Debate Over State, Federal Regulation Takes Center Stage

May 18’s hearing on stablecoins in the United States House of Representatives was dominated by the debate between state and federal regulation.

The new Subcommittee on Digital Assets, Financial Technology, and Inclusion of the House Committee on Financial Services heard testimony from five experts as it considered two proposed bills to regulate stablecoins.

Two bill drafts were being considered by the subcommittee. The Republican bill was published in April before a Financial Services Committee hearing on stablecoins.

Later, ranking member Maxine Waters introduced a competing bill based on a bill introduced but not passed during the previous session of Congress.

The “race to the bottom” was the most contentious aspect of state-level regulation of stablecoins.

The Republican bill would permit stablecoin operators to choose the state in which they register, bypassing the Federal Reserve Board.

The floor, according to the bill’s proponents, would prevent a race to the bottom and mirror the two-tiered federal and state banking regulatory system in the United States.

Democrats were not persuaded. The Democratic bill maintains access to regulation in the hands of the federal government and the appropriate regulator.

David Portilla, a partner at Davis Polk & Wardwell, preferred a path of moderation. In any case, he stated:

“Federal regulation of stablecoin issuers would offer more uniform, consistent rules, whereas state regulation could promote more diversity and innovation in regulation and supervision. The answer to this question need not be binary.”

Current regulations were not suitable for stablecoins. In addition to a “floor” mechanism for federal involvement in stablecoin regulation for establishing minimum standards, he suggested a “toggle” based on the magnitude of the issue.

The bill was proposed by the Republicans would regulate all issuers equally, regardless of size.

Rep. Brad Sherman, an ardent opponent of cryptocurrencies, claimed that a dollar-backed stablecoin would compete with the fiat dollar and undermine it, thereby diminishing the effectiveness of U.S. sanctions.

Another stakeholder, Matt Homer of venture capital firm The Department of XYZ, stated, “Stablecoins will happen regardless of whether we want them to or not,” adding, “Off-shore issuers are just as free to create dollar-backed stablecoins as U.S. issuers.

We should do it in the United States so we can regulate it on our terms.” Warren Davidson, a pro-cryptocurrency lawmaker, echoed Homer, stating:

“Often, they [stablecoin developers] are fleeing our shores to find certainty. So it would be great if we’d provide some.”

Robert Morgan, CEO of the USDF Consortium, spoke in favor of the current regulatory structure and the benefits of tokenization for traditional banks. The author referred to tokenization as a “third way.”