Key Highlights
- Consensys states that the OCC’s proposal might extend its yield bans to third parties that distribute them outside congressional intent.
- It calls for explicit protection for decentralized finance activities, noting that user-generated yields differ from issuer-provided returns.
- The company suggests using disclosures rather than imposing bans on multiple co-branded stablecoins issued by the same organization.
Consensys, a blockchain-based software company, has filed its official comments with the Department of the Treasury, responding to the proposed regulation of the Office of the Comptroller of the Currency (OCC) concerning the use of stablecoins based on the GENIUS Act. Although largely supportive of the proposals, Consensys identified several aspects of the legislation that might benefit from further refinement.
The GENIUS Act aims to create a comprehensive framework for stablecoin regulation in the United States, addressing financial stability, consumer protection, and payment system competitiveness. However, Consensys warned that certain provisions could have unintended consequences.
Concerns raised
As per the official announcement, one of the major issues addressed by Consensys is yield restrictions. As per the GENIUS Act, stablecoin issuers are forbidden to provide interest or yield to token holders in order to avoid any form of direct competition between stablecoins and bank deposits.
Consensys supports this objective but argues that the OCC’s interpretation may go beyond what was intended. Based on the firm’s arguments, the regulation would prohibit interest or yield payments even to “related third parties,” which can be defined to include independent distribution networks or partners providing a co-branded wallet interface.
According to Consensys, such third parties will likely run their own business and have independent revenue streams. This would enable them to reward users without necessarily passing the yield obtained from the issuer’s reserves.
Another concern involves decentralized finance (DeFi). The company noted that when users deploy stablecoins in lending protocols through non-custodial wallets, they are knowingly engaging in market-driven risk.
Returns from such activity come from other market participants, not the stablecoin issuer. Consensys argued that these activities should not fall under the same restrictions as issuer-provided yield mechanisms.
Additional issues
The GENIUS Act provides for an exemption where non-custodial software interfaces are not deemed to be regulated intermediaries. In the course of the discussion, Consensys encouraged the regulators to clarify that the DeFi engagement is exempt from the same regulations.
Thirdly, there are issues related to multi-brand stablecoin models. In this regard, the OCC seems to be exploring ways to ensure that a licensed entity cannot be used to support more than one co-branded stablecoin. According to Consensys, the regulation is too narrow-minded and can potentially hamper efforts towards making stablecoins available via multiple channels.
Rather than banning multi-branding activities by licensees, Consensys has suggested a disclosure-based model. This means that licensed entities should be required to disclose their identities along with information on how stablecoins are backed and how they work. Should this become an issue, the OCC may require segregation of reserves for multiple branded tokens.
Broader implications
Consensys stressed the importance of the fact that the decisions made here will determine the fate of the market in the long run. It is up to the regulator to decide whether the sector will become a competitive and user-friendly payments infrastructure or a closed system, where only a few big players with the ability to absorb regulatory expenses will dominate.
As the US government develops its final strategy regarding cryptocurrencies, one cannot help but notice the complex task of finding the right balance between regulation and innovation presented by the participants of the market, like Consensys. The future role of the rules established under the GENIUS Act is expected to be crucial in the integration of stablecoins into the financial system.
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