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Policy Perspectives is our regular site that provides views and opinions from leading experts on key issues in the world of crypto regulation and policy.
Stablecoins are one of the hottest topics in the crypto space today. They have also been a hot topic in the halls of the US Congress, which has been working on a series of related bills since the beginning of the year. A few weeks ago, influential lawmakers and members of the Biden administration indicated that Congress might even be able to pass a stable currency bill before the end of 2022.
However, earlier this month, CoinDesk reported that the prospect of passage this year remains remote and that debate over any stable currency legislation could start in 2023.
This is not surprising; the upcoming November elections in the US have always presented a challenge for passing successful legislation in the near future.
It’s disappointing though. Any significant delay in passing stable currency legislation will set the US back in terms of establishing a legal and regulatory framework that promotes crypto-asset innovation, while also jeopardizing US competitiveness.
Stablecoins in the foreground
Stablecoins have been a national policy priority since November 2021, when the President’s Task Force on Financial Markets released a report on the topic.
That report highlighted what US regulators perceive as risks to stablecoins, such as the threat of bank-style issuers, risks to payment systems, as well as other market integrity, consumer protection and illicit financing risks. He called on Congress to pass legislation that would limit the issuance of stablecoins to insured depository institutions (IDIs). – that is, banks covered by the Federal Deposit Insurance Corporation (FDIC).
That report sparked activity in the US Congress, which has since seen numerous stablecoin proposals. One of the more serious models that helped shape the debate was a bill introduced in April by outgoing Sen. Pat Toomey. That proposal countered the President’s Task Force request by clarifying that a wide range of institutions — including money service businesses (MSBs) and state-owned banks — could issue stablecoins, not just federally issued IDIs.
This has led to some speculation that there is a significant and unbridgeable gap between the Biden administration and Republicans in Congress over how to treat stablecoins.
However, over the summer, the US government softened its stance and indicated that it could accept legislation allowing non-bank institutions (such as MSBs) to issue stablecoins if appropriate safeguards are in place. This U-turn was likely prompted by the shocking collapse of the Terra/UST stablecoin earlier in the year, which appears to have convinced administration officials that stablecoin legislation is a matter of absolute urgency.
Congress is stepping up
Since then, Toomey’s proposal has fallen by the wayside, but Congress is working on a bipartisan proposal. This would reconcile the two positions by allowing non-banking institutions to issue stablecoins, but requiring them to be subject to strict capital and liquidity requirements and to be supervised by the Federal Reserve.
This is a perfectly reasonable compromise: allowing non-bank institutions to issue stablecoins would ensure that smaller firms and innovators are not completely excluded from the future of stablecoin development. Placing issuers under Fed supervision would ensure a strong supervisory framework.
The US House Financial Services Committee appeared poised to release the bill as early as July, but disputes over the nature of the consumer protection measures led the committee to pause release of the draft after Congress’s summer recess. Now the potential for a successful bill this year is in jeopardy.
Delaying passage of the bill until 2023 would represent a failure in US policymaking – one that would threaten US competitiveness and undermine innovation in the US financial sector.
The world reacts
Other countries in the G20 are already moving forward with legal and regulatory frameworks for stablecoins. These include Japan and the UK, both of which have recently launched proposals to clarify the country’s approach to issuing stablecoins.
Earlier this year, the European Union agreed on its inaugural Markets in Crypto Assets (MiCA) regulation, which defines requirements for stablecoin issuers that are expected to come into force before the end of 2023. Crypto industry participants increasingly recognize that MiCA is leading policy framework globally, and see it as a difficult but reasonable path to legitimize the industry.
If the US continues to delay stablecoin legislation, it will quickly gain a reputation as a country that is not a viable home for stablecoin issuers, who are eager for long-term legal and regulatory clarity on their status. Continued uncertainty over the US approach will only encourage stablecoin innovators to look elsewhere, such as the EU, undermining US competitiveness in the global race to capitalize on cryptocurrency developments.
Congress’s failure to act soon could have another important consequence: The Biden administration could decide, facing a legislative gap, to make stablecoin issuers public with systemically important payment, clearing and settlement activities.
This would empower regulators to step up oversight of stablecoin market participants and limit their activities. This could encourage stablecoin issuers to leave the US and would only reinforce the perception that the country does not have a reasonable or clear legal and policy framework conducive to stablecoin innovation in the long term.
Speed is key
It is overwhelmingly in the interest of the crypto industry that Congress pass stable currency legislation soon. In the long term, innovation suffers from a lack of regulatory and legal clarity. And it would certainly undermine the industry’s long-term goals if stablecoins caused a systemic financial crisis due to a regulatory and legal vacuum. It would only provoke even harsher political responses in the future.
The sooner the US provides clear guardrails for stablecoin issuance, the sooner the industry can continue to innovate for the benefit of US competitiveness, with reduced risk to the broader national and global financial sector.
US lawmakers have an opportunity to be bold and lead the global effort to address stablecoins and boost American competitiveness and innovation. Will they take it?
Regulation of Stablecoins America
