WASHINGTON — Members of the House Financial Services Committee expressed bipartisan skepticism to a key recommendation by the Biden administration’s financial regulators, who have urged lawmakers to limit stablecoin issuance to federally insured banks and credit unions.
The committee convened in a virtual hearing Tuesday to discuss a
“Current statutory and regulatory frameworks do not provide consistent and comprehensive standards for the risks of stablecoins as a new type of payment product,” she said in her prepared testimony.
But Republican lawmakers repeatedly panned the idea that stablecoins should spring only from insured depository institutions, and that concern appeared to be shared by some key Democrats. Rep. Tom Emmer, R-Minn., and one of the top advocates in the House for the crypto industry, criticized the working group's report, arguing that “banks should not be the only institutions in the ecosystem with dibs to issue the potential array of financial products that the President's Working Group report simply lumps together as a stablecoin.”
Emmer’s concerns were echoed by many other Republicans on the committee, including Ranking Member Patrick McHenry, R-N.C. But they were also joined by Rep. Gregory Meeks, D-N.Y., who said he was concerned that a legal framework limiting stablecoin issuance to banks could have a negative impact on competition in the sector and on racial equity among its potential customers.
“It occurs to me that limiting stablecoin issuance to insured depository institutions, which have a high barrier to entry, could limit competition,” said Meeks, who also pointed to “the disproportionate amount of people of color that gravitate to nonbank financial institutions.”
During Tuesday’s hearing, Liang reiterated the working group's determination that banks would be well equipped to monitor some of the inherent risks of stablecoins. But she also acknowledged that a firm exclusively focused on issuing stablecoins would not necessarily have all the same risks as a full-service bank, suggesting that there could be some degree of “flexibility” in the government’s approach.
“There is flexibility within the [insured depository institution] framework to not focus on the credit risk of making loans,” Liang said, referring to the working group's recommendations. “Stablecoin issuers do not make loans. They don’t engage in fractional reserve banking. But they do have payments, and there are operational and convertibility risks that are associated with that.
“You would like some oversight to ensure that the payment system continues to operate well, which is a public service to the financial system,” Liang added.
Early in the hearing, Liang was asked by committee Chair Maxine Waters, D-Calif., whether she believed that “technology companies such as Facebook” should be allowed to issue stablecoins. Liang told Waters they should not, pointing to historical “separation of banking and commerce” in the U.S.
“The issue of the separation of banking and commerce has been an issue that Congress has grappled with for many years,” Liang said. “In this case, we believe stablecoins, as a payment instrument, should not be issued by a technology firm.”
Democrats have been circulating
In her testimony, Liang noted that the PWG report did not make a recommendation on whether stablecoins should be backed by some kind of federal insurance. Depending on the approach taken by lawmakers to regulating the industry, Liang said on Tuesday, “the capital and liquidity standards that could be applied to a stablecoin issuer may not need deposit insurance.”
Several Republicans on the committee criticized the working group report’s lack of analysis on existing state-level regulation that stablecoin issuers and other digital-asset firms must comply with, suggesting that a federal pile-on of new rules could squash the sector’s capacity for innovation.
“There was no mention of any state regulatory framework,” McHenry said. “There’s no lessons learned from the states included in this report. … Why was that not included in the report?”
Liang responded by saying the working group had consulted with state regulators in the course of developing its recommendations but that as national regulators, they would prefer to have “plenary oversight” over the stablecoin ecosystem, rather than rely on the “fragmented” state regulatory system.
Democrats were more supportive of national stablecoin oversight overall during Tuesday’s hearing. “Imagine if we didn't have any federal regulation of state-chartered banks, the [Federal Deposit Insurance Corp.] didn't propose any capital rules, the FDIC didn't do any audits,” said Rep. Brad Sherman, D-Calif.
Such an approach, he said, would simply result in a “race to the bottom” for states trying to court business from the digital-asset industry. “We’re told to look at the benefits of these digital systems,” Sherman added, “but it's really just a potential, or hope, for benefit.”
