As Washington attempts to get its arms around the rapidly growing cryptocurrency industry, policy makers in the Biden administration and on Capitol Hill have identified stablecoins as an initial target for tighter regulation.
Often billed as one-to-one representations of a currency like the dollar, stablecoins have recently exploded in popularity as investors use them for trading other cryptocurrencies. There are dozens of stablecoins, though a handful pegged to the dollar account for most of the market value, which grew roughly 500% in the 12 months ending in October, according to a report from the Biden administration.
Both Democrats and Republicans want to create new safeguards to help ensure that one stablecoin is quickly redeemable for one dollar, while at the same time warding off broader risk to financial markets. But despite bipartisan agreement about the need for new federal action on stablecoins, policy makers remain at odds about how and when to take it.
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The Biden administration is asking lawmakers to pass legislation that would treat stablecoin issuers like banks, a step that Republicans and some Democrats oppose in favor of a lighter statutory touch. Other Democrats are skeptical of compromising with Republicans on the issue at all, instead pushing the Biden administration to take more aggressive steps itself.
How—and if—Congress resolves the debate over the roughly $185 billion stablecoin market is an early test of whether Washington will ultimately write new laws or wield existing frameworks to regulate the broader $2 trillion cryptocurrency industry.
“This is a relatively narrow segment of the crypto universe and it would be very constructive if we provided some regulatory certainty and clarity,” said Sen. Pat Toomey (R., Pa.), the top Republican on the Senate Banking Committee, who last week released a draft bill on the issue. “Stablecoins are the logical place to start and the place where there’s the most interest in starting.”
While policy makers say they want to craft rules that could support stablecoins’ wider adoption, they worry about their meteoric growth. The reserve assets of the largest stablecoin, Tether, have been the subject of multiple investigations, with the Commodity Futures Trading Commission last year accusing it of misrepresenting that its dollar reserves were equivalent to its coins. Tether Ltd. agreed to pay a $41 million settlement but didn’t admit any wrongdoing in the case.
The Treasury Department last year led a group of financial regulators from across the administration to study stablecoins, warning that a rush of redemptions for a stablecoin could fuel a fire sale of its reserve assets and put stress on the broader financial system. They asked Congress to pass legislation requiring stablecoin issuance to be limited to entities regulated like banks, which would subject their reserves to oversight from a federal banking agency.
“To peg their stablecoin to a dollar, most issuers say they back their coins with traditional assets that are safe and liquid,” Treasury Secretary Janet Yellen said during a speech last week on the Biden administration’s approach to digital currencies. “In this way, whenever you want to trade your stablecoin back into a dollar, the company says it has the money to make the exchange. But right now no one can assure you that will happen.”
Some lawmakers on Capitol Hill, as well as representatives of the cryptocurrency industry, are resistant to regulating stablecoin issuers like banks. Both Mr. Toomey and Rep. Josh Gottheimer (D., N.J.) have drafted legislation that would provide additional oversight of issuers’ reserve assets, but give issuers the choice of subscribing to banklike requirements or falling under a regulatory classification created for stablecoins. Mr. Toomey’s bill would also allow stablecoin issuers to operate under state rules.
Mr. Gottheimer said he deviated from the Biden administration’s request to regulate all stablecoin issuers like banks because of industry feedback and the desire to win bipartisan support for the effort.
“What we heard is clearly some are willing to become a bank or go that route and others are not and they want a little bit more flexibility,” he said. “Also frankly I think what we can get through the Congress is part of this as well.”
The Blockchain Association—an industry group that represents Circle, the issuer of one of the most popular stablecoins—wants to allow nonbanks to compete with banks on issuing stablecoins.
“It’s helpful to have that competition, to have that innovation,” said Ron Hammond, the association’s director of government affairs.
Senior Treasury officials said they have been encouraged by the bipartisan recognition of the risks stablecoins pose and expect that they will be able to reach an agreement with lawmakers on the issue. Some Democrats have been hesitant to work on legislation on stablecoins specifically, instead favoring attempting to pass a bill that deals with the broader set of regulatory issues associated with cryptocurrency.
Absent congressional action, the Biden administration has said it would encourage the Financial Stability Oversight Council, a group of financial regulators led by Ms. Yellen, to consider designating elements of the stablecoin processes as systemically important to the stability of financial markets. That step could open the door to more stringent oversight of the assets that back stablecoin, an option that some Democrats prefer to the legislative frameworks garnering bipartisan support.
Sen. Sherrod Brown (D., Ohio.), the chairman of the Senate Banking Committee, said the Biden administration should move ahead under its own power.
“That’s the most certain path forward,” he said. “I’m very willing to move legislatively, I just don’t know if we can get Republicans.”
Other Democrats, including Rep. Ritchie Torres (D., N.Y.), a progressive who has made the case for the benefits that cryptocurrencies could provide to low-income Americans, want to pass legislation and restrain some Biden administration regulators. Securities and Exchange Commission Chairman Gary Gensler has said that stablecoins could be classified as securities.
“The lack of congressional action has left behind a power vacuum that regulators like the SEC are trying to fill and without a congressional statute, the regulations could vary widely from administration to administration,” Mr. Torres said. “For me, crypto has the potential to be so consequential it should be legislated and regulated on a bipartisan basis to the extent possible.”
In its executive order last month commissioning a series of studies of the cryptocurrency industry, the Biden administration tasked agencies with reviewing areas where new legislation may be necessary to improve the government’s handle on digital assets, including on the possibility of creating a digital version of the dollar.
Given some of those reviews are likely to take months, lawmakers anticipate that Congress won’t take major action on cryptocurrency until next year—an encouraging possibility to Republicans who are poised to win control of the House in the fall’s midterm election.
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