Lawmakers clash over how to regulate ‘stablecoins’

House lawmakers debated Tuesday whether the federal government should force “stablecoin” issuers to adhere to strict federal bank regulations and insurance to limit the risks of a quickly growing segment of the cryptocurrency market.

Members of the House Financial Services Committee pressed a top Treasury Department official on the Biden administration’s suggested framework for regulating cryptocurrencies tied to fixed value. 

While the prices of popular cryptocurrencies such as Bitcoin and Ethereum rise and fall in financial markets, stablecoins are meant to hold their value and serve primarily to transmit money. 

There is roughly $180 billion in stablecoins in global circulation, according to cryptocurrency tracking websites, amid a broader explosion in cryptocurrency investment during the coronavirus pandemic.

“In the current environment, regulators are in a bit of an uncomfortable position,” said Nellie Liang, the under secretary of Treasury for domestic finance.

Stablecoins are meant to be a safe haven amid volatile cryptocurrency markets and help create a bridge between digital tokens and traditional commerce. They have also drawn bipartisan interest as a cheaper and more accessible way to send money or make transactions outside of the traditional financial system and across international lines.

Most stablecoin offerors say they use a portfolio of fiat currency or other financial assets to back up the value of the digital token. Not all stablecoin issuers, however, disclose what they use as reserves or whether they have enough to cover the value of each token.

“If stablecoins are backed by high-quality assets, their risk is quite low and they can form a building block, a cornerstone of a payments system,” Liang said. “If there’s questions about the quality of the assets and the reserve pool backing them, then they create risk.”

Even Republican lawmakers who’ve pushed back on Democratic criticism of the cryptocurrency industry have acknowledged some of stablecoins’ regulatory shortcomings. Both parties generally agree federal law must be updated to give stablecoin issuers clear standards meant to keep consumers safe and the broader financial system stable.

“We need legislation. We agree on that,” said Rep. Patrick McHenry (N.C.), the top Republican on the House Financial Services Committee who has championed the innovative potential of cryptocurrencies for years.

“Regardless of what some may believe, it’s our job on Capitol Hill to develop legislation to direct regulatory action,” he continued. “With nearly a quarter of American adults now invested in crypto, we must move quickly to put in place a framework that clearly defines the rules of the road.”

Both Democrats and Republicans expressed concerns about a stablecoin issuer going bankrupt in times of crisis if they lacked enough cash or other easily sellable assets to cover redemptions en masse. Policymakers also fear a run on a stablecoin could trigger broader chaos in financial markets if the issuer struggles to cover their losses.

In a November report, the President’s Working Group on Financial Markets and two bank regulatory agencies proposed only allowing firms supervised by the Federal Deposit Insurance or National Credit Union Administration to issue stablecoins. Doing so would make sure stablecoins are backed by federal deposit insurance but also subject issuers to regular federal inspection and tougher risk management requirements.

“Simply labeling something as stable or openly reliant on a one-to-one ratio does not in itself mean it maintains a stable value,” said Rep. Maxine Waters (D-Calif.), the chairwoman of the House Financial Services Committee and a skeptic of cryptocurrencies.

But McHenry and many of his Republican colleagues pushed back on a proposal outlined in the November report, arguing it would limit the ability of stablecoin issuers to expand financial access beyond the traditional financial system. He also said it made little sense for Democrats to bring ostensibly riskier activities into the federally insured firms after spending more than a decade writing rules meant to limit bank risk-taking.

Rep. Andy Barr (R-Ky.) argued lawmakers could create similar checks and protections for stablecoin issuers outside of the banking system through audits and transparency rules.

“If you have an audit, if you have oversight of the integrity of audits to ensure that stablecoins truly are stable,” Barr said, “That to me solves the problem without requiring stablecoin issuance to be done through insured depository institutions.”