Congress wants a stablecoin bill in theory, but differs on the details

Al Drago/Bloomberg

WASHINGTON — At Tuesday's House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion hearing on stablecoins, Chairman French Hill announced the subcommittee would work to revitalize and update a stablecoin framework — modeled after the so-called 'ugly baby' bill negotiated in the last Congress. Rep. Hill, R-Ark., a former banker, widely viewed as an ally of the cryptocurrency industry, made clear he wants to work out a bipartisan deal to provide issuers clarity, though the hearing ultimately showed how lawmakers still disagree over the details.

Democrats broadly voiced ongoing skepticism toward stablecoins, including risks to financial stability and consumer protections as well as the potential for illicit activity. 

Subcommittee ranking member Rep. Stephen Lynch, D-Mass., has major concerns about the bill, because, he said, it prioritizes state regulatory authority. 

"Giving states the authority to regulate stablecoins allows issuers to easily avoid federal oversight and seek out more permissive states," Lynch said.

He also thinks that the bill treats stablecoin issuers too much like traditional banks, allowing nonregulated entities to issue banklike products and giving them access to Federal Reserve programs usually reserved for heavily regulated banks. He argued that the exclusivity of such programs to highly regulated entities is for a good reason, and said the bill also needs to address conflicts of interest. He also said one of the benefits of crypto-company failures over the last year was that they were ring-fenced, and did not infect other aspects of the economy, and that legislation should preserve this.

Rep. Maxine Waters, D-Calif., balked at the fact that the GOP-led committee was resurrecting a bill she thinks is obsolete given events — like bank and crypto firm failures — since the idea of a stablecoin bill was first floated.

"The posted bill in no way recommends the final work on stablecoins," she noted. "It does not represent any final bill of any kind. … We are starting from scratch to deal with stablecoins."  

Rep. Bill Foster, D-Ill., is concerned primarily with the anonymity of the stablecoin industry, saying that without a standardized way to identify individual digital wallets, bad actors could escape consequences.

"What we need is the equivalent of a license plate on every digital wallet. … It would be completely unacceptable to have unlicensed cars and unlicensed drivers driving through your neighborhood or across your international borders," he said. "It can be anonymous, like a license plate is anonymous, under most circumstances, but you have to have that guarantee that when someone drives through your neighborhood and runs over your dog, that you can jot down the license plate, take it to a trusted court system, de-anonymize the owner of that car, or that wallet. And, haul them into court."

Not all Democrats were so skeptical toward stablecoins, however. Rep. Ritchie Torres, D-N.Y., said he supports a separate regulatory regime for securities and cryptocurrency. That's the opposite of what Securities and Exchange Commission Chairman Gary Gensler told the full committee the previous day. Gensler asserted that most cryptocurrencies are actually securities and should be regulated by the SEC as such. As if speaking directly to one particular witness — superintendent of the New York State Department of Financial Services Adrienne A. Harris — Torres added he will not vote for a stablecoin bill that preempts New York's already existing regulatory authority. 

Rep. Brad Sherman, D-Calif., said money laundering is his biggest concern. While he said he understands that fiat currency isn't perfect, at least it's regulated.

"It's damn hard to cheat on your taxes, and it's damn hard to run a drug sales operation with the U.S. dollar because we've got [know-your-customer regulations] and anti-money-laundering," Sherman said.

Sherman also noted that lack of a federal framework could produce a race to the bottom, in which states compete with each other to attract businesses by promising minimal regulation. Given the lack of current concrete advantages over fiat currency, cryptocurrency is just a vehicle attracting bad actors with the promise of operating unidentified, he said.

"If we allow every state to have its own rules, [let's take] a state like Wyoming which doesn't have that many people. Cows don't always sell for as much as you'd like. If they could make a billion dollars by just having a regulatory system that was perfect for tax evaders, what would stop them? That is a huge market, which I think could be more important to Wyoming than cows," he said. 

Republicans struck a more urgent tone, noting that time is of the essence to hammer out a bill. They cited the global challenges to dollar dominance from nations like China, the fear that strict regulation could lose the U.S. business opportunities to more crypto-friendly countries and the need to resolve conflicting definitions of stablecoins.

The full committee's chairman, Rep. Patrick McHenry, R.-N.C., struck an urgent tone, saying inaction could hurt consumers.

"[it is important] that we acknowledge the intellectual framework around us having a modern financial regulatory regime at the federal level. Consumer interest is not served by us not acting."