WASHINGTON — One of the few pieces of legislation that could actually pass through Congress into law poses an existential risk to bankers, experts said.
Lawmakers in both the House and the Senate — and on both sides of the aisle — have spent the last several years negotiating legislation that's meant to set up a regulatory framework for stablecoins.
Although multiple proposals are floating around Capitol Hill, the most prominent candidate is the yet-unreleased bill from Reps. Patrick McHenry, R-N.C., and Maxine Waters, D-Calif., respectively the chairman and the ranking member of the House Financial Services Committee.
The chances of this advancing beyond the House committee stage got an additional boost earlier this month as Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee and a longtime skeptic of crypto legislation, signaled some willingness to consider a stablecoin bill
There's multiple avenues for that package to be considered, including an upcoming must-pass defense spending bill, according to three committee sources familiar with discussions. Other crypto legislation is scheduled to receive a vote in the House this week.
But the proposal, along with
Concerns about crypto's potential impact to the DIF center around the idea that stablecoin issuers, similar to banks, are essentially taking consumer deposits. Stablecoins, which often hold reserves as collateral in order to maintain a one-to-one peg and keep the value of the digital asset stable, are thus positioned as an alternative to a traditional deposit account and, experts fear they would be treated as such under forthcoming legislation but without the same safety and soundness protections that traditional bank accounts have.
"Banks are key parts of the payment system, and stablecoins threaten to undermine that in a frankly less safe manner for depositors," said Todd Phillips, a bank regulation law professor at Georgia State University. "I don't understand why bankers haven't stood up and really started fighting this."
A pervasive question that any stablecoin bill, according to multiple experts in banking law, should address what happens if a stablecoin experiences a run and fails. Unlike banks, which pay into the Deposit Insurance Fund so the Federal Deposit Insurance Corp. can resolve the institution and insure consumer deposits, stablecoin issuers would have no such obligation under any of the released proposals.
"All of these bills in one way, shape or form — explicitly or implicitly — are going to end up providing the stablecoin industry with some kind of support from the government," said Hilary Allen, a bank law professor and associate dean for scholarship at American University.
The Lummis-Gillibrand bill directly requires the FDIC to resolve a stablecoin issuer should it experience insolvency, but does not require stablecoin issuers to pay into the Deposit Insurance Fund.
"That suggests to me they are going to get a free ride from the deposit insurance fund," Allen said.
Although that's just one proposal, Allen said that the underlying issue still exists in other legislative proposals and will continue to so long as stablecoin issuers aren't required to register as banks — a
A source familiar with the unreleased text of the McHenry-Waters bill said that the FDIC receivership provision isn't in that version.
Most likely, Allen said, if the final version of a passed stablecoin bill doesn't directly address the insolvency issue, stablecoin issuers will likely be treated like money market funds, which have been saved from turmoil in the past with Federal Reserve liquidity facilities.
"These resemble money market funds more than anything else," Allen said. "When money market funds fail, the government bails them out. So if the legislation says nothing, then that's absolutely what's going to happen."
Arthur Wilmarth, professor emeritus of law at George Washington University Law School, said that the process by which the regulatory rules for money market funds came into existence is similar to what's happening now with stablecoins.
"We made this mistake with money market funds," he said. "The money market funds was an arbitrage vehicle, and the regulators permitted it because they thought, 'Well we couldn't get Congress to repeal the regulation to interest rate limits on deposits.' And so they thought by allowing this new non-deposit deposit, it would break down the arbitrage, which it did."
But by the time that happened, Wilmarth said, money market funds became so big that regulators couldn't manage them.
"As you saw in both 2008 and 2022, we had to bail them out twice, and we'll have to bail them out in the next crisis," he said. "So why would we create a new form of non-deposit deposits?"
Instead, Wilmarth said that the best way to address the issue is to require that stablecoin issuers be banks.
"If you want to prevent runs, and you want to provide safety and stability both to consumers, investors and the financial system, the only way you can do that is to regulate these instruments as deposits and put them in banks," he said.
Lawmakers are also not considering the line between banking and commerce deeply enough, the experts said.
The Bank Holding Company Act separates banking activity from commerce, but it only applies if a company owns a bank, Allen said. If a stablecoin issuer is not included in that definition of a bank, any company could own one.
"And so, that's a great gaping hole through which to exploit something that's already becoming fragile," she said. "This would potentially finally blow that up."
Should a stablecoin bill allow an issuer to do something that is the "functional equivalent of deposit-taking," then a company like Walmart, Meta or Amazon could "break that last separation between banking and commerce," Allen said.
Years ago, especially when the social media platform Facebook pitched its idea for the Libra stablecoin,
The discussion at that point was whether banks should be the only institutions allowed to issue stablecoins.
"Why would we develop this framework and say we're going to allow these people to do the same kind of business outside the framework and without most of the protections?" he said. "That's just insane."
But, short of requiring that all stablecoin issuers be banks, Wilmarth said that the legislation should at least have a provision that requires the owner of a stablecoin issuer to be engaged primarily in financial activities.
"Otherwise I think one could say that this is a backdoor way for nonbanks to get into the banking business, and I think that's a really huge issue," he said. "You can certainly see why the big tech firms would see stablecoins as their way to get into the banking business and avoid the bank holding company and the separation of bank and commerce."
