If today’s hearing before Congress is any indicator, the US Treasury Department’s proposal for a new stablecoin legislation is doomed.
On February 8, the House Financial Services Committee welcomed Nellie Liang, the Treasury’s undersecretary for domestic finance and the main force behind the President’s Working Group on Financial Markets’ November report on stablecoins.
Liang’s unusual position and anticipated push to restrict stablecoin supply to insured depository institutions, or IDIs, were previously noticed by The Block.
IDIs are institutions that are insured by the FDIC, which primarily covers banks. Given its beginnings in the financial collapse and bank runs that precipitated the Great Depression, FDIC insurance is subject to a slew of capital and liquidity requirements, as well as government oversight.
Many point out that banks earn money by lending out customer deposits. As a result, the composition of stablecoin reserves has become a key source of contention in the discussion.
As Warren Davidson (R-OH) summarised the hearing’s lessons, “the most important thing I hope is that a stablecoin really relies on what is behind it.”
Generally, industry actors prefer less stringent restrictions, and this instance is no different. Along with the industry, today’s hearing demonstrated that this scepticism has evolved into a new yardstick for bipartisanship in the House.
While there was general agreement that stablecoins should be transparent and subject to audits, the committee unanimously rejected the notion that every stablecoin issuer should be subject to the same level of regulation as banks. Chairwoman Maxine Waters (D-CA) even interrupted between two other representatives’ queries to urge committee members not to “minimise a reasonable reserve.”
Notably, Democratic briefing papers seen by The Block emphasised “Republicans and industry perspectives,” noting that “there has been a great deal of bipartisanship and places where our perspectives coincide.”
At the heart of this bipartisanship are concerns about fairness and, furthermore, a common animosity against large banks that currently function as insured depository organisations.
“It strikes to me that restricting stablecoin issuance to IDIs, which have a high entrance hurdle, may reduce competition,” Gregory Meeks stated (D-NY). “Such proposals may have an effect on racial fairness.”
“There is a fundamental distinction between a stablecoin that is entirely dollar-to-dollar backed […] and what Mr. Green famously referred to as investing in nothing,” Jim Himes (D-CT) said. He then inquired if Liang would “agree that comprehensive IDI and bank charter control may not be essential in such circumstance.”
Himes and Coin Center have collaborated to exclude new Treasury monitoring capabilities from anti-money laundering laws in the COMPETES Act.
Liang said that stablecoin issuers would not need the same level of control, but emphasised the importance of IDI insurance. Essentially, her basic point was that financial regulators should have that power. The committee did not seem to believe it.
Patrick McHenry (R-NC), the committee’s senior Republican, believes the present danger of stablecoins is smaller than the chance of them being included into the IDI framework by Congress. “How are they mitigating this seeming risk?” They convert them all into banks and provide them with a government backing. Which is the polar opposite approach.”
Ritchie Torres (D-NY) said that stablecoins should be controlled “not via the brutal instrument of banking regulation,” but rather through common sense principles. He was especially critical of the IDI plan, claiming that Circle, the issuer of USDC, was unable to proceed with its bank charter application.
Torres, a rookie congressman from the Bronx, has previously expressed support for the role stablecoins may play in remittances for his constituents who often transfer money to family members living overseas.
Perhaps most significantly, today’s hearing demonstrated that Democrats have become more sensitive to the potential effect of cryptocurrency on the unbanked, minority groups, and cross-border transactions. This is partly due to the interests of a rookie class of lawmakers, but it is also a result of the cryptocurrency industry’s growing participation in Washington, DC, which includes presenting the industry’s social justice work and contributing to Democratic campaigns and causes.
Liang will go before the Senate Banking Committee next week to speak on the same report. However, the House has a considerably easier time passing legislation than the Senate, which is currently deadlocked, and any legislation implementing the IDI requirement must originate in one of these two committees. Additionally, the November midterm elections loom, posing a danger to the speed of any legislation in a more polarised climate.
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