U.S. House of Representatives Stablecoin Hearing: The battle between state and federal regulatory rights is a bipartisan focus

The newly formed subcommittee on Digital Assets, Financial Technology and Inclusion of the House Financial Services Committee heard testimony from five experts during a hearing on stablecoins in the U.S. House of Representatives on May 18, which is considering two proposed stablecoins. draft bill. State versus federal regulatory authority was a key bipartisan point of contention during the hearing, with Republican and Democratic lawmakers failing to agree on the distribution of stablecoin regulatory power.

The Power Debate: State vs. Federal Control

The proposal, led by Republican Representative French Hill (R-Ark.), was unveiled in April ahead of a hearing at the Financial Services Committee. In response, top Democrat Maxine Waters has introduced a competing draft based on a bill that was previously introduced but failed to move forward during the last session of Congress.

In a version of the proposal advocated by Republicans, the bill would allow stablecoin operators to choose which state to register in, without going through the Federal Reserve Board. States would be free to set their own standards, and issuers would have 180 days to submit them to federal regulators. All required registration materials. Supporters of the bill argue that it will prevent a "race to the bottom" and be consistent with the two-tier federal/state banking regulatory framework in the United States.

The Federal Reserve system plays a leading role in a Democratic proposal pushed by Representative Maxine Waters, a Democrat who proposes giving state regulators the authority to approve issuer registrations while the Fed retains the authority to approve or deny federal registrations. Democrats are very concerned about the qualifications of the issuer, such as the fact that the issuer should be a federally insured depository institution. Provisions requiring stablecoin issuers and/or distributors to comply with some kind of know-your-customer (KYC) and anti-money laundering standards can also be expected.

Some Democrats on the panel took issue with allowing state regulators to set standards for stablecoin offerings, arguing that the bar could be lowered too much, prompting crypto firms to move to the states with the most lenient regulations. Waters argued that "several key positions" were missing from the GOP proposal, and Rep. Stephen Lynch (D-Mass.), the subcommittee's top Democrat, said: "We seem to have drifted further apart. My feeling is that if we point it at 50 states and territories, then this approach is likely to continue, and the crypto industry will look to those areas that offer them the best opportunities, those jurisdictions, to maximize profits and avoid cumbersome and costly regulations and disclosures.”

But Hill said: "We're not starting from scratch, and the similarities between the two proposals are strong, and we're not that far apart."

Areas of current consensus include: the composition of stablecoin reserves (both instruments include cash, short-term treasury bills, and central bank reserve deposits), requiring issuers to apply for approval or rejection within 90 days, and recognizing stablecoins as non-securities, allowing The U.S. Securities and Exchange Commission (SEC) "takes a back seat" in this area.

Davis Polk & Wardwell partner David Portilla spoke at the hearing in favor of a middle way. He said: "Federal regulation of stablecoin issuers will provide more uniform and consistent rules, while state regulation can promote more diversity and innovation in regulation. The answer to this question is not necessarily binary." Portilla said that in any case, the current regulations are not suitable for stablecoins. In addition to the "bottom line" mechanism of federal participation in stablecoin regulation to set minimum standards, it can also be "switched" according to the scale of issuance.

Stablecoins and the Crypto Market
Stablecoins like Tether’s USDT and Circle’s USDC have been an important part of the crypto market, with both House Republicans and Democrats agreeing on shared goals, including addressing risks to consumers and maintaining the U.S. dollar’s ​​role in global trade, possibly through Regulatory USD-denominated stablecoins come to fruition.

For the crypto industry, eager for U.S. regulatory clarity, there have been several recent hearings on stablecoins, or crypto more broadly, with a majority of members of the House and Senate appearing to advocate for action if they are able to act on stablecoins. It will be a major step forward in U.S. encryption regulation.

However, any legislation would have to pass the Senate Banking Committee, whose chairman, Sen. Sherrod Brown (D-Ohio) (D-Ohio), has yet to signal a willingness to move forward with such a bill, posing yet another step on the road to comprehensive stablecoin regulation. an obstacle.