Four things banks should watch for with new stablecoin bills

February 10, 2025 9:00 AM

From left, Rep. Glenn Thompson, R-Pa.; Sen. John Boozman, R-Ark.; Senate Banking Committee Chair Tim Scott, R-S.C.; House Financial Services Committee Chair French Hill, R-Ark., and David Sacks, White House Artificial Intelligence and Crypto czar, at a news conference Feb. 4.

WASHINGTON — The Trump administration has signaled that it is full steam ahead on reshaping the federal stance toward digital assets policy, and two bills introduced last week in the House and Senate are a big part of that push.

Senate Banking Committee Chair Tim Scott, R-S.C., said last week that he is working to get a stablecoin bill establishing a regulatory framework for digital assets to President Donald Trump's desk within the first 100 days of the administration. Stablecoins have the potential to be more tightly integrated into the banking system than other cryptocurrency assets, and in some cases could be used as an alternative to a traditional deposit account.

Sen. Bill Hagerty, R-Tenn., introduced a stablecoin bill last week cosponsored by Scott, while House Financial Services Committee Chair French Hill, R-Ark., began circulating a discussion draft of his own bill last week. But while the bills are substantially similar, they are not identical, meaning that there's room for the version that eventually emerges from both chambers to gain buy-in from Democratic lawmakers.

Despite the differences between the bills, the two Republican authors signaled that they view the negotiations between Republicans in both chambers as the more significant shaping force for the legislation, since Republicans hold majorities in both chambers and the White House.

"From enhancing transaction efficiency to driving demand for U.S. Treasuries, the potential benefits of strong stablecoin innovation are immense," Hagerty said in a statement sent out with the House bill. "We need legislation that establishes a safe and pro-growth regulatory framework that will unleash innovation and advance the president's mission to make America the world capital of crypto. I look forward to working with Chairman French Hill and the House Financial Services Committee."

As it looks likely that some version of one of these two bills will eventually become law, here's some of the biggest ways they could impact the banking industry.

Bank regulators will oversee stablecoins

In both bills, the responsibility of regulating stablecoins would fall to bank regulators.

The Senate bill would establish the Federal Reserve as the watchdog for bank stablecoin issuers with more than $10 billion of stablecoin, while the Office of the Comptroller of the Currency would oversee nonbank stablecoin issuers above $10 billion. State regulators would oversee bank and nonbank stablecoin issuers with less than $10 billion in market value of stablecoins under the Senate bill.

The House bill adopts a similar approach, but also creates a nonbank stablecoin issuer charter overseen by the OCC — a notable difference from earlier stablecoin bills introduced in the House. A bill drafted by former House Financial Services Committee Chair Patrick McHenry, R-N.C., envisioned a charter issued by the Federal Reserve for "payment stablecoin issuers."

What happens to state regulation?

While both bills leave some room for state regulation, it's important to note that creating these national pathways would likely be a more attractive option for large stablecoin issuers under the conditions laid out by each bill.

Currently, stablecoin issuers navigate state-by-state compliance regimes, increasing compliance costs and complexity for issuers.

But getting to one — or even several — national charters has been a politically tricky prospect. The issue popped up in the last round of stablecoin bill negotiations in the previous Congress, with many groups, including the Conference of State Bank Supervisors, urging lawmakers to preserve robust state supervision.

"While targeted reforms made through cooperation between the states and federal government may be appropriate as the nonbank financial services marketplace evolves, wholesale preemption of the existing state regulatory and supervisory framework, either through legislation or regulation, should be avoided," said Brian Milhorn, president and CEO of CSBS, in a Jan. 16 letter to congressional and Senate Banking Committee leadership. "Preserving the integrity of the dual banking system in emerging areas such as payment stablecoins is equally important."

Banks can't use reserves for purposes other than backing the stablecoin

In general, the bills would prohibit a practice called "rehypothecation," for payment stablecoins. This means that reserves backing the stablecoin can't be used for any other purpose.

This helps solve a tricky problem that lawmakers tried to suss out last Congress in the aftermath of the fall of FTX and trying to ensure that the banking system and the crypto market don't become too intermingled. In this scenario, it's theoretically much less likely that a run on a bank that holds stablecoin would cause a system-wide panic.

"As in the traditional financial system, rehypothecation can create a collateral chain requiring multiple transactions to unwind," a group of Federal Reserve researchers warned in a paper last year. "In a stress event, a user attempting to avoid an automated margin call may trigger a rapid unwinding of positions across different platforms if the collateral has been repeatedly rehypothecated."

But while prohibiting rehypothecation would in some ways limit risk, it could also suck up safe collateral that would otherwise be available in the financial system. Treasury bonds — some of the most stable and liquid assets — would likely be the backing asset of choice for stablecoin issuers, and requiring large quantities of Treasuries to be held on the sidelines could limit the depth and liquidity of the Treasury market. That could cause collateral shortages, making the assets that grease the worldwide financial system in short supply, making it more difficult and disruptive to deploy them in times of stress, such as the Fed did at the start of the COVID-19 pandemic.

Banks' crypto custody concerns are well-addressed

Both bills also would prohibit the Securities and Exchange Commission, the National Credit Union Administration or the "appropriate federal banking agency" from requiring that companies include assets held in custody as liabilities on their balance sheets.

The SEC, under its former head Gary Gensler, issued a staff accounting bulletin known as SAB 121 that required companies to do so because crypto's digital nature renders it susceptible to a cybersecurity breach or even a hack, a susceptibility that other assets held under custody don't share. Accounting for crypto assets under custody as a liability would disrupt banks' minimum capital requirements, severely undercutting banks' ability to access the custody business.

Congress passed a Congressional Review Act resolution on SAB 121, which was vetoed by former President Joe Biden. The SEC has since rescinded the staff bulletin, but the wording in both bills would make it impossible for regulators to issue a similar bulletin or guidance in the future.