According to the current version of a bill being developed in the United States House of Representatives, companies issuing stablecoins would have to deal with the Federal Reserve as the primary oversight agency.
While the industry is desperate for rules and oversight to alleviate the uncertainties that keep most investors on the sidelines, stablecoin firms would be regulated by an agency that spends much of its time trying to keep Wall Street banks in check. This would be a first for the Fed and nonbank crypto businesses, which have never had a federal supervisor.
The House Financial Services Committee has reached an agreement on a bipartisan effort to establish stablecoin oversight in the United States. It could be the first step toward crypto regulation, though a few details need to be worked out. According to two people who asked not to be identified because the legislation has not yet been released, the bill currently includes naming the Fed as the government’s watchdog for stablecoin issuers. However, the details are still being worked out, so the Fed’s role may change.
Ian Katz – Capital Alpha Partner’s (a Washington, D.C.-based research firm) managing director, stated that the Fed is the big fish in the pond of bank regulators, and stablecoins are a big deal, so this is not a surprise. Due to the potential ramifications for the dollar, the Fed was always going to play a big role in stablecoin oversight.
Committee leaders had hoped to release the bill this week, but a last-minute intervention from Treasury Secretary Janet Yellen may have pushed it back until after the August congressional recess, according to another person familiar with the situation.
The Treasury Department insists that the bill addresses the risks to customers’ money when cryptocurrency exchanges do not take steps to separate that money from the firm’s assets. Meanwhile, Republicans objected to expanding the legislation, according to the source. The Fed’s role isn’t as contentious as other aspects of the bill, so lawmakers and their staff will have the rest of the summer to work on it.
Stablecoins, which are tied to the value of the dollar, such as Tether’s USDT and Circle Internet Financial’s USDC, represent a relatively small share of the $1 trillion in crypto’s overall market capitalization however are traded at a very high volumes because they are frequently used by investors to move in and out of bitcoin (BTC), ether (ETH), and other cryptocurrencies.
If the House bill allows such nonbank issuers to open Fed master accounts, it is reasonable that the Fed would play the primary federal supervisor’s role, according to Alexandra Steinberg Barrage, a former FDIC senior official who is now a regulatory lawyer at Davis Wright Tremaine. If the Fed is in charge of licensing nonbank stablecoin issuers, the payment, licensing, and supervisory functions are all centralized in one regulator.
Dueling roles
Licensing financial institutions is more commonly linked with the Office of the Comptroller of the Currency, which controls federal bank charters.
When that agency was led by Trump administration appointee Brian Brooks, who is now the CEO of Bitfury, the crypto industry experienced a brief period in which a government ally attempted to open the door for digital assets in US banking. However, that came to a halt with the arrival of Acting Comptroller of the Currency Michael Hsu, a self-described “crypto skeptic” who claims the industry has an unhealthy “dependency on hype.”
Michael Barr, the Fed’s new vice chairman for supervision, was appointed last week. While the crypto world knows him as a former Ripple Labs adviser, he’s also known to advocate for aggressive financial oversight, so his stance on regulating digital assets is unclear. That question would undoubtedly be answered if his agency was suddenly given direct authority over who issued stablecoins because he would be taking the lead.
Michael Barr was appointed as the Fed’s new vice chairman for supervision last week. While he is well-known in the crypto community as a former Ripple Labs adviser, he is also known to advocate for strict financial regulation, so his stance on regulating digital assets is unclear. That question would almost certainly be answered if his agency were suddenly given direct authority over who issued stablecoins because he would be in charge.
In practice, however, there are currently no firms on that list. Because the council has steered clear of using that authority, the Fed’s experience is limited.
The House committee’s chairwoman, Maxine Waters (D-Calif.), negotiates with the panel’s ranking Republican, Patrick McHenry (R-N.C.), and each seeks support from members of their respective parties. As a result, any proposal to empower the Fed would have to navigate a political minefield.
If the bill passes the House, it will face Sen. Sherrod Brown (D-Ohio), the Senate Banking Committee’s Chairman. He’s wary of the crypto industry, but his thoughts on this legislative effort are unclear. Sen. Pat Toomey (R-Pa.), the panel’s top Republican, has proposed his version of stablecoin legislation and believes a bipartisan bill can be negotiated this year. He will leave the public office at the end of the current legislative session.
Putting the Fed in charge of stablecoins raises the question of whether the Securities and Exchange Commission will play a smaller role with those tokens. The Fed’s involvement could be good news for cryptocurrency businesses that are at odds with the SEC. Gary Gensler, its chairman, has frequently stated that most crypto tokens meet his agency’s definition of securities that must be registered.
When it comes to capital reserves and liquidity minimums, which are expected in this bill, the Fed could be one of the world’s toughest financial regulators. Keith Noreika, former head of the OCC, warned crypto advocates not to be so eager to be regulated that they overlook the potential difficulties of being overseen by the Fed.
Perhaps it is better at this early stage to evolve regulation of this new technology organically rather than creating a monopoly federal gatekeeper that may inhibit innovation, said Noreika, who recently took a senior role at Patomak Global Partners and expects to work with crypto clients. According to the long-time regulatory lawyer, the central bank frequently takes a one-size-fits-all approach to regulation, which could have a “dramatically adverse impact” on stablecoin technology.
The Fed had a track record thanks to one of the most eminent stablecoin efforts in recent history: libra, which became Diem. That would-be stablecoin, backed by Facebook (now Meta) and other tech heavyweights, negotiated for months with the Fed, among others, before US authorities intervened and the Diem effort collapsed.
Unfortunately, the timing just wasn’t right, and neither was the messenger, said Kurt Hemecker, the Diem effort’s chief of staff and head of internal business operations.
Hemecker, who is now the Mina Foundation’s chief operating officer, has no ill will toward the Fed, suggesting that given the central bank’s role in supervising the US financial system, it is reasonable for the Fed to be the kind of overall regulator for stablecoins.
