WASHINGTON (CN) — Although Democrats and Republicans in Congress have slightly different opinions on a legislative framework for regulating stablecoin cryptocurrencies, lawmakers said Thursday that they were confident a consensus is not far off.
Congressional debate surrounding stablecoins — a genre of cryptocurrency whose values are pinned to an analog currency such as the U.S. dollar or another commodity — has grown in recent months as policymakers look to establish guidelines for their use in payment transactions.
True to their name, stablecoins are considered less volatile than other types of crypto such as Bitcoin, making them ideal for traders looking for a safe place to store digital assets during market fluctuations as an alternative to pulling funds out of the crypto exchange entirely. There are roughly 200 different stablecoins, in all valued at more than $100 million, currently circulating in the cryptocurrency market.
Although stablecoins are primarily used as a way station for traders looking to reinvest in other digital assets, lawmakers see the currency’s potential as an efficient method of paying for retail goods that can expand options for consumers. However, the regulation of stablecoin markets is largely in states’ hands at the moment, and federal oversight is done by a variety of agencies depending on how the currency is used.
In the previous session of Congress, a bipartisan measure establishing legal guidelines for “payment stablecoins” and regulating their use made headway in the House Financial Services Committee, but never saw a vote. Now, the Republican-controlled lower chamber is trying its hand again — but the refreshed stablecoin debate has resulted in some partisan disagreement.
Democrats and Republicans split on stablecoin regulation in April, when the GOP put forward its own version of the stalled legislation. California Representative Maxine Waters, the finance panel’s ranking member, accused her Republican colleagues of sidestepping negotiations and said Democrats would produce their own version of the bill.
“I think we’re starting from scratch to deal with stablecoins,” Waters said at the time.
The dueling bills are largely similar. Both provide a legal definition of payment stablecoins and both set up guidelines for stablecoin issuers, such as banks, to seek approval from the Federal Reserve or another banking regulator. However, Democrats’ bill would tighten restrictions on non-bank issuers, giving the Fed the power to disapprove stablecoin issuers with state registration and denying non-bank issuers direct access to the agency.
The Democratic bill also bars commercial retailers such as Facebook and Walmart from issuing their own stable cryptocurrency, which lawmakers have said maintains separation between banking and commerce. Further, the measure would direct the Fed to study whether the government should establish its own central bank digital currency.
In their first hearing since the schism, the finance panel met Thursday to hash out those differences. Despite the partisan rhetoric, Arkansas Republican French Hill said in an opening statement that there was still a path forward on stablecoin legislation.
“I remain convinced that members on both sides of the aisle are actively working in good faith to find agreement on these key points,” Hill said.
Pushing back on Waters’ earlier comments, Hill argued that lawmakers should not ignore the common ground Democrats and Republicans found in the previous session: “I want to be clear, while we know there are two different legislative proposals today, we’re not starting from scratch.”
Massachusetts Democrat Stephen Lynch acknowledged the parties’ differences, but echoed Hill’s calls for cooperation.
“It appears that we’ve shifted further apart from bipartisan agreement,” Lynch said. “My hope is that we can use this hearing and future discussions to find some alignment.”
Meanwhile, Lynch expressed concerns about stablecoins expressed by other lawmakers — particularly that they could be prone to runs, in which users sensing market volatility pull all of their funds out of the digital currency, and that attaching such risk to the larger U.S. economy could threaten financial stability.
The Massachusetts Democrat alluded to the recent failure of Silicon Valley Bank and the collapse of crypto trading exchange FTX as examples of the need for strong guardrails on emerging financial services technology.
“We need to ensure that any proposal provides adequate safeguards to our financial system,” he said.
While the Republican bill addresses some of those concerns, Lynch argued, it leaves out what he said were some key provisions such as adequate consumer protection and consideration of a federal digital currency.
“Ranking Member Waters’ bill gets us a step closer to addressing some of those newer issues that have emerged,” Lynch said.
Meanwhile, a panel of witnesses advised lawmakers Thursday on best practices for developing stablecoin regulation guidelines.
Matt Homer, a former executive in the New York Department of Financial Services’ research and innovation division, held up the Empire State’s regulatory process as an example of effective stablecoin oversight.
“New York’s experience shows that it is possible to effectively regulate stablecoins using common sense and time-tested regulatory practices,” Homer said.
Albany implemented reserve requirements for currency issuers that required them to back their digital tokens with cash separate from funds deposited by users, Homer explained, and also established consumer protections making it easier for users to exchange stablecoins for U.S. dollars.
David Portilla, a financial services lawyer and partner at the New York-based law firm Davis Polk & Wardwell LLP, commended lawmakers for their efforts and urged a bipartisan consensus on stablecoin regulation.
Portilla argued that while the significant risks of currency-backed digital tokens can be managed, the current legal framework for regulating them is insufficient.
“We can and should proactively mitigate these risks by establishing a regulatory framework now, before the risks grow larger and scale makes that change more difficult,” Portilla said.
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