Jack Solowey and Jennifer J. Schulp
Tomorrow, the House Financial Services Committee’s Digital Assets Subcommittee will hold another hearing on stablecoins (crypto tokens pegged to the value of another asset like the U.S. dollar).
Ahead of the hearing, the Subcommittee released two new discussion drafts of stablecoin legislation, a 74‐pager and a 34‐pager. These drafts appear to be the reported separate partisan efforts by Democrats and Republicans after they essentially disowned an earlier bipartisan draft—the “ugly baby” they were at one point co‐parenting.
Whereas the 74‐page draft is strikingly similar to the “ugly baby,” the 34‐page draft—call it “Bill 2.0”—is a more significant update. While the longer draft would increase federal authority to disapprove certain stablecoin issuers—empowering the Federal Reserve Board of Governors (“Fed Board”) to deny required registrations by state‐approved stablecoin issuers—Bill 2.0 would open the door to more kinds of stablecoin issuers, permit technological experimentation, and help to clarify longstanding jurisdictional issues.
At a high level, U.S. stablecoin policy should allow for a competitive stablecoin market composed of diverse issuers. Doing so means establishing objective standards for collateral and disclosures and restricting regulatory discretion that can choke off competition and privilege insiders. Bill 2.0 contains important upgrades that could help the U.S. get closer to this goal, and a version 2.1 could help patch its additional bugs.
Ideally, stablecoin legislation should focus on the asset‐backed stablecoins (those designed to be fully backed by collateral) that constitute the vast majority of the current market. Bill 2.0 appropriately maintains this focus, eschewing ideas like temporary bans on certain algorithmic stablecoins.
Stablecoin legislation also should enable competition and inclusion by allowing a larger pool of potential market entrants, including networked businesses (like social and e‑commerce platforms) and brands trusted by diverse communities. Bill 2.0 helpfully rejects prohibitions on non‐financial businesses being allowed to issue stablecoins.
Last, stablecoin legislation should resolve the regulatory ambiguity and avoid allowing the regulatory discretion that threatens the development of a competitive U.S. stablecoin market. Bill 2.0 takes an important step toward resolving jurisdictional ambiguity in the U.S. by amending securities laws to exempt covered stablecoins from the definition of securities.
But, while moving in the right direction, Bill 2.0 has shortcomings when it comes to restricting regulatory discretion. A version 2.1 could help fix these bugs to ensure, for example, that regulators are not granted broad authority to prohibit stablecoin issuers from entering the market based on vague criteria.
Under Stablecoin Bill 2.0 there are three types of “permitted payment stablecoin issuers”: (1) federally approved insured depository institutions (e.g., banks and credit unions); (2) federally approved nonbank issuers; and (3) state‐approved issuers.
With respect to federally qualified bank and nonbank stablecoin issuers, Bill 2.0 would empower federal regulators to deny these issuers’ applications where their activities are found to be “unsafe or unsound” in light of the “risks presented by the applicant and the benefits provided to consumers.” Weighing the risks and benefits to consumers of a stablecoin issuer on safety and soundness grounds creates an overly vague standard by which to reject new market entrants.
Digital asset policy should indeed be risk‐based; however, Bill 2.0 already addresses the primary risks of stablecoins—that issuers don’t have the reserve assets they claim to—in an entire section devoted to collateral, disclosure, audit, certification, capital, liquidity, and risk management requirements (“basic operating requirements”). Regulators shouldn’t be granted a trapdoor to deny applicants that otherwise meet those standards.
Moreover, where downside risks (e.g., that a stablecoin will “depeg” due to inadequate collateral) are already addressed, regulators should not be concerned with the benefits of a prospective stablecoin issuer. An applicant should not have to demonstrate its merit before being allowed to operate lawfully, as consumers can decide whether they find a project’s benefits compelling enough to pursue.
That any one pathway to becoming a stablecoin issuer likely will never be perfect is itself an argument for the utility of Bill 2.0’s state approval pathway—which, at a high level, allows each U.S. state and territory to devise its own approval standards for stablecoin issuers, provided the issuers also comply with the abovementioned basic operating requirements. Allowing the laboratories of democracy to experiment with their own standards could help further diversity among stablecoin issuers and thereby promote both competition and financial inclusion.
Nonetheless, although Bill 2.0 makes strides in paring away requirements for state‐approved issuers to also jump through federal registration hoops, it leaves open possible federal rulemaking and enforcement channels that go beyond regulations merely implementing basic operating requirements.
One such rulemaking provision is found in a section otherwise devoted to the approval of federally qualified stablecoin issuers. But nothing in the provision itself suggests it can’t be read to allow for rules applying to state‐qualified issuers as well, which would then subject such state‐qualified issuers to general “rules necessary for the regulation of the issuance of payment stablecoins.” Ideally, the provision should make clear that the rules made under it wouldn’t apply to state‐qualified issuers. But, at a minimum, the provision should clarify that these rules also must not go beyond implementing the basic operating requirements, whereas at present the limitation is only that the rules must not be “inconsistent” with such requirements.
As for enforcement, Bill 2.0 also could be read to expand federal authority over state‐qualified stablecoin issuers beyond the enforcement of basic operating requirements. Although the enforcement section’s own rulemaking provision appropriately refers to rules and orders regarding basic operating requirements, an additional section on “Enforcement Authority in Exigent Circumstances” grants the Fed Board wide latitude to define those “exigent circumstances” in which the Board may take enforcement actions against state‐qualified issuers.
For one, the Fed is not the optimal regulator of stablecoin issuers. Not only is the Fed as a monetary policy specialist not well‐suited to regulatory work, as Brookings’s Aaron Klein argues, but also where the Fed perceives private stablecoin issuers as competitors with its own services—such as Federal Reserve deposits or the FedNow system—the Fed faces a conflict of interest. This conflict becomes even greater the more discretion the law affords.
In addition, giving any regulator the power to define its own rules regarding exigent circumstances and take enforcement measures accordingly creates wide leeway to devise new regulatory priorities beyond the basic operating requirements determined by Congress. It also allows the regulator to take discretionary actions against institutions on an ad hoc basis. Such enforcement authority also should be limited to addressing only violations of rules implementing basic operating requirements.
The House Financial Services Committee is distinguishing itself among U.S. government bodies by doing the hard work to thoughtfully address the digital asset ecosystem’s thorny questions. Stablecoin Bill 2.0 is an important step in the right direction, but the Committee could do more to foster a diverse and competitive market by making updates to produce version 2.1.
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