Much discussion has occurred informally and occasionally formally about the various legitimate reach and impact of US-based financial regulation on the crypto economy. While it is unlikely to be exciting reading, I think it’s important for members who are able to continue to build out the theoretical framework around the Maker protocol, since it is so distinctly different from other sources of stablecoins.
A few months ago, I posted some discussion about a paper making the rounds in policy and media circles, “Taming Wildcat Stablecoins” by Gorton and Zhang. My main conclusion at the time was that policy is being directed at DAI’s competitors and not DAI itself.
One possible mechanism for regulating stablecoins under current US law is again being whispered about as a low-effort way for the Financial Stability Oversight Council (FSOC) to recommend regulatory action. Let’s run through this specific mechanism, and why it would probably be a positive for Maker.
As we all know, the US financial laws are a legal thicket that are complex to navigate. This is a problem not just for market participants, but for regulators and lawmakers. So deciding that an existing legal framework already exists often elicits a sigh of relief from those looking to patrol the regulatory perimeter.
Gaining favor in some circles is the notion that an unrepealed section of the 1933 Glass-Steagall Act – a Great Depression-era banking law – provides fairly clear prohibition against the acceptance of deposits by non-bank institutions.
The text of the relevant portion, Section 21(a)(2):
“For any person, firm, corporation, association, business trust, or other similar organization to engage, to any extent whatever with others than his or its officers, agents or employees, in the business of receiving deposits subject to check or to repayment upon presentation of a pass book, certificate of deposit, or other evidence of debt, or upon request of the depositor, unless such person, firm, corporation, association, business trust, or other similar organization (A) shall be incorporated under, and authorized to engage in such business by, the laws of the United States or of any State, Territory, or District, and subjected, by the laws of the United States, or of the State, Territory, or District wherein located, to examination and regulation, or (B) shall be permitted by the United States, any State, territory, or district to engage in such business and shall be subjected by the laws of the United States, or such State, territory, or district to examination and regulations or, (C) shall submit to periodic examination by the banking authority of the State, Territory, or District where such business is carried on and shall make and publish periodic reports of its condition, exhibiting in detail its resources and liabilities, such examination and reports to be made and published at the same times and in the same manner and under the same conditions as required by the law of such State, Territory, or District in the case of incorporated banking institutions engaged in such business in the same locality.”
Note the unlawfulness of "receiving deposits subject…to repayment…upon the request of the depositor."
This, of course, can through the eyes of US regulators, appear to fit fairly nicely on top of Tether, USDC, BUSD, USDP, GUSD, et al. Violations of this provision result in:
“Whoever shall willfully violate any of the provisions of this section shall upon conviction be fined not more than $5,000 or imprisoned not more than five years, or both, and any officer, director, employee, or agent of any person, firm, corporation, association, business trust, or other similar organization who knowingly participates in any such violation shall be punished by a like fine or imprisonment or both.”
It is important to note that there are three exemptions to the illegality of taking demand deposits, all of which can be summarized as being subject to federal, state, territory, or district laws and regulations regarding the product. Right now, there is considerable lack of clarity at any level about how digital assets should be considered, but it likely means organizational headaches for the likes of USDC and Tether. Other stablecoins may or may not suffer less disruption, depending upon their structure and if they are already under specific regulations at the federal or state/territory/district level.
As far as DAI is concerned, there are no deposits held by Maker that are subject to redemption promises. A user of the Maker protocol’s software retains custody of their own collateral and any DAI is user-generated. This is naturally quite different from how fiat-backed stablecoins operate, and represent an example of how Maker both deserves a different regulatory touch, and in some circumstances may be likely to receive that.
That difference supports my own assertion that Maker is not a lending protocol (leaving aside RWA for the moment), but a loan-guarantee protocol. Any claim the Maker protocol has on a user’s collateral is more akin to a lien than anything else, with liquidation triggered by collateralization falling to unacceptable levels, but otherwise not interacting with the user’s collateral at all.
If Section 21 of the 1933 Glass-Steagall legislation does indeed become the primary method of regulating stablecoins in US markets, Maker could be well positioned to benefit. This is only one possible road that US regulation of the stablecoin space may take, but is a reassuring example of how DAI might emerge with a lasting competitive advantage under some regulatory outcomes.