The STABLE Act Architects Don’t Understand Ethereum
Proponents of the STABLE Act are calling for tougher regulation on stablecoins. But the arguments they’ve presented demonstrate a clear lack of understanding.
- U.S. Congress introduced the STABLE Act last week, in the hope of regulating Facebook’s Libra currency and other stablecoins.
- The bill could make anyone running an Ethereum node liable for potential prosecution.
- Following backlash from the crypto community, the STABLE Act’s architects have presented dubious arguments surrounding the technicalities of the blockchain.
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Last week, four Congresspeople in Washington D.C. introduced the highly-controversial STABLE Act. If passed, it would impose cumbersome banking regulations on the emerging crypto industry.
As such, the Act has earned the ire of industry leaders and other members of Congress.
The STABLE Act Explained
U.S. Congresswoman Rashida Tlaib introduced the Stablecoin Tethering & Bank Licensing Act (STABLE Act), legislation purported to “protect consumers from the risks posed by emerging digital payments.”
The Act made specific reference to Facebook’s currency Libra, though it would also apply to privately-issued stablecoins like those commonly used on Ethereum.
The Act was plotted with the help of Rohan Grey, an assistant professor at Willamette University College of Law. He’s previously helped Tlaib draft the Public Banking Act, which was introduced in October. Another of the STABLE Acts key advocates is Nathan Tankus, who works alongside Grey at financial education network The Public Money.
The STABLE Act proposes that issuers of stablecoins should be required to obtain a banking licence like those a number of cryptocurrency exchanges have recently filed for. They’d also need approval from the Federal Reserve and FDIC, as well as FDIC insurance.
Since its announcement, the act has been a point of controversy among cryptocurrency enthusiasts.
The community has taken issue with the technicalities of the small print, which outlines how anyone could face criminal prosecution for helping to validate a stablecoin nucleus like Ethereum. On a recent episode of Bankless, Coin Center’s Jerry Brito described it as a “frontal assault on people’s ability to run software.”
Grey and Tankus have defended themselves against a storm of fiery tweets by highlighting “the risk of processing illegal transactions,” the issues of “counterfeiting money,” as well as sharing their thoughts on those who participate in blockchain networks.
But in their tirade against one of the technology’s groundbreaking innovations, they’ve shown a fundamental lack of understanding of the Ethereum blockchain.
Misunderstandings of Ethereum
The STABLE Act’s architects key argument is that stablecoins could be used for illegal activity. For that reason, anyone facilitating a node should also be held accountable.
One of Gray’s more confused points was his proposal that nodes for a blockchain like Ethereum should selectively validate blocks to avoid enabling potentially criminal activity. Hundreds of Twitter users responded to his point by explaining that validators are unable to choose between blocks.
There's a simple solution to this: don't validate blocks that contain deposit contracts.
— Rohan Grey (@rohangrey) December 3, 2020
During the Twitter debates, Tankus made the troubling argument that the Ethereum Foundation is responsible for “mediation” of the network.
He then went on to mention an “industry myth” in reference to the blockchain’s level of decentralization.
It’s true that the Ethereum Foundation wrote and deployed the blockchain’s immutable code, but the inference that they could have influence—or worse still, hold responsibility—over the network’s transactions is worrying and irrational in equal measure.
Each of you agree to mediation as chosen by the foundation when you participate. There are also the trademark holders and owners of the master codebases. There are a number of significant legal entities. https://t.co/S7RSz7GFcm
— Nathan Tankus (@NathanTankus) December 4, 2020
In between his gaffes about how transactions are validated, Gray has made it clear that he shares the same viewpoint.
As Pierre Rochard, a prominent Bitcoiner, memorably pointed out, criminalizing node operators would be like holding taxpayers accountable for the invasion of Iraq.
Gray and Tankus are two highly-accomplished scholars in the field of economics and finance. But in their arguments for holding individuals accountable for the activity of a global Internet-native network, they’ve shown fundamental misunderstandings of how blockchains work.
Ethereum is a vast, near limitless ecosystem, one on which permissionless smart contracts can program powerful money legos.
That includes stablecoin transactions among many others (the network processes about 1 million daily at the moment). The idea that nodes might be able to identify each of these operations and block them demonstrates a misapprehension, lack of research, or perhaps a bit of both.
It’s not true that Ethereum is run by one entity, either.
Today, there are 11,152 nodes worldwide. As for validators, the Ethereum 2.0 Beacon Chain has received 40,00 since launching at the start of the month. The emerging DeFi space recently hit 1 million users.
Usage is increasing, and these numbers will likely grow as awareness of Ethereum, and perhaps moreso regressive moves like the STABLE Act, increases.
Key Takeaways for Enthusiasts
Though the STABLE Act could have negative consequences, blockchain enthusiasts can draw several reassuring takeaways from the discussions (the consequences of this are bigger than Ethereum alone).
For one, there are ways of funding education for policy makers. Coin Center, a team dedicated to handling policy issues surrounding cryptocurrencies, is part of the current Gitcoin Grants round. Moreover, as Brito pointed out, any bill has to pass through the senate, so the STABLE Act doesn’t necessarily mean heavier regulation immediately.
And purchasing the hardware needed to provide security to blockchains like Ethereum has never been easier or more affordable.
The STABLE Act has caught the attention of the crypto community, and for good reason.
That so many of blockchain’s proponents have come together to voice their concern is a promising sign. If crypto is to achieve its potential, this is only the first small battle of a potential regulatory war ahead.
Disclaimer: At the time of writing, the author of this feature owned ETH among a number of other cryptocurrencies.