House lawmakers are reviving their focus on stablecoins under new Republican leadership, but partisan fault lines are dimming the chances for any new law on the controversial cryptoassets.
(Bloomberg) — House lawmakers are reviving their focus on stablecoins under new Republican leadership, but partisan fault lines are dimming the chances for any new law on the controversial cryptoassets.
Republicans and Democrats on a House Financial Services Committee subcommittee kicked off a hearing on Wednesday bickering with each other — a bad sign for any quick legislative agreement. The assets had been one of the few areas where members of the two parties have found some common ground.
Republican Patrick McHenry, who chairs the committee, said a draft bill released this month establishes a foundation for a federal framework, while acknowledging that more work was needed. The proposal mirrors a draft circulated among members and staff in September, which McHenry said was the result of negotiations between him and the committee’s top Democrat, Maxine Waters.
Waters, however, said Wednesday that she and McHenry never completed negotiations and that the recent draft should be completely disregarded, citing failures like the collapse of Sam Bankman-Fried’s FTX, which occurred after their initial talks. “Unfortunately a lot of things have happened in between,” she said. “I think we’re starting from scratch.”
She also said Republicans have indicated they plan to write their own separate bill. If that’s the case, Democrats would do the same, with the two sides eventually needing to come back together to hash out differences, Waters said.
Stablecoin regulation became a hot topic of discussion last year after the collapse of the popular token TerraUSD, which was designed to maintain a 1-to-1 peg to the US dollar through an algorithm and trading in a sister token called Luna. The arrangement, which differs from many stablecoins that are backed by reserve assets like cash or Treasuries, crashed last May.
The implosion kicked off a domino effect that helped fuel the collapse of hedge fund Three Arrows Capital, Voyager Digital, and, most prominently, Alameda Research and FTX.
Witnesses for Wednesday’s hearing included New York State Department of Financial Services Superintendent Adrienne Harris and Dante Disparte, chief strategy officer and head of global policy for stablecoin giant Circle Internet Financial.
Disparte in his written testimony for the hearing said it’s imperative for the US to create a federal framework to prevent a failure like TerraUSD from occurring again. He also said that countries in Europe and elsewhere are moving ahead. “The rest of the world is not waiting for the U.S. to issue a comprehensive regulatory approach to payment stablecoins and the broader digital assets market,” he said.
Sense of Urgency
French Hill, the chairman for the Subcommittee on Digital Assets, Financial Technology and Inclusion that held the hearing, relayed a similar sense of urgency, saying it’s crucial for members to work together to pass legislation.
Under the draft legislation, coins similar to the defunct TerraUSD token would be banned for two years. It would also lay out the processes for banks and nonbanks to get regulatory approval to issue stablecoins designed to be used for payment or settlement.
In addition, the bill would prohibit businesses from commingling customers funds — including stablecoins, private keys and cash — in an effort to protect consumers in cases of bankruptcy. And it would direct the US Federal Reserve to lead a study on the impact of a potential US digital dollar — also known as a central bank digital currency — including the possible effects on the financial system and banking sector, as well as the privacy of Americans.
Stephen Lynch, the top Democrat for the digital assets subcommittee, said he had a number of concerns about the draft, including that nonbanks would be allowed to issue bank-like products. He used failures of banks like Silicon Valley Bank and Signature Bank this year to underscore his point.
“If the recent bank runs have taught us anything, it’s the danger of allowing shadow-banking products,” he said.
The role of state regulators arose as another potential sticking point with the draft legislation. Harris, the NYDFS superintendent, said she would like to see some changes.
“Although it has language that states nothing in the legislation will preempt states, in practice I think there are a number of provisions that give federal regulators veto authority over state regulators and their judgments and oversight so that would be counter-productive and provide a disincentive for companies to take a state path,” she said.
Ritchie Torres, a Democrat on the House Financial Services Committee representing New York, said he wouldn’t support any stablecoin legislation that “preempts the New York State Department of Financial Services or otherwise encroaches on the sovereignty of New York State.”
(Updates with lawmaker comments from hearing throughout.)
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