- Lawmakers in the US are struggling to regulate stablecoins effectively.
- Stablecoins could pose risks to traditional finance, and there are concerns about the potential for illicit activities.
- The proposed legislation aims to regulate stablecoins on both the state and federal level, but some lawmakers have criticized the bill, and more work is needed to balance innovation with regulatory oversight.
Stablecoins, a type of cryptocurrency that aims to maintain a stable value, have been the subject of increased scrutiny in recent years as lawmakers and regulators attempt to determine how best to regulate them. On Wednesday, the U.S. House Financial Services Committee reconvened to discuss regulation of stablecoins, but lawmakers acknowledged that progress is slow. Members of the Committee were set to review a draft legislation that would provide requirements for payment stablecoin issuers and foster research on a digital dollar. However, the bill was criticized by some lawmakers who argued that the recent banking crisis highlighted the need to keep digital assets away from traditional finance.
One of the biggest challenges facing lawmakers is how to balance regulatory oversight with innovation and competition in the marketplace. Stablecoins are used in a variety of applications, including international money transfers, e-commerce transactions, and as a store of value. However, they have also been linked to money laundering, tax evasion, and other illicit activities.
Another concern is the potential harm that stablecoins could pose to traditional finance. One of Circle’s main takeaways from the recent banking crisis was that the firm needed to make sure it could shield itself from exposure to traditional finance. If stablecoins are not regulated properly, they could pose a risk to the financial system as a whole, potentially causing bank runs or other systemic risks.
The proposed legislation covers a regulatory framework for stablecoins on both the state and federal level, calls for a two-year moratorium on new stablecoins that solely maintain their price using other tokens pending research from the U.S. Treasury Department, and sets standards for interoperability, reporting, and enforcement. The hope is that these measures will help to promote stability and reduce the potential for illicit activities.
One of the witnesses that testified on Wednesday was the Blockchain Association Chief Policy Officer Jake Chervinsky. Chervinsky argued that “different types of stablecoins merit different kinds of regulation” and “the United States should support stablecoins instead of creating a [central bank digital currency].” He also noted that stablecoins denominated in U.S. dollars could be a good thing for letting the greenback flourish on the global stage.
The hearing comes nearly a year after Terra’s UST stablecoin and sister token LUNA collapsed, dragging down the crypto market as a whole. TerraUSD was an algorithmic stablecoin, falling under a unique class of tokens pegged to the price of a sovereign currency like the U.S. dollar. While conventional stablecoins are collateralized by traditional assets like the buck, algorithmic stablecoins seek to maintain their value using code and market incentives, often involving multiple tokens.
Regulating stablecoins is a complex issue that requires balancing innovation with regulatory oversight. While stablecoins have the potential to revolutionize the payments system and reinforce the dominance of the U.S. dollar, they also pose significant risks if not regulated properly. Lawmakers and regulators must work together to find a solution that promotes innovation while reducing the potential for illicit activities and systemic risk.
In recent years, stablecoins have emerged as an increasingly popular cryptocurrency asset. Unlike traditional cryptocurrencies like Bitcoin and Ethereum, which are highly volatile, stablecoins are designed to maintain a stable value, often pegged to a traditional asset like the US dollar. However, with the rise of stablecoins comes concerns around regulation, and lawmakers are currently grappling with how to regulate this emerging asset class.
Recently, members of the US House Financial Services Committee turned their attention to stablecoins, but lawmakers noted that any progress made since last year is tenuous at best. FSC ranking member Maxine Waters suggested that lawmakers are “starting from scratch” after Republicans made alterations to a bill that died on the vine last year ahead of the midterm election called the Stablecoin TRUST Act. Lawmakers’ most recent pass at getting stablecoin legislation doesn’t have a catchy name yet. Right now, it’s still called “To be added Act of 2023.”
However, Representative Stephen Lynch criticized the legislation being discussed, saying the recent banking crisis spotlights the need to keep digital assets away from traditional finance. Lynch said that one of the “saving graces” of the crypto exchange FTX’s collapse was that it didn’t spill over into the traditional financial system, saying losses would’ve occurred for investors more broadly if crypto hadn’t been “ring-fenced.” Lynch suggested that stablecoins should be separated from the traditional banking system, and that allowing stablecoins to issue deposit-like products without FDIC insurance is dangerous.
Stablecoins have also posed risks to traditional finance in other ways. The failure of a 40-year-old bank, Silicon Valley Bank, last month caused Circle’s USDC stablecoin to lose its peg to the U.S. dollar. The token fell as low as 87 cents, but eventually reclaimed its normal price, days after the government intervened in the crisis and guaranteed SVB depositors would be made whole. One of Circle’s main takeaways from the banking crisis was that the firm needed to make sure it could shield itself from exposure to traditional finance.
The stablecoin bill covers a regulatory framework for stablecoins on both the state and federal level, calls for a two-year moratorium on new stablecoins that solely maintain their price using other tokens pending research from the U.S. Treasury Department, and sets standards for interoperability, reporting, and enforcement.
Blockchain Association Chief Policy Officer Jake Chervinsky testified before the committee on Wednesday, arguing that “different types of stablecoins merit different kinds of regulation” and “the United States should support stablecoins instead of creating a [central bank digital currency].” Chervinsky stated legislation should provide opportunities across institutions, address the quality of issuers’ collateral, and “clearly delineate regulatory authority on the federal level.”
The stablecoin bill is an important step toward regulating the cryptocurrency market and ensuring the safety of investors. As stablecoins continue to gain in popularity, it is essential that lawmakers provide clear guidance and oversight to protect consumers and ensure the stability of the financial system. While the bill is not perfect and will likely require further revisions, it represents a significant step forward in the regulation of this emerging asset class.
Thanks for reading Solanews , remember to follow our social media channels for more