Jennifer J. Schulp
Crypto policy is off to the congressional races. Putting the rubber to the road on the Trump administration’s executive order “Strengthening American Leadership in Digital Financial Technology,” Davis Sacks, the White House artificial intelligence (AI) and crypto czar, announced on February 4 that stablecoin legislation is an administration priority. And Congress (perhaps uncharacteristically) hopped to it.
Stablecoins are crypto tokens that are pegged to the value of another asset, like the US dollar. The general idea behind these tokens is that their stable value will promote their use as a digital medium of exchange. Because transactions with stablecoins can settle nearly instantaneously, some view them as improvements to existing payment rails (which are slower and more costly). And because the US dollar is the primary reference asset for stablecoins globally, stablecoins could present an opportunity to extend the dollar’s reach to more markets and help cement the dollar’s global reserve status in the era of digitally native payments.
Even before Trump swept into office, there was widespread bipartisan agreement that legislation is necessary to address stablecoins. But agreement that legislation is necessary didn’t translate into agreement about what that legislation should look like. Picking up, in some ways, from where prior discussions left off, there are now three stablecoin regulation bills attracting attention on Capitol Hill:
- the GENIUS Act, a bipartisan bill introduced in the Senate by Bill Hagerty (R‑TN), Cynthia Lummis (R‑WY), and Kirsten Gillibrand (D‑NY);
- the STABLE Act, a discussion draft put forth in the House by French Hill (R‑AR) and Bryan Steil (R‑WI); and
- an unnamed piece of draft legislation released in the House by Maxine Waters (D‑CA), which she characterizes as the “culmination of three years’ worth of work” to “craft bipartisan stablecoins legislation.”
Stablecoins would benefit from a clear regulatory framework, and any legislation should adhere to the following four principles that aim to ensure that this innovation can meet its full market potential. Legislation should:
- focus on stablecoins’ primary risk;
- reject discretionary gatekeeping;
- assign authority to appropriate regulators; and
- preserve a state regulatory pathway for stablecoin issuers.
Both the GENIUS Act and the STABLE Act fare better than the Waters Draft along these dimensions. And although the GENIUS Act and the STABLE Act are improvements on many of the efforts from last Congress, they both have room for improvement.
Focus on Stablecoins’ Primary Risk
For stablecoins backed by assets, the biggest risk is that the token is not, in fact, stable. In other words, there is a risk that the issuer does not have the assets that it claims to have backing the token. This is a straightforward and tractable risk that can be addressed by basic reserve and disclosure requirements for stablecoin issuers.
The meat of all three bills—the GENIUS Act, the STABLE Act, and the Waters Draft—focus on these primary risks by requiring stablecoin issuers to meet certain reserve requirements and make certain disclosures to the public.
But each of the bills goes further than that. The GENIUS Act and the STABLE Act subject stablecoin issuers to capital, liquidity, and risk management regulation focused on the operations of the issuer, rather than narrowly focusing on the reserve itself. Similarly, the bills would allow regulators to deny a stablecoin issuer’s application if the regulator determines that the activities of the applicant would be “unsafe or unsound.”
This bank-like regulation, however, is an inappropriate fit for stablecoin issuers, which do not function as fractional-reserve banks. While it makes sense to regulate to ensure that the issuer has the reserves necessary to maintain the token’s stability and that assets are available for redemption, regulation that focuses on the issuer’s own operational capabilities is unnecessary, increases costs, and grants discretion to regulators.
The Waters Draft goes even further, though, in imposing more ancillary requirements on stablecoin issuers. For example, the Waters Draft prohibits nonfinancial commercial companies from controlling issuers and requires an issuer to demonstrate a public benefit to become federally licensed. Such requirements are direct impediments to competition that could provide Americans with greater payment options and incentivize all payment providers to improve their products and services.
Reject Discretionary Gatekeeping
Discretion enables regulators to pick winners and losers based on considerations other than market forces (e.g., political favoritism), protect incumbents from competition, and indefinitely impose de facto bans on financial innovation. A framework embedded with high degrees of discretion also does little to fully dispel the regulatory uncertainty that has plagued the US digital assets ecosystem. For these reasons, any discretion granted to regulators in the stablecoin framework should be severely circumscribed.
The GENIUS Act and the STABLE Act grant less discretion to regulators than the Waters Draft, which injects more discretion into the issuer approval process. But they both give regulators substantial discretion over stablecoin issuers by requiring them to regulate the “safety and soundness” of the issuer and permitting them to broadly regulate “any other risk-related factor.” Even more starkly, both the GENIUS Act and the STABLE Act allow federal regulators to themselves define under what “exigent” circumstances they can intervene to bring enforcement actions against state-regulated issuers.
This type of regulatory discretion is problematic because it does not provide clear guidance to issuers about expectations, leaving the contours of regulation up to the (possibly changing) views of the agency overseers. Moreover, the existence of this discretion creates a trapdoor whereby regulators may subvert congressional intent to support competition in payment systems with their own additional requirements.
Assign Appropriate Federal Regulators
A principal question raised by any national stablecoin framework is which regulator should be tasked with overseeing the federal component. Both the GENIUS Act and the STABLE Act create a federal framework for stablecoin issuers that is overseen by federal banking regulators (the Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency), depending on the type of issuer. The Waters Draft, in contrast, places a portion of the federal oversight authority with the Board of Governors of the Federal Reserve System (the Fed).
The GENIUS Act and the STABLE Act have the better design. The Fed is an inappropriate regulator for stablecoins. First, the Fed faces an irremediable conflict of interest as a stablecoin regulator because it is itself a provider of competing payment services. Second, as a monetary policy specialist, the Fed already struggles with its regulatory responsibilities for bank regulation. Adding more regulatory responsibilities runs the risk of distracting the Fed from its already expansive statutory responsibilities.
Although the GENIUS Act and the STABLE Act assign primary federal regulatory responsibility to non-Fed regulators, they don’t leave the Fed completely out of the regulatory loop. Both involve the Fed in some way over the state-regulated pathways and give the Fed authority to create and implement reciprocal arrangements for stablecoins issued in overseas jurisdiction. Any role granted to the Fed presents the same issues with conflicts of interest and unsuitable regulatory experience. The Fed should be excised entirely from the regulatory framework in favor of less conflicted regulators.
Preserve a State Pathway as a Regulatory “Safety Valve”
Finally, while there are benefits to a federal regulatory framework—such as streamlined standards for a national market—there are also drawbacks to a federal monopoly on stablecoin regulation. These include a one-size-fits-all regime that would be less knowledgeable about regional markets, less adaptive to changes in technology and consumer preference, and less incentivized to innovate itself. Historically, the United States has managed these trade-offs in the banking and payment sector through a “dual-banking” system, which allows banks to be chartered and—with important caveats—supervised at either the state or the federal level. This should be mirrored for stablecoin regulation.
Preserving a bona fide state-level pathway for stablecoins would allow jurisdictions with existing stablecoin frameworks to preserve the knowledge they have already gained. In addition, maintaining such an ongoing regulatory safety valve in the stablecoin sector would help mitigate the risk of overreach from both state and federal regulators.
A bona fide state pathway is one that does not discriminate against state-registered stablecoin issuers. The three bills take different approaches to this. The STABLE Act takes the preferred approach, allowing the most leeway for states to design their own regulatory frameworks (so long as they meet basic federal requirements) and allowing state-registered stablecoin issuers to compete on fair terms with federally registered issuers.
The GENIUS Act imposes more restrictions on state-registered stablecoin issuers, including a requirement that any issuances over $10 billion must be federally regulated and that state frameworks must be “substantially similar” to the federal regulatory framework. These requirements restrict the ability of states to be laboratories of innovation—a role that can lead to improved frameworks to support new technologies and consumer benefits. Given the importance of network size and token liquidity to a successful stablecoin, these requirements also inherently place state issuers at a disadvantage.
The Waters Draft goes even further, requiring dual approval and supervision by state and federal regulators. It would be a stretch to describe that proposal as creating a viable state pathway.
Summing Up
It’s good to see Congress engaging on stablecoin legislation, and both the GENIUS Act and STABLE Act are improvements on prior efforts that looked more akin to the current Waters Draft. Further improvement is needed, though, to create a regulatory framework that allows consumers the opportunity to take advantage of innovation and allows market forces to determine the future of stablecoins.
Stablecoin legislation is long past due, but Congress shouldn’t legislate at breakneck speed in this area without taking the time to get it right.