Jack Solowey
The United States has long led global finance. Its institutions shaped critical financial infrastructure and saw the dollar become the world’s reserve currency—thanks to rule of law, property rights, and an innovative market economy at home. As the economic landscape evolves, maintaining this position is a matter of adapting to new technologies that could complement the U.S. dollar and enhance global financial plumbing. Yet, in a fit of myopia, U.S. regulators seem bent on stifling the very developments that could help extend America’s historic strengths, looking askance at recent attempts to integrate open‐source software with finance.
Yesterday, the House Financial Services Committee’s Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing on stablecoins (cryptocurrencies pegged to the value of an asset like the dollar). The committee deserves recognition for taking the all‐important first step: admitting we have a problem. Nonetheless, although the witnesses largely agreed on the shortsightedness of U.S. hostility to decentralized financial technology and the need for regulatory clarity, comments from lawmakers indicated that a common‐sense solution on stablecoins, unfortunately, remains far off.
Moreover, a bill posted on the committee’s website before the hearing—a draft stablecoin framework that first circulated last fall—needs work if it is to rein in the excessive regulatory discretion that hinders a competitive stablecoin market and undermines American developers and consumers.
To their credit—Subcommittee Chairman French Hill (R‑AR) and Committee Chairman Patrick McHenry (R‑NC) acknowledged that the bill is but a jumping off point for future revisions—an “infant” in Rep. Hill’s words (and an “ugly baby” in Rep. McHenry’s phrasing from last fall). And Chairman McHenry was candid that the bill is imperfect “in many, many ways.” More pointedly, Ranking Member Maxine Waters (D‑CA) was clear to emphasize that from her perspective, “we’re starting from scratch” and should “disregard the bill that has been posted altogether” given developments in the crypto space since earlier negotiations.
So, what should a final bill look like? To answer that question, it’s important to understand how the U.S.’s tangled web of legacy state and federal laws allow regulators to freestyle when it comes to stablecoins and intervene erratically in the market, which, according to the testimony of Columbia Business School professor Austin Campbell yesterday, is driving developers to more welcoming shores abroad. At the federal level, the Securities Exchange Commission and bank regulators have leveraged ambiguity to threaten enforcement actions against stablecoin projects and caution licensed institutions away from involvement with the crypto ecosystem.
Sensible stablecoin legislation can provide a much‐needed signal that the U.S. is finally ready to adopt a sane approach to digital assets. However, to achieve that sanity, a stablecoin bill will need to embrace competition from new entrants. This can be accomplished by reducing the regulatory discretion that disserves U.S. businesses and users, avoiding overreactions to experimental instruments, and opening the doors to non‐traditional market participants.
A stablecoin bill should not grant regulators open‐ended leeway to reject the applications of stablecoin issuers. Instead, legislation should focus on objective criteria related to reserve assets and disclosures rather than vague factors like a project’s future benefits, contribution to financial stability writ large, overall convenience, or ability to promote financial inclusion.
While those are laudable goals—and consistent with the promise of stablecoins to facilitate competition, transparency, efficient payments, and financial inclusion—evaluating a given stablecoin project’s ability to achieve them ex ante would be highly subjective. Requiring stablecoin issuers to prove their merit in order to exist, instead of simply to mitigate known risks related to the quality and availability of their collateral, would hold stablecoin issuers to a higher standard than other financial institutions. Indeed, the very goals of inclusion and competition would be better served by allowing new market entrants, not creating nebulous prior restraint standards with which to reject new players.
Along these lines, a stablecoin bill should simply address stablecoins’ primary risks: that fiat asset‐backed projects have the reserves and redemption policies they claim to. As Jake Chervinsky, Chief Policy Officer of the Blockchain Association, noted yesterday, currently “over 90% of the market capitalization for all stablecoins comes from just five custodial stablecoins.” Legislation should avoid expressing an opinion on, let alone banning or pausing, other types of instruments that are erroneously lumped together with fiat‐collateralized stablecoins, such as crypto‐asset‐backed stablecoins and algorithmic stablecoins (which endeavor to maintain stable values by engineering convertibility between two digital assets from the same issuer). While algorithmic stablecoins, for example, are an unproven technology, they’re largely irrelevant to the problem of providing regulatory clarity to businesses tokenizing fiat assets. Moreover, prohibiting financial technology experimentation generally is unbecoming of the leader of the free world and an innovative market economy.
Lastly, stablecoin legislation should allow flexibility when it comes to the types of businesses issuing stablecoins. Not only should non‐bank and state‐chartered entities be allowed to become lawful issuers, but so too should businesses from diverse sectors, including those traditionally outside of finance. Preventing companies with other lines of business from issuing stablecoins—or affiliating with those doing so—would risk further constraining financial inclusion and competition. Inclusion goals could be hindered where trusted brands are blocked from serving the markets and communities they know best. And potential efficiency gains could be lost where networked businesses in other sectors (like social media and ecommerce platforms) are unable to bring their expertise to bear in the stablecoin market should they choose to.
Through curbing regulatory discretion, avoiding disproportionate interventions, and opening the field to new participants, Congress could help to resolve the U.S.’s unsustainable stablecoin status quo. If the U.S. wishes to remain the world’s preeminent financial market, legislative work on stablecoins must continue to ensure that our laws are open to technologies with the potential to help maintain and extend that lead.
