Stablecoins have recently caught the attention of lawmakers in the United States for many reasons.
They are good for making everyday consumer purchases — better than traditional cryptocurrencies like Bitcoin (BTC) or Ether (ETH) with their well-documented volatility.
However, some lawmakers fear that stablecoins are also increasingly being used by bad actors like drug dealers and terrorist groups for their day-to-day payments.
If all stablecoins aren’t brought under a regulatory umbrella, the argument goes, they could even eventually undermine U.S. dollar dominance.
“[A]ll of those types of illicit actions that are bad for the U.S. dollar are bad for the U.S. economy, bad for the sector, bad for banking and payments, and bad for people,” Circle’s Dante Disparte told CNBC in January apropos of stablecoin legislation.
Timothy Massad, former chairman of the Commodity Futures Trading Commission and now a research fellow at Harvard University, posed the problem in a recently published paper:
“It is the global dominance of the dollar, coupled with the role of U.S. banks in facilitating dollar payments, that gives the U.S. its tremendous financial leverage. Could stablecoins undermine that leverage?”
Massad and others are concerned that stablecoins and other cryptocurrencies — if not subject to the Bank Secrecy Act-like monitoring and responsibilities — will enable “rogue actors” to work around U.S. economic sanctions, eventually subverting U.S. economic and political policy goals.
Interestingly, Massad’s paper appeared on the same day (April 17) that U.S. Senators Cynthia Lummis and Kirsten Gillibrand introduced the Lummis-Gillibrand Payment Stablecoin Act, bipartisan legislation that seeks to create a regulatory framework for payment stablecoins.
Among its benefits, according to a Lummis press release, the proposed legislation will “promote U.S. dollar dominance while preserving the dual banking system.”
Meanwhile, in the U.S. House of Representatives, the final version of the McHenry-Waters stablecoin bill, which has been in the works for some time, could soon be ready, co-author Maxine Waters told Bloomberg on April 25.
Stablecoin legislation will “cement” U.S. dollar
Are the stars now aligning for meaningful stablecoin legislation in the United States? And if such legislation is enacted — which can’t be assumed given that it’s a presidential election year — will it make any difference with regard to larger questions like the dominance of the U.S. dollar or the future of American financial innovation?
Massad told Cointelegraph that the Lummis-Gillibrand bill represented a “great step forward” toward providing a regulatory framework for stablecoins. It subjects issuers to the Bank Secrecy Act, for one thing, which requires financial institutions to report suspicious activity.
“That’s good, but it’s not enough,” Massad said, citing “the need to put additional focus on the payment rails, not just issuers.”
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“Effective stablecoin legislation will cement the U.S. dollar’s primacy around the world and ensure homegrown, responsible digital asset innovation flourishes,” Kristin Smith, CEO of the Blockchain Association, told Cointelegraph. She applauded Lummis and Gillibrand’s “longstanding bipartisan approach to digital asset regulation,” adding:
“Action from U.S. regulators and Congress on stablecoin legislation that acknowledges the importance of stablecoins to the market and that encourages future stablecoin innovation to take place in the U.S. is paramount.”
Maintaining dollar base for stablecoins
It could also keep the stablecoin market dollar-denominated.
Europe’s path-breaking Markets in Crypto-Assets Regulation (MiCA) regulatory regime, which takes effect at the end of June, for example, provides a safer, stronger eco-system for stablecoin issuers and users, in the view of many, and it could soon provide more competition in this area.
“All the conditions are in place to allow a move toward rebalancing euro versus dollar stablecoins in the long term,” Jean-Marc Stenger, CEO at France’s Societe Generale - Forge, told Cointelegraph.
Austin Campbell, founder and managing partner of Zero Knowledge Consulting, warned in 2023 testimony before the U.S. House Financial Services Committee’s Subcommittee on Digital Assets, Financial Technology that the “market” for stablecoins was moving outside the United States to Singapore, Dubai, the European Union and other jurisdictions.
Could Lummis-Gillibrand turn things around?
“A good bill would,” Campbell told Cointelegraph last week. “I don’t think Lummis-Gillibrand is that yet, but it’s well-intentioned. It needs technical work. I think McHenry-Waters is further along.”
What about Lummis’ statement that the proposed legislation would also be “critical to maintaining the U.S. dollar’s dominance.” Does Campbell agree?
“Yes, I do. Blockchains are growing quickly, and the dollar is the central unit of exchange. If the first point continues but the second one doesn’t, that’s a long-term problem for the dollar.”
As noted above, Massad worries that unregulated stablecoins might evolve as a tool to evade U.S. sanctions.
In his paper, he pointed out that stablecoins were “a primary means for Hamas to evade law enforcement and sanctions” prior to its Oct. 7, 2023 attacks on Israel, which is yet another reason why he argues that “we are better off bringing stablecoins within the regulatory framework in order to minimize the risks they pose.”
Commenting on recent regulatory efforts in the U.S., Massad said, “We’re getting closer.” The Treasury Department is now “leaning into” stablecoin regulation somewhat, and the House is moving forward with its own proposals. Senate Banking Chairman Sherrod Brown also seems more open to stablecoin legislation than in the past.
Still, Massad declined to predict whether federal stablecoin legislation would actually pass, let alone be enacted in 2024.
“Momentum building” behind stablecoin legislation
Others believe the political winds are favorable. George Leonardo, founder of Cap Hill Crypto, cited three positive developments: “Recent reports that McHenry, Waters and Senator Chuck Schumer discussed finding a legislative vehicle for stablecoins, Senate Banking Chairman Sherrod Brown’s recent comments indicating he’s open to cutting a deal, and Senators Lummis and Gillibrand unveiling their new bill suggest there is some momentum building.”
At the very least, Leonardo told Cointelegraph, “There is still bipartisan, bicameral interest in passing stablecoin legislation in 2024.”
For his part, Campbell said: “I am always skeptical of major legislation in an election year.”
“The key challenge of an election year is the shortened legislative calendar,” noted Leonardo, who previously worked for U.S. Senator John Cornyn. “As Members spend more time in their home districts campaigning, there’s less time to consider, amend, and pass any legislation, including any stablecoin bill, on the House and Senate floors.”
An election year sometimes has its advantages, too. “It’s also possible the election, and the Member turnover that comes with it, will motivate Members to close out a deal this year, rather than risk restarting negotiations with a shuffled deck next Congress,” continued Leonardo, adding:
“Chairman McHenry, who has spearheaded stablecoin negotiations for House Republicans, will be retiring and has made clear enacting stablecoin legislation is one of his key priorities before leaving Congress.”
If stablecoin legislation were passed in 2024, it could also have some interesting spinoffs. “We believe it could lead to mergers between banks and stablecoin issuers as issuers will want the advantages of being a bank, and a bank looking to play a role in stablecoins will want the user base of an existing issuer,” wrote Jaret Seiberg, who heads TD Cowen’s Washington Research Group, in a recent policy note.
Hurdles remain for stablecoin bill
Obstacles will need to be overcome. The legislation still faces “significant hurdles,” according to Seiberg, “such as keeping support from the White House and being attached to a broader legislative package.”
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“We still believe the still-being-negotiated deal between House Financial Services Chair Patrick McHenry and Rep. Maxine Waters will be the base text for the eventual bill,” continued Seiberg, adding:
“Lummis-Gillibrand, in our view, would be positive for stablecoin issuers as it would establish clear rules of the road. It also would be symbolically significant for crypto in general as it would be the first constructive crypto legislation from Congress.”
Of course, stablecoins as an asset class can flourish even if the U.S. Congress does nothing. They have “become popular as a means for people in countries with weak currencies to acquire a dollar substitute,” wrote Massad. “Moreover, that growth could come even if the U.S. does not take action.”
In general, though, there’s more recognition today that bringing stablecoins within the U.S. regulatory “perimeter” is “better than leaving it outside,” Massad told Cointelegraph.