US stablecoin bill debate hones in on preventing 'race to the bottom'

Debate over whether or not states should be able to regulate stablecoins, and tension over whether that would create a “race to the bottom,” took up much of the latest Congressional hearing on creating a comprehensive framework for digital assets. 

The hearing at the Digital Assets, Financial Technology and Inclusion Subcommittee on Thursday featured dueling stablecoin bills from the top Republican and Democrat on the House Financial Services Committee, bringing formerly closed door negotiations out into the public. 

Debate on stablecoin legislation drew unusual lines of agreement as House Republicans, who typically favor lowering regulation, argued that their bill went far enough in creating new guardrails for the still-nascent technology. 

Both sides see the need for stablecoin legislation after supposedly-stable tokens crashed much of the crypto market last year, culminating with the collapse of FTX and its affiliated firms and financial contagion throughout much of the crypto and digital asset industry. 

State of play

Some Democrats on the panel took issue with allowing state regulators to set standards for stablecoin issuance, arguing that the baseline could be lowered too far, driving firms to states with the loosest regulation.

“A race to the bottom is a practice, is the custom of this industry, you know, to go offshore and seek areas of least regulation,” argued Rep. Stephen Lynch, the top Democrat on the subcommittee. “My feeling is that if we directed this to 50 states, and territories perhaps, that that practice would continue and that cryptocurrencies would seek out those areas, those jurisdictions, that offer the best opportunity for them to maximize their profit and avoid cumbersome and costly regulation and disclosure.”

That would hamstring regulations like the New York Department of Financial Services, Lynch said. New York’s approach to stablecoins was put forward as a model by all sides, though Republicans say they want states, which currently regulate payments providers, to have the freedom to set their own standards as long as they meet certain criteria.

The Federal Reserve, given prominence over the area by Democrats in their own draft, would still potentially play a role under the Republican bill. Republicans also want the Office of the Comptroller of the Currency to continue to oversee stablecoin issuers who register as national trust companies, a bank-like category that focuses on providing a service that does not involve lending. 

'Both sides of the aisle' 

Republicans could try to pass their own legislation out of committee along party lines, and the House of Representatives, with zero support from Democrats since a simple majority is all that’s needed in that chamber of Congress. But Democratic control of the Senate and White House means the more support they can gain from across the aisle, the more likely a bill will become law. 

Republicans on the committee did not see the gap between the two sides over state-level regulation as insurmountable.

“It’s important as we work through the drafts that we strike the right balance there,” said Rep. French Hill, the Republican subcommittee chair. “It’s a key, effectively, a difference between these two drafts and one that we’re going to try to figure out between both sides of the aisle as we work through this.”