The Unintended(?) Consequences of the STABLE Act
On purpose or not, the bill could turn even node operators into criminals
The recently introduced STABLE Act aims to ban any stablecoin that is not issued by a federal bank. Yes, any stablecoin irrespective of whether it is issued by a state-regulated trust company, like Gemini Dollars, a consortium of state-licensed money transmitters like USDC, or by an Ethereum-based smart contract like Dai.
It’s one thing to argue that all dollar-denominated liabilities should be the exclusive purview of banks. But this bill does not do that. This bill seems to leave most non-bank dollar-denominated liabilities out; it apparently does not cover any liabilities held by PayPal, Venmo, Square Cash, Apple Pay, Google Pay, nor any of the traditional money transmitters like Western Union and Moneygram. The bill, instead, targets dollar-denominated liabilities for special regulatory treatment if and only if they are so-defined “stablecoins.”
The risks of these liabilities are certainly no greater when they are held by a stablecoin-issuing money transmitter rather than a traditional money transmitter, indeed they are probably reduced because public blockchains create verifiable accounting tools for auditing the supply of instruments in circulation. The risks are even fewer for stablecoins issued by smart contracts through which backing is secured by a decentralized protocol and no person or corporation has the power to run away with the reserve funds.
So why does this bill target stablecoins but not traditional money transmitters? Perhaps because it is easier to pick on a young innovative industry with fewer political allies than an older sector with deeper pockets. Or maybe the bill is intended after all to indeed cover the likes of PayPal and Western Union because the definition of “stablecoin” in the bill is intended to be interpreted broadly. If that’s the case then this is a cleverly marketed trap; a trojan horse that the likes of Apple and Square might want to eye with suspicion.
Centralized stablecoins aside, the bill is a disaster with regard to decentralized applications like Maker Dao, as well as a disaster for the larger innovation-enabling platforms, like Ethereum, on which those applications run.
First we should ask why we’d even want banking regulation in the decentralized context. Defenders of the bill might say there is still risk in decentralized stablecoins but that it changes from counterparty risk (a bank failure) to a technology risk (a network failure). While that’s true to an extent, it begs the question: do we expect to solve a 21st century technology risk by applying banking laws written in the 1860s? What does the National Bank Act, which creates the bank chartering structure, have to say about double-spending attacks, proof-of-stake consensus mechanisms, network latency, or the security of asymmetric signature schemes? It, of course, says nothing. And for the bill’s proponents that might be OK, because application of federal banking laws to decentralized networks is not actually the point. The bill doesn’t intend to address the risks of blockchain networks, it would simply ban those networks outright to protect the public from hypothetical future harms.
Stablecoins aside, the bill would have dire implications for permissionless blockchains generally. The bill is intended to cover smart-contract-issued stablecoins like Dai. The logical consequence of the bill is that if any person is running software that validates Dai or other stablecoin smart contracts they will, themselves, be violating the law unless they are a chartered bank. Wisely, the bill does not appear to criminalize authoring or distributing that smart contract code because that would almost certainly face strict constitutional scrutiny on First Amendment grounds, as we’ve written about extensively.
Instead, it makes it illegal to run that software. To be clear, that software is the Ethereum network client. An Ethereum node does not discriminate between the various otherwise validly constructed smart contracts, it simply checks the math. If your software can’t discriminate between “legal” and “illegal” smart contracts, the bill’s sponsors might argue, then your choice to run that software is, itself, illegal. By targeting stablecoins this bill would have the effect of also destroying the larger Ethereum network and any other smart-contract-enabled public blockchain as necessary collateral damage.
Irrespective of the policy goals of this bill, what would be the collateral consequences of enforcement? How would it be done? In no uncertain terms, enforcement would require actual raids into the homes of Americans in order to stop those Americans from operating computers connected to otherwise lawful computer networks. Let’s not pretend that the bill simply says that only banks should back consumer held dollar notes when it actually necessitates the mass search and seizure of computers running free and open software in American households.
This is not a light touch proposal sensitive to the rights and freedoms we hold dear as Americans. It is a proposal that will require midnight raids and mass persecution. How much additional funding would the FBI require if their mandate included stopping every 14-year-old from running open source software in their basement? How much poorer would we be as a nation if banking laws forbade our citizens from participating in the wellspring of innovation that is permissionless blockchain networks?
Defenders of the bill might argue that this is fear mongering; that while the law could apply to an otherwise innocent individual running an Ethereum node, financial regulators will wisely prioritize enforcement and use their discretion to only go after the big players. With respect, laws that criminalize otherwise harmless everyday actions are unconscionable. It doesn’t matter if some of us believe that a benevolent enforcer will choose only to use those laws for the right reasons and would never use them to terrorize the public at large. Laws should be limits on the power of the state as much as they are limits on the freedoms of the people. Anyone who says they want limitless power but will only use it wisely fails to understand the fundamental value of the rule of law in preserving a free society.