In a conversation with the Atlantic Council webcast earlier today, a bipartisan update on the stablecoin bill was provided by Rep. French Hill (R, AR), Chair of House Financial Services’ (HFS) Subcommittee on Digital Assets, Financial Technology and Inclusion, and Rep. Jim Himes (D, CT), a member of the HFS Committee and also Ranking Member of the House Permanent Select Committee on Intelligence.
The discussion was led by the Atlantic Council’s Josh Lipsky and Ananya Kumar. See the interview here.
Click below (or scroll down) for several highlights from the 50-minute conversation:
The following transcript has been lightly edited for clarity.
on addressing commingling
REP. FRENCH HILL (R, AR): “We’ve seen a lot of digital asset players that are holding themselves out as an exchange. Or, they’re creating digital assets or trying to build their digital ecosystem where they produce their own stablecoin and effectively make a market in it – where nobody knows what the value of it is, how it’s characterized, how it’s overseen.”
“And that was a big challenge in the FTX collapse. People loaned against something they didn’t even understand the value of -including a lot of sophisticated players too. So yes, it’s gonna rival the losses back in the dotcom boom when it’s all said and done. We tried to address that by defining first and foremost what is stable? How is it defined? They have to have an audit. They have monthly attestation. They have exposure of their liquidity. This is something that’s not the case in stablecoins today.”
“Those are high, federal standards. We also don’t facilitate commingling of it. And there’s a separation, obviously, between a dealer, an exchange and the stablecoin promoter. And you can be – in our draft bill – a bank or non-bank, stablecoin issuer. You have to meet that same high federal floor of those standards. And you may also have a state pathway. You could have a state license to do that subject to federal oversight and federal enforcement.”
on regulatory arbitrage
REP. FRENCH HILL (R, AR): “That is a real key issue for this bill draft – and from the work that then-Chair Maxine Waters and Ranking Member McHenry did last summer and last September. Working with both the Fed and the Treasury to try to get this right because we do want to facilitate a pathway.
“But to quote my colleagues on the other side of the aisle, ‘We don’t want any race-to-the-bottom.’ And in my view, this draft doesn’t facilitate that. It has a high, federal minimum floor of standards.”
“States certainly can license people and add requirements. But, they have to meet these federal requirements. And then that in turn is subject to Federal Reserve review, or Federal Reserve enforcement of this particular statute.”
“So I think we prohibit that race-to-the-bottom that some of my colleagues have talked about. But, we have the ability for a state like New York to facilitate innovation as the world’s large, dollar-based financial center. We want action in New York to be encouraged.”
REP. JIM HIMES (D, CT): “Two things to say. Number one, we always have these arguments when we’re talking about the regulation of any financial product: exactly what is the relationship between the federal government and the state? This is not a new conversation, and in fact, the answer is very different depending on the products.”
“In this country for historical reasons, not necessarily for great reasons, we have federal banks and brokerages that are completely regulated at the federal level. And then we have property and casualty insurers that are completely regulated at the state level. And of course, you have a spectrum there. So this is a familiar conversation.”
“And the more important point I want to make is something that hasn’t come up: if we’re talking about stablecoins on something that we agree – and I think the world generally agrees on – which is every stablecoin that purports to be worth $1, in fact, has a liquid dollar in reserve backing it… I get a lot calmer about the outcome of this thing [when I hear this].”
“We talked about bank regulation. Banks are inherently unstable entities because banks take $1,they keep five cents and they lend out 95 cents. And they tell the guy who put that dollar in the bank, ‘Anytime you want to, come get that dollar.'”
“That is the inherently unstable system of the property and casualty insurer. We saw this in Hurricane Andrew. You can write lots of insurance and if they don’t have adequate reserves, ‘’Oops,’ you got a problem. If there’s a liquid dollar there, and I can get it back, I get a lot less tense about precisely where we land so long as we’re confident that somebody is making sure that a liquid dollar is there. That’s a small regulatory problem relative to the large regulatory problem associated with regulating fractional banking.”
REP. FRENCH HILL: “(…) I agree with everything Jim just said. I would even support if the bill had intraday valuation. I think that’s technically possible. I’ve had members mention that to me for this exact reason – to build confidence on [stablecoins] – because these payment stablecoins – and we should put the emphasis on the word ‘payment’ – this is for a payment to be used on a blockchain in an application that might be a business-to-business or business-to-consumer application.”
“And we want them to be of impeccable design. You shouldn’t have to be second guessing it. It’s why we don’t facilitate algorithmic stablecoins. There’s been a little ‘irony’ in that market recently. [laughs] But we want this to be the base case of what a stablecoin is. That’s not to say there are advances that people might make in the future when there’s higher confidence, but this this market requires us walking before we run. It does remind me of the [dotcom era.]”
“We had a framework between March of 2000 and October of 2002. They ran a framework whether it’s Webvan or Pets.com, or CMGI – whatever that one was – everybody was writing covered call options on. Bottom line was that 5.5 trillion dollars was lost.”
“So we want to make sure we have this base case, right. If we get this base case right – where I propose we do no harm – we actually facilitate innovation in the US, we attract capital back to the US, we facilitate the use of the dollar as this token basis – all of that will benefit innovation in the United States. Investors will be better protected, they’ll be protected from fraud. And I would argue that if both these bills were in place, our stablecoin legislation and our regulatory framework (market structure bill) you would not have had in FTX last year.”
on algorithmic stablecoins
REP. FRENCH HILL: Well, it wouldn’t be a stablecoin. We’re describing in this bill what a stablecoin is. (…)
where the Biden administration is versus Congress on stablecoins
REP. JIM HIMES: “Well, the President’s Working Group proposals obviously informed our thinking. And if I recall correctly that working group suggested that only chartered banks should issue stablecoins. We’ve obviously varied from that, which is fine. That’s how this place is supposed to work.”
“The conversation right now is more between the committee and the regulators. And the conversations are happening formally and informally as we all work, I think, in good faith. The truth is five years ago, if you said the word ‘stablecoin,’ in the Financial Services Committee, much less the United States Congress, people would have looked at you funny. So this is as much a process of everybody getting educated as it is us figuring out exactly the right balance.”
“And of course, this happens to be a field like the Internet back in 1998-1999 with the amount of hype and revolutionary rhetoric and ‘everything will be different..’”
“It’s hard to stay focused on the reality of what [stablecoins are] doing, but it’s been a very constructive conversation.”