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Stablecoin Legislation
What happened?
This past week, the House Financial Services Committee (HSFC) released a draft of a stablecoin bill.
The bill focuses on developing a regulatory framework for dollar-backed stablecoin issuers, such as deeming them a financial institution and placing regulatory authority in the hands of Federal banking agencies—most notably the Board of Governors of the Federal Reserve System (the Board). The bill proposes stablecoin issuers to undergo an application process with the Board to evaluate several factors such as the ability to maintain reserves backing its payments and its “financial resources, managerial or technical expertise, and governance.”
The bill would require a two-year period, beginning on the date of the enactment of this act that would prohibit the issuance, creation, or origination of a “endogenously collateralized stablecoins”—essentially dollar-backed stablecoins. Furthermore, the bill requires a study by “the Secretary of the Treasury, in consultation with the Board, the [Office of Comptroller of the Currency], the [Federal Deposit Insurance Corporation], and the Securities and Exchange Commission.
The bill would also require the Board and other federal agencies listed above to conduct a study of CBDCs and their effects—such as privacy rights and civil liberties, financial inclusion, etc.—and publish a report within one year of the enactment of the bill. Furthermore, the Board and listed federal agencies must provide a confidential briefing on the “development of international standards related to” CBDCs within 180 days of the bill’s enactment.
However, it has been reported that House Republicans intend to revise the bill as there is no longer bipartisan support.
What does this mean?
The bill’s introduction further evidences Congress’s keen focus on backed stablecoin issuance. It’s encouraging that the bill doesn’t seek to limit the issuance of stablecoins to banks and would instead create a pathway for non-bank issuers to comply with the regulations.
The devil will be in the details, of course, as revisions are set to be made and we will be paying close attention to this bill through its life cycle.
House Financial Services Hearings on SEC Oversight and Stablecoins
It was a busy week for crypto on Capitol Hill this week, with the House Financial Services on Digital Assets, Financial Technology and Inclusion holding separate hearings on crypto related matters on two consecutive days.
SEC Oversight
On Tuesday, the House Financial Services Committee held a hearing entitled “Oversight of the Securities and Exchange Commission” in which SEC Chair Gensler appeared as the sole witness. Two key issues carried the day. First, representatives pressed Gensler on the SEC’s unprecedented rulemaking blitz. Paradoxically, Gensler also drew scrutiny from lawmakers for an utter dearth of formal rulemaking and guidance issued with respect to digital assets during his tenure. In response, Gensler remained adamant that the existing securities laws provide sufficient clarity to the market and urged market participants to come into compliance with those laws. Notwithstanding these claims, Gensler was unable to opine on whether specific digital assets constitute securities and equivocated when asked about his own evolving view on the SEC’s authorities.
Stablecoin Legislation
On Wednesday, the House Financial Services Subcommittee convened, this time to discuss the role of stablecoins in the payment system and the need for legislation in a hearing entitled, “Understanding Stablecoins’ Role in Payments and the Need for Legislation.” The witnesses were Blockchain Association Chief Policy Officer, Jake Chervinsky; Professor Austin Campbell of Columbia Business School; New York State Department of Financial Services Superintendent, Adrienne A. Harris; Circle Chief Strategy Officer and Head of Global Policy, Dante Disparte; and Consumer Reports Financial Fairness Director, Delicia Reynolds Hand.
Though legislators seemed to agree that stablecoin legislation is needed, some appeared divided as to the shape it should take. Some members and witnesses alike seemed to reach consensus on the importance of ensuring a clear and measured approach to stablecoins that does not preempt state legislation and attracts responsible stablecoin innovation to the United States. On the other hand, several representatives appeared more wary of stablecoins and their role in the payments system. They also took issue with the draft legislation. During the hearing, Ranking Member Maxine Waters (D-CA) indicated that she no longer supports the legislation in its current form, raising concerns that the bill does not adequately address risks revealed by the failure of FTX.
What does it mean?
In the SEC oversight hearing, Gensler's inability to provide clear answers on the classification of digital assets like Ether and his insistence on the sufficiency of existing securities laws highlights the ongoing lack of regulatory clarity for the crypto industry. This uncertainty will continue to hinder innovation and growth in the American digital asset sector, as companies struggle to navigate the legal landscape. Representative Torres (D-NY) took issue with the SEC’s choice of enforcement targets, noting that instead of prioritizing enforcement against “offshore, deregulated, over-leverage companies,” the SEC has chosen to target onshore, regulated companies like Coinbase. Nonetheless, Gensler appeared unbothered—a likely signal that we should not expect him to change course during the rest of his tenure.
As for the stablecoin hearing, its tenor suggests that reaching a consensus on stablecoin legislation will be challenging. Of note, increasing concerns around weakening dollar supremacy may serve to catalyze the passage of thoughtful stablecoin legislation. However, those same concerns could also spur the development of a U.S. CBDC.
Coinbase Applies for Bermuda License as US Crypto Regulatory Landscape Drives Innovation Abroad
What happened?
This week, Coinbase announced it successfully obtained a license from the Bermuda Monetary Authority as it kicked off its 8-week international expansion drive to enter new markets with “responsible crypto forward regulatory frameworks.” Though no official announcement has been made regarding its Bermudan launch, Coinbase is rumored, from a person close to the company, to launch its offshore derivatives exchange as soon as next week.
This announcement comes just after Coinbase CEO Brian Armstrong’s statements at Fintech Week in London opining on the dangers of not providing a clear and comprehensive regulatory framework for the crypto industry in the United States. When the former head of the UK treasury, Chancellor George Osborne, asked whether Armstrong could ever foresee Coinbase leaving the US, Armstrong stated, “We were founded in the US, I think the US has the potential to be an important market in crypto. Right now, we are not seeing that regulatory clarity needed, so, I’d say anything is on the table.”
As an example of the confusion the crypto industry faces in the US relative to the UK (where crypto is regulated singlehandedly by the Financial Conduct Authority), Armstrong discussed the “turf battle” between the Commodities Futures Trading Commission and Securities Exchange commission, explaining, “We actually have contradictory statements from the heads of the CFTC and the SEC coming out almost every few weeks. How's a business going to operate in that environment? We just want a clear rulebook."
What does this mean?
This statement comes less than a month after the SEC sent Coinbase a vague Wells Notice regarding its plans to pursue an enforcement action against its alleged violation of securities laws for running its exchange and staking services. Armstrong and other domestic leaders in crypto have expressed frustration regarding agencies’ choice of regulation-by-enforcement in lieu of open collaboration. For instance, prior to this notice, Armstrong stated “We’ve met with them [at the SEC] over 30 times in the last year. […] [We] never got a single piece of feedback from them about what we can be doing better or differently, and then this Wells notice arrived.”
As we further discussed in our Weekly Update two weeks ago, American executive agencies’ outright hostility to the industry and refusal to allow it to function within a regulatory perimeter pose a danger to domestic innovation in blockchain and global competitiveness. Coinbase’s expansion offshore and abroad is just one first step in this trend, but nevertheless illustrates the loss of domestic crypto leadership that could occur with continued misguided regulation by enforcement.