On April 19, the Subcommittee on Digital Assets, Financial Technology and Inclusion under the House Financial Services Committee held a hearing discussing the appropriate regulatory framework for stablecoins. The hearing included a draft of a bill first circulated in September that was created by Representative McHenry and Representative Waters.
Initially, this bill — which the committee memorandum suggested was bipartisan — seemed as though it could advance, though this idea was quickly put to rest. This bill looks to be a particular point of contention between the GOP and Democrat members of the committee with Representative Waters saying, “It does not represent a final product of any kind. I think we’re starting from scratch. Disregard the bill that has been posted altogether.”
She also said that the draft was released at Representative McHenry’s urging and that GOP members had begun work on their own version. This led Representative Waters to suggest the Democrats would draft their own version.
One of the primary sources of tension in the hearing was caused by the debate over what the appropriate regulatory framework for stablecoins would look like. Specifically, whether it was appropriate for them to be non-bank entities, particularly if they would have access to accounts at the Federal Reserve.
Representative Lynch voiced concerns around both the fact that they are non-banks and that the current version of the bill allows for them to be regulated by the states, potentially weakening the value of the federal framework.
Adrienne Harris, superintendent of the New York Department of Financial Services (NYDFS) was the stand-in for state regulatory agencies at the hearing. She advocated for the BitLicense and complementary framework that New York has created.
The current New York regulatory framework for stablecoins requires them to be fully reserved, redeemable within two days, attested monthly, and done with the approval of the NYDFS. The reserves are allowed to be:
- Short-duration US treasuries
- Reverse repurchase agreements collateralized with US treasuries
- Government money market funds
- Deposits at banks
The draft bill limits the reserves for stablecoins to:
- Physical US currency
- Short duration treasuries
- Short-duration reverse repurchase agreements collateralized by US treasuries
- Central bank reserve deposits
The draft bill currently intends to leave a path for stablecoin issuers who are regulated by state regulators like NYDFS, but would still require them to register with the Federal Reserve. They would also need to live up to the Federal standards, potentially co-opting some of the power of state regulators, a point raised by Representative Torres.
Read more: How the US gov’t bailed out USDC stablecoin
Crypto.com Arena, not KYC Arena
Other representatives like Sherman chose to use their time to worry about the broader societal implications of stablecoins, with Representative Foster suggesting that in order to effectively police them, you may need to know the customer behind each wallet.
Representative Sherman would later attempt to make a joke saying that he attends basketball games at Crypto Arena (he meant Crypto.com Arena) and not Know Your Customer Arena. This was an attempt to suggest that crypto companies aren’t generally compliant. He would later compare regulating stablecoins to regulating organ harvesting.
Dante Disparte, chief strategy officer for Circle, was also in attendance and was pushed by Representative Casten on what changes have been implemented to prevent Circle from again being over-exposed to uninsured deposits at a failing bank.
Circle’s response seemed to suggest its cash is actually held at a smaller number of banks now than it was before the collapse of Silicon Valley Bank (SVB). This claim left some ambiguity as to how that improved its reserve composition.
At one point, Harris also had to reiterate that Signature Bank’s shutdown was not crypto-related, pointing out that at one point it was seeing deposit outflows of 20% with approximately 20% of that related to cryptocurrency.
Harris also clarified that Signature’s shutdown wasn’t part of some complex ‘Operation Choke Point,’ but was done to manage a bank run.
The lack of bipartisan consensus surrounding this draft of the bill suggests that there will be major revisions before a version is brought for a vote. We’re also likely still a long way from a regulatory stablecoin framework, particularly with Congress being forced to deal with the impending debt ceiling.