House Republicans fed up with the Securities and Exchange Commission's stance on crypto proposed new draft stablecoin legislation that would take jurisdiction away from the agency over payment stablecoins.
The draft, made public as negotiations continue over a comprehensive framework for stablecoins, comes amid the SEC’s investigation into BUSD, a shared stablecoin between digital asset infrastructure company Paxos and international crypto exchange Binance. As currently written, the bill would shift authority over stablecoins to federal and state bank and credit union regulators.
In a difference from where bipartisan talks previously stood, the bill would no longer touch algorithmic stablecoins or mandate a study of a central bank digital currency. Instead the bill would narrowly focus on stablecoins used for payments, and is intended to be a companion piece to legislation that would govern digital asset markets in the U.S.
The move to limit the SEC's role comes as little surprise as both industry executives and congressional Republicans have criticized SEC Chair Gary Gensler’s approach towards digital assets.
“I’ve been disappointed in the SEC approach on digital assets, particularly stablecoins, but other aspects too, of not bringing clarity,” Arkansas Republican French Hill told The Block last week.
As chair of a new digital assets and financial technology-focused subcommittee, Hill plays a key role on stablecoin negotiations.
House Financial Services Chair Patrick McHenry, R-N.C., among others, was frustrated with Gensler over a lack of clarity around whether or not he believes ether is a security or a commodity. Frustration has also grown with the SEC chair over his assertion of jurisdiction over stablecoins.
Gensler asserted that they were a security investment that would fall under the SEC’s jurisdiction, seemingly putting him at odds with other Biden administration officials, according to a source familiar with bipartisan talks around a stablecoin regulatory framework last year.
Industry advocates believe Gensler tried to undermine talks between McHenry, Rep. Maxine Waters, D-Calif., and the Treasury Department last year in order for the SEC to continue to hold full sway over stablecoins in the U.S., but a separate source familiar with those talks has disputed that.
Aside from shifting oversight of stablecoins from the SEC to federal and state bank and credit union regulators, the bill also subjects nonbank stablecoin issuers to regulatory examinations, that every stablecoin be backed by legal tender or short-term Treasury bonds and includes a monthly reporting requirement with a certified public accounting firm.
States could approve stablecoin issuances using their own standards, but the bill sets a floor for state regulators for evaluating projects. The Federal Reserve can also halt projects, even if approved by a state, if the stablecoin does not meet those baseline criteria. State regulations put in place by the New York Department of Financial Services provided a reference point for the new draft, staff said during a press call on Monday.
Issuance of a stablecoin without regulatory approval could result in criminal, as well as civil, penalties, and stablecoin issuers would be subject to anti-money laundering and know your customer requirements, similar to a bank. Stablecoin issuers waiting on full approval from regulators could be granted a preliminary green light to start issuing stablecoins for up to a year while being evaluated.
Under terms of the bill stablecoins would have to be backed at least one-to-one with legal tender or short-term Treasury bills. In the event of a bankruptcy, a common occurrence for digital asset firms in 2022, payment stablecoin holders would be treated preferentially for reimbursement.
Senior Republican committee staff characterized the bill as a conversation starter, and that it has been shared with Democratic staff of the House Financial Services Committee as well as the Biden administration. Any digital asset-related bill will need bipartisan support in order to become law, due to a Republican majority in the U.S. House of Representatives and a Democratic majority in the Senate, as well as required sign off from President Joe Biden, a Democrat.
McHenry has seen receptiveness
Last week McHenry told The Block that he's seen receptiveness from the Biden administration towards making a deal on stablecoins, after blaming the Treasury Department last year for bipartisan talks stalling.
"I've got the votes to legislate here," McHenry said, speaking to the shift in leverage towards Republicans after last year's midterm elections. "I would like to have a wider vote than a narrower vote, but either way, I'm going to get a bill through the House on stablecoins."
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