Progress Stablecoin Legislation or Risk the Financial Future

Cato Institute | Jack Solowey | Apr 20, 2023

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. 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.
• 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).

See:  OpEd: Draft U.S. Bill on Stablecoins Highlight Differences with CBDCs

• How to achieve sensible stablecoin legislation?
  • 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.
  • A stablecoin bill should simply address stablecoins’ primary risks: that fiat asset‐​backed projects have the reserves and redemption policies they claim to.
  • 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.

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