Stablecoin Legislation Faces Federal Reserve’s Scrutiny

Legislation aimed at establishing a comprehensive regulatory framework for stablecoins in the United States may encounter obstacles, as Federal Reserve Chair Jerome Powell advocates for a robust federal role in regulating the sector.

ICYMI: Fed should play role in regulating stablecoins, Chair Powell sayshttps://t.co/AnKWE5Js6o

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Federal Role in Stablecoin Regulation

During his testimony before the House Financial Services Committee, Powell emphasized that payment stablecoins should be considered as money, and therefore, the central bank should have a role in approving their issuance. He argued that it would be appropriate to establish a strong federal role in the regulation of stablecoins, expressing concerns about a weak role that could allow excessive private money creation at the state level. Powell expressed skepticism regarding state approval and preemption for stablecoin issuers, which is currently included in a Republican-led proposal under discussion at the committee level.

The leading Democrat on the House Financial Services Committee, Representative Maxine Waters, also criticized the Republican proposal that grants state regulators the power to approve stablecoin issuance. Waters pointed out that the proposal takes state preemption to a new level, allowing a stablecoin approved in one state to be sold across the country without the need for approval from other state regulators.

While Republicans can advance the bill out of committee and the House of Representatives with a party-line vote, it would require support from Democrats to become law. Given that Democrats hold a majority in the Senate, any legislation without their support would face challenges, and President Joe Biden is unlikely to sign a bill that lacks his party’s backing.

Support for the creation of a new regulatory framework for stablecoin issuers comes from industry players such as U.S. stablecoin giant Circle. Fintech companies, particularly payment providers, have long complained about the burdensome process of registering state-by-state as money service providers, calling for a simpler path to conduct business nationwide.

Patrick McHenry, the Republican Chair of the House Financial Services Committee, anticipates a vote on the stablecoin bill, along with a bill addressing the market structure of digital assets, to take place in the second week of July. During his testimony, Powell also dismissed the notion of the Federal Reserve issuing a digital dollar directly to Americans in the near future. He raised concerns about the potential disruption of financial privacy that a digital dollar could cause, stating that it was not something the central bank would support.

While Powell acknowledged that the Federal Reserve is still far from deciding whether to issue a central bank digital currency (CBDC), he stressed that if a digital dollar were to be issued, it would be done in a way that preserves financial privacy and does not displace the existing financial system. Powell made it clear that the Federal Reserve does not support individual accounts at the Federal Reserve and that any future CBDC would be intermediated through the banking system to address privacy concerns.