approach differs from a proposal by the Office of the Comptroller of the Currency (OCC), which would allow issuers to halt net new issuance but delay mandatory liquidation for up to 15 business days. The Fed’s proposal is informed by analysis of the March 2023 collapse of Silicon Valley Bank, which revealed that restricting redemptions simply shifted trading volume to secondary markets, failing to contain the run on USDC. Circle reported that $3.3 billion of USDC reserves, roughly 8% of the total at the time, were held at the failed bank during the crisis.

Source: CryptoSlate