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Stablecoin issuers, like most companies in the digital assets sector, have become the subject of spirited debates centered around regulating their stablecoin token offerings. A dozen months since the implosion of Terra, whose ecosystem featured the TerraUSD (UST) stablecoin, regulators have intensified oversight efforts on similar offerings in the space. This year, the USD coin (USDC) briefly lost its peg in March, reintroducing previous concerns shared by market participants. The incident drew even more regulatory attention to the niche, with industry executives and lawmakers harping on the need for immediate conversations on stablecoin regulation.
In the US, ongoing legislative talks aiming to conceive an ideal regulatory framework for oversight of these dollar-pegged digital assets have yet to bore fruit. A previous attempt saw Ranking Member Rep. Maxine Waters and Chair Rep. Patrick McHenry, who represent opposing sides of the aisle, collaborate on a version of the bill last fall. Lawmakers, however, failed to arrive at an agreement before the end of the Congressional session, resulting in the abandonment of the bill last year. In a more recent development, Waters and McHenry presented separate stablecoin proposals in a hearing held last week to address the stablecoin issue.
Stall in previous stablecoin legislation efforts that earned bipartisan cooperation
Towards the end of last year, the House Financial Services Committee desired to accelerate discussions on formulating clear rules governing their use and issuance. However, bipartisan talks on the subject in the House of Representatives failed to materialize despite running on for months. McHenry laid the stall to Biden administration officials holding up discussions in the House of Representatives, citing differences between congressional members and the Treasury Department.
The department reportedly acted in reluctance facing pressure from the Securities and Exchange Commission, which curtailed progress. The SEC constantly presented objections and requested revisions at inconvenient timing. Persons familiar with the developments said the securities markets watchdog, in one instance, faulted the bill's scope in regards to payment stablecoins and its application to existing tokens. The Gensler-led agency has, on past occasions, sought to bring the entire digital assets sector under its control while clinging to the authority it presently has over the industry.
Fresh conversations begin to take shape but expect a lengthy haggling
Republicans on the House Financial Services Committee released a discussion draft providing guidance on the issuance and use of stablecoins last month. The legislative proposal categorized stablecoins as non-securities products, thereby falling outside the purview of the Securities Exchange and Commission (SEC). It instead mandated that stablecoin issuers come under the regulatory ambit of either a federal payment entity or a state-qualified payment issuer with registration. Democrats, through Rep. Maxine Waters, also presented their bill version, which had some notable overlaps, for consideration in the May 18 hearing.
“To echo the Under Secretary and the title of today’s hearing, we want for payment stablecoins to be used as a payment mechanism, which they’re really not today. And the only way we can do that is by passing the appropriate regulatory framework legislation.” Rep. French Hill said when the Committee’s Subcommittee on Digital Assets, Financial Technology and Inclusion convened last week.
The second hearing on stablecoin regulation focused on the newly circulated draft bills, but hardly any progress was made as both divides failed to come to a middle ground on contentious issues. Though the sides failed to agree on a number of items, the contentious points highlighted in the stablecoin bills nonetheless struck as surmountable.
House Republicans seek to regulate stablecoins, but Democrats have played down its rulemaking
Republicans propose that stablecoin issuers register through state-level agencies and have a 180 days window to submit all required registration materials to Federal regulators. The draft encompassed several other measures that stablecoin issuers must fulfill. For instance, it allows state regulatory agencies to take a flexible approach in handling certain requirements for approving these entities as long as they meet the minimum requirements outlined in federal legislation. In contrast, the Democrats proposed a plan that would give state regulators oversight on issuer registration, while still allowing the Federal Reserve to retain its authority to accept or reject federal registration.
Overlaps in the proposed drafts
The two bills submitted for consideration portrayed consensus on some aspects – both stipulate minimum standards, including capital requirements that stablecoin issuers must follow. Both sides of the House agreed that the enforcement approach advocated by SEC chair Gary Gensler has been ineffective, evidenced by the fact that the chair has proposed at least twice as many rules as his predecessors. The sides recognized the imperative need to establish a clear regulatory framework that safeguards the interests of consumers.
The potential impact of dollar-denominated stablecoins on the US dollar's position in global trade also stood out as another notable overlap. House Republicans and Democrats conceded that Congressional action is necessary and that acting prudently to regulate dollar-denominated stablecoins could favor the dollar's hegemony status.
Contrariety, subtleties and other disputable points
House Republicans favored lowering regulations such that states, which currently regulate payment providers, can set their standards if they meet certain criteria. While the two dueling proposals allow banks and non-banks to issue stablecoins, the draft presented by Patrick McHenry seeks to ultimately empower individual states. The side also advocates that the Office of the Comptroller of the Currency remains in charge of overseeing stablecoin issuers who register as national trust companies. Democrats on the committee found fault in this approach, where state regulators set standards for stablecoin issuance, suggesting that crypto companies are likely to flee the market to escape regulation.
The version from the committee’s senior Democrat Rep. Maxine Waters, meanwhile, demands a concrete criterion to determine who can become an approved issuer, i.e., a stablecoin provider must satisfy specific reserve capital thresholds and provide monthly disclosures of its reserve portfolios. At the same time, the Federal Reserve Board will have ultimate authority on which stablecoins are issued. Waters also pointed out that the Republican version did not touch on the security of digital wallets. The side expressed concerns that state-level regulation could create a regulatory arbitrage situation where issuers choose states with the least burdensome requirements.
“A race to the bottom is a practice, is the custom of this industry, you know, to go offshore and seek areas of least regulation,” Rep. Stephen Lynch, the top Democrat on the subcommittee, said, “My feeling is that if we directed this to 50 states, and territories perhaps, that that practice would continue and that cryptocurrencies would seek out those areas, those jurisdictions, that offer the best opportunity for them to maximize their profit and avoid cumbersome and costly regulation and disclosure.”
The apparent divide is, however, not limited to the political sides – some House members on opposing sides support the implementation of a regulatory framework, while others oppose any form of regulation. Markedly, the latest proposals add to a list of previous bills introduced to regulate stablecoins – none of which have stood out as comprehensive.
Senate Banking Committee holds the cards
A nod from the House and Senate on the either draft would mark a monumental outcome in the US payments and market niche as far as legislation goes. That said, the approval and adoption of stablecoin regulations depends on the Senate Banking Committee which has been passive on the subject of a stablecoin bill. The final decision ultimately lies with the Committee and its chair Sherrod Brown, whose say-so is all-important if any deal is to live long into the future.
Wyoming Senator Cynthia Lummis, who on more than a solitary occasion has come in defense of crypto assets, recognizes that a change in tune from Brown is needed. The Ohio Senator in February slammed institutions that help invest in crypto investment products as speculative and run by reckless companies in retrospect to the highly-impactful collapse of FTX. Other industry experts remarking on the recent bills pointed out that neither is likely to make it to the floor, at least in the current version.
Stablecoin regulation has remained a pain in the neck, even internationally, with lawmakers discouraging banks from dealing with the cryptocurrencies. CoinDesk reported on Tuesday that the European Commission plans to make it easier for banking firms (including commercial banks) to hold stablecoins and tokenized assets per a leaked document. Under the leaked plans, the commission will recognize and define stablecoins based on fiat with exceptions being where extra credit is involved or there is market risk. The simplified plan will see the risk weight for crypto fall from 1,250% to 250% for stablecoins pegged to non-fiat assets like gold.
“Without a proper regulatory framework being in place to address the different types of risks faced by banks due to this new type of exposures, transmission channels between crypto-asset markets and financial markets might increase in type and size, leading to increased risks to financial stability and for individual banks” a section of the EU commission document read.
The commission’s softer stance contrasts the firm perspective of the European Parliament, which stipulated earlier this year that banks have reserves in the ration one euro of capital for the value of each digital assets they have exposure to. Even under the new plan, banks dealing with digital assets would still need sufficient capital as a safeguard. As part of the plan, supervisors will be required to assess the position of the bank to ensure they are capable of handling manage the risks with cryptocurrencies. It is worth noting the document doesn’t represent the commission’s formal position.