Lawmakers to scrutinize ‘stablecoins’

A House committee is set to debate how far the federal government should go to supervise, regulate and allow the offering of “stablecoins” — cryptocurrency tokens tied to a fixed value.

In a Tuesday hearing, members of the House Financial Services Committee and Treasury Undersecretary Nellie Liang are expected to draw lines around the ways Washington should address a rapidly growing segment of the cryptocurrency industry. 

Stablecoins have exploded in popularity and prominence among digital currencies, drawing both excitement and concern from policymakers. While the values of other cryptocurrencies such as Bitcoin and Ethereum are volatile, stablecoins offer tokens redeemable for a specific price, usually in U.S. dollars. 

With close to $180 billion in stablecoins in circulation, policymakers are racing to set up a basic framework for which companies are allowed to offer stablecoins, transparency rules for stablecoin issuers and whether stablecoin offers should be subject to federal stress testing.

“It’s a combination of new innovation and technology along with the traditional financial system,” said Ron Hammond, director of government relations for the Blockchain Association, a cryptocurrency industry trade group. 

“There’s definitely some regulatory gaps that need to be filled,” he said.

Cryptocurrency advocates say stablecoins offer a bridge between digital tokens as an investment and as a usable currency and could also expand the ways consumers can send money with minimal transfer or conversion fees. 

Most stablecoin issuers keep reserves of fiat currency or other ultra-safe assets, such as U.S. Treasury bonds, to back up the value of the digital token. While those reserves are meant to make sure the digital token can be redeemed for actual currency, policymakers have raised concerns about how sturdy these companies can remain during a crisis.

If holders of a certain stablecoin try to redeem their tokens for U.S. dollars en masse, experts fear the company who issued the coin could go bankrupt or — even worse — trigger broader chaos in financial markets. Skeptics often cite the bank runs of the 1929 financial crash and a deep decline in Treasury yields triggered by mass a sell-off in money market funds during the onset of the coronavirus pandemic in 2020.

“If I want to get my money back, will I get one-to-one with a stablecoin? I do with my dollar at a bank,” said a financial services industry advocate. 

“People assume that a stablecoin has the same characteristics as currency,” the advocate continued, “so if there’s a run, then that creates a problem.”

A November report from a Biden administration panel of financial experts, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency set down the marker for a potential stablecoin regulation framework. 

The report urged Congress to pass legislation limiting stablecoin issuance only to banks or credit unions with federal deposit insurance from the FDIC or National Credit Union Administration (NCUA). This shields customers if those digital tokens collapsed in value, but also limits stablecoin issuance to financial firms already under federal supervision from the FDIC or NCUA. 

The agencies also urged Congress to put companies that offer cryptocurrency “wallets” under federal supervision, to restrict relationships between stablecoin issuers and commercial firms, and consider whether stablecoin issuers could be “systemically important financial institutions.”

That designation was created by the 2010 Dodd-Frank financial reform law to allow financial regulators to subject companies to annual stress tests and stricter capital requirements. 

While both parties have called for some type of stablecoin regulation, Republicans and some Democrats have pushed back against the Biden administration report. Lawmakers have unleashed a flurry of bills with overlapping aims, giving the Financial Services panel plenty of offerings to sort through before finding common ground. 

“Several complicated questions around stablecoins need to be resolved,” wrote Ian Katz, director at research consultancy Capital Alpha Partners, in an analysis last week.

One proposal floated as a compromise from Rep. Josh Gottheimer (N.J.), a crypto-friendly Democrat, would allow a broader range of companies to offer stablecoins so long as they partnered with a bank or credit union or used a form of deposit insurance.

But Katz said it could be months, if not longer, before lawmakers can coalesce around a bill with enough bipartisan support to reach President Biden. He added he’s “skeptical that there’s enough support, especially among Republicans, for [the Gottheimer bill] to become law” before next year. 

“There will be no lack of discussion on Capitol Hill. But our sense is that it will take some kind of significant external event affecting a lot of crypto investors, like a fraud or perhaps a much steeper decline in asset prices, for Congress to actually pass legislation,” Katz said.