Update on Stablecoin Legislation from HFSC
In an interview last week, Representative Jim Himes (D-CT) told CoinDesk that upcoming stablecoin legislation in the House will likely allow a path for non-bank firms to be eligible to issue stablecoins. Earlier this year, the Biden administration’s Working Group on Financial Markets recommended that stablecoins only be offered by “insured depository institutions, which are subject to appropriate supervision and regulation.”
Himes told CoinDesk that Chairwoman of the House Financial Services Committee Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC) have been working in concert on a stablecoin-specific bill meant to establish requirements for issuers.
“There is broad agreement that legislation is necessary,” McHenry said, adding that “the best way to get this done” is in a bipartisan manner. He further contended that “requiring stablecoins to only be issued by banks would be a major obstacle to foster innovation.”
McHenry and Senator Pat Toomey (R-PA) have both expressed their optimism about the bill’s prospects, saying they believe it could be presented on the floor by the end of the year. Himes, on the other hand, is less optimistic about the release and said he doubts any meaningful legislation will come out of this Congress.
Toomey has also separately expressed his support for non-bank stablecoin issuance in the past, adding that he believes there should be a federal license specifically for stablecoin issuers to do business alongside traditional depositories.
What does this mean?
Expect to see a new bipartisan stablecoin bill, and it sounds like this bill will likely allow a path for non-depository institutions to issue stablecoins.
It is encouraging to see legislators take an incremental approach to developing a framework for digital assets rather than a “one size fits all” approach. It’s also encouraging to see support for sound regulation on both sides of the aisle given the current level of political polarization.
It remains unclear how this legislation will address, if at all, other types of stablecoins, like crypto overcollateralized stablecoins and “algorithmic/undercollateralized” stablecoins. To the extent that it does, it is important to differentiate between stablecoin models since they present different risks and function in different ways.
A few words on how UST has played into this: there’s no minimizing what was a spectacular and destructive collapse, and it’s worth considering ways to limit the negative externalities and consequences of experimental failures. But “failure must be an option,” in the words of Senator Toomey. Innovation requires experimentation, and the (very worthy) cost of experimentation is failure.
Central Bankers Discuss Stablecoins, CBDCs, and & DeFi at G20 Panel in Indonesia
On Sunday of last week, the G20 hosted a panel discussion in Indonesia to address a host of regulatory issues including those surrounding CBDCs and stablecoins.
Australian Central Bank Governor Phillip Lowe expressed his support for well-regulated stablecoins rather than state-issued CBDCs, stating, “I tend to think that the private solution is going to be better - if we can get the regulatory arrangements right - because the private sector is better than the central bank at innovating and designing features for these tokens. He further noted there would likely be “very significant costs for the central bank setting up a digital token system."
Lowe and the other panelists agreed that stablecoin regulation is necessary, especially in light of recent events surrounding the collapse of Terra, an algorithmic stablecoin that lost its peg earlier this year.
Hong Kong Monetary Authority CEO Eddie Yue agreed with Lowe, adding that the implementation of sound regulations surrounding stablecoins and centralized crypto entities could help mitigate the risks associated with DeFi activity.
Yue said he believes this approach would be more practical and effective than attempting to regulate on-chain DeFi activity.
"Despite the Terra-Luna incident, I think crypto and DeFi won't disappear - though they might be held back - because the technology and the business innovation behind these developments are likely to be important for our future financial system," Yue concluded.
What does this mean?
The crypto community has long feared the privacy implications of a CBDC. Hearing a panel of central bankers from G20 nations express their support for privately issued stablecoins over CBDCs is a win for financial privacy and innovation.
It is equally encouraging to hear central bankers (who tend to be the most DeFi-hostile cohort of regulators) from G20 nations recognize the fundamental differences between centralized crypto projects and DeFi projects, as well as the role DeFi will play in the future of our financial system.
SEC Director of Enforcement Appears Before House Subcommittee
This Tuesday, the House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets held a hearing on oversight of the SEC’s enforcement division.
Gurbir S. Grewal, the SEC’s Director of Enforcement, represented the Commission at the hearing.
Although the Commission nearly doubled the size of its Crypto Assets and Cyber Unit in May, Director Grewal said the agency will likely require more staff to reign in the industry. Grewal said the SEC hopes to fill the 125 additional seats they asked Congress for but indicated that the Commission has requested even more resources.
There were extensive debates throughout the hearing from both sides of the aisle. Chairman of the Subcommittee Brad Sherman (D-CA) expressed his belief that the SEC should continue regulating crypto markets, which he has often described as rife with fraud and unregulated risk. Surprisingly, Sherman concluded the hearing by stating that “more clarity would be helpful,” so maybe he’s coming around a bit? 😂
On the other hand, Ranking Member of the Subcommittee Bill Huizenga (R-MI) criticized the Commission’s enforcement-first approach to digital assets under the leadership of SEC Chairman Gary Gensler. He pointed out that of the 63 items that the agency included in its 26 rulemaking proposals, none have been related to digital assets with the exception of a single footnote in one of the proposals.
Representative Tom Emmer (R-MN) pulled no punches, scorching the SEC’s approach to the cryptocurrency ecosystem in strong terms.. He criticized the SEC as uninterested in making it clear which areas of the crypto industry fall under their regulatory jurisdiction. Rather, he argued, the Commission is solely interested in expanding its crypto enforcement division at any cost. He went on to characterize the current SEC as a “power-hungry” regulator that was “politicizing enforcement” of the crypto industry.
Watch the full exchange here:
What does this mean?
With the Commission continuing to build out its enforcement division and no signal from Chair Gensler indicating a shift in approach, it seems reasonable to assume that the Commission will continue bringing enforcement actions and pursuing litigation as a means of regulating the industry. As noted by Representative Emmer, Chair Gensler’s request for crypto market participants to “come in and talk to the SEC” is reasonable at face value but a red-herring in practice. The SEC is not willing to consider even technical changes to its traditional regulations that would allow hypothetical blockchain-based securities to trade within the SEC’s regulatory perimeter. Look no further than the SEC’s unwillingness to consider how custodians could compliantly hold customer assets under SEC regulations. “Come in and register” becomes “come in and find out there is no way to register,” which serves no one including consumers.
Emmer concluded his comments promising that “there is a new day coming,” referencing his confidence that Republicans will take control of the House of Representatives and engage in robust oversight of the SEC’s approach to crypto.