The House Finally Introduces a Stablecoin Bill, But Will Crypto Opponents Even Come to the Table?

By | April 18, 2023

It’s hard to have good faith dialogue about regulation when one group involved in the discussion doesn’t think the industry being regulated should even be allowed to exist. That increasingly seems to be the problem with crypto legislation.

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[Music] In the wake of one of the most Tumultuous years in crypto history the Conversations happening at consensus 2023 have never been more timely and Important this April coindesk is Bringing together all sides of the Crypto blockchain and web3 Community to Find solutions to crypto’s thorniest Challenges and finally deliver on the Technologies transformative potential Join developers investors Founders Brands policy makers and More in Austin Texas April 26-28 for consensus 2023 Listeners of the breakdown can take 15 Off registration with code breakdown Register now at consensus.coindust.com And join coindesk at consensus 2023 [Music] Welcome back to the breakdown with me Nlw It’s a daily podcast on macro Bitcoin And the big picture power shifts Remaking our world The breakdown is produced and Distributed by coindesk What’s going on guys it is April 17th at and today we are Previewing the battle coming up between McHenry Gensler the SEC Congress it’s All going down and we have the lead-in Now quick note before we dive in this is The last week that the breakdown will be On the coindesk podcast network if you

Listen to this show via coindesk you’ll Have to switch over to the breakdown Only feed which you can find by Searching the breakdown or the breakdown Nlw wherever you listen to podcasts and Hey while you’re at it you should check Out the breakdown Network’s other new Shows Bitcoin Builders and the AI Breakdown again after April 23rd which Is this Sunday the breakdown will no Longer be on the coin ask podcast Network alright guys today well we’ve Got a little bit of spice we’re gearing Up for what could be a bit of a showdown Tomorrow between SEC chair Gary Gensler One of krypto’s fiercest opponents in DC And Congressional Republicans on the House Financial Services committee who Are inversely some of our industry’s Biggest allies in advance of that we’re Going to check in on activity from both The house Financial Services committee As well as from the SE see to see how Things stand heading into the hearing on Saturday the financial services Committee published a new discussion Draft Bill proposing to establish a Comprehensive regulatory framework for Stable coins in the final months the Previous Congress work on stablecoin Legislation was frenetic with lawmakers Attempting to negotiate a draft bill That could be put forward there appeared To be broad bipartisan agreement that

Stablecoin legislation was both Fundamentally important and an Achievable First Step an important Symbolic action to prove that Congress Is capable of moving forward important Legislation relevant to the crypto Industry despite that sentiment the Previous attempt fell apart in the final Weeks reporting at the time featured a Wide range of finger pointing from Lawmakers to explain why the legislation Did not get introduced the causes cited Were everything from the treasury Department apparently intervening around How self-hosted wallets should be Handled to the SEC insisting that Stablecoin should be defined as Securities and fall under their Jurisdiction earlier this month an Anonymous former government official Familiar with the situation said quote The stable coin legislation was coming Together over the summer and the SEC was Known to oppose it I think the true aim Was to stop any stablecoin legislation Which interestingly was at odds with the Position that they took with the President’s working group report it Tracked with their activities now which Is essentially claiming through Enforcement action that all stable coins Are securities end quote one of the key Complaints was that during consultation On the bill the SEC put forward a stable

Coin definition that would have been so Restrictive that it would not recognize Any of the existing stable coins and This I think really gets at the nut of Where things landed by the end of last Year John Rizzo a former U.S treasury Spokesperson explained some of the Issues he had seen during his time in Washington last month in an op-ed for Coindesk he wrote many on the Progressive left believe that government Regulation of stable coins in crypto More broadly would provide undue Legitimacy in other words even Restrictive legislation would still Suggest that crypto was allowed that Stable coins were a legal thing to Create and over the course of last year The part of the U.S government apparatus That wants crypto not to have any Legitimacy to not be a legal Enterprise Has done nothing but grow we discussed Last week how this position got its Clearest voice yet in an editorial piece By Professor Hillary Allen that was that Was published in foreign affairs as I Said then I think the fact that this is Now being a vocal clear loud articulated Position suggests that it’s been growing Behind the scenes for some time and Clearly as we now look back at Stablecoin legislative efforts last year It was a part of the discourse even if It wasn’t being said out loud so then

What is in this new bill Well according to house Financial Services committee chairman Patrick McHenry this draft bill is the same one That had been circulating throughout DC Last year and is now being made public For the first time there are some pretty Common Sense elements of it it would Place the Federal Reserve in charge of Non-bank stable coin issuers like tether And circle Banks and Credit Unions could Seek approval to issue a stable coin From their existing regulator Registration with the regulator would be Compulsory for all issuers who want to Do business in the U.S so far all things That you would expect now when it comes To reserves in this draft stablecoin Reserves are not mandated to be held in Any particular form but Reserve Stability is considered in granting Registration applications in this Consideration the legislation Specifically expresses a preference for Full Reserve or one-to-one backing held In cash short duration treasury bills And other cash-like instruments the Issue of how to deal with FDIC insurance For stable coins was put off for another Day with the legislation stating clearly That stable coins are not insured nor Are they considered to be quote backed By the full faith and credit of the United States like other other forms of

US Dollars one positive part of the Draft legislation it explicitly Considers self-custody and will provide Carve outs to exempt wallet software Providers from registration requirements Now in the crypto industry there are Obviously many types of things that we Call stable coins this legislation would Place a two-year moratorium on newly Issued stable coins that are quote Unquote endogenously collateralized That’s what this industry typically Refers to as algorithmic stable coins Such as the ill-fated Luna UST pair the Treasury would be required to study These mechanisms and Report their Findings to Congress within a year Existing algorithmic stable coins would Be allowed to continue to operate under This two-year ban now there was a lot of Concern on Twitter that this moratorium Would cover stable coins with crypto Asset backing like die but the Definition in the legislation seems Sufficiently narrow to allow them it Only covers stable coins that quote rely Solely on the value of another digital Asset created or maintained by the same Originator to maintain the fixed price In other words it sees the issue as at Least in part the conflict of interest Between the stablecoin issuer and the Asset issuer as opposed to just being a Priori against digital assets as a

Collateral Source another aspect of These rules would be that banking Regulators in the National Institute of Standards and Technology would be Empowered to set interoperability Standards for stable coins including Technical and legal specifications with A view to allowing users to clear and Settle across different payment networks Without having to purchase native stable Coins for each Network finally the Federal Reserve would be instructed to Study the effects of a digital dollar Issued by the Central Bank the FED is of Course already undertaking Technical and Structural research around a potential Cbdc but this legislation would direct The scope of the research to explicitly Include monetary policy Financial Stability and privacy for individuals Among a multitude of other areas it Would also require a report on the Research to be provided to Congress Within a year now perhaps the most Notable feature of this draft bill is That it was released with very little Publicity now that’s different from our Standard pattern which has been Politicians releasing bills that they Know don’t have a chance to actually Make it through just as a way to score Political points either for their Pro or Against crypto perspective maybe that Means that lawmakers aren’t trying to

Use this particular legislation as a Political football and are more Interested in just getting it done now Interestingly although Tuesday’s hearing With SEC chair Gary genzler is the one That many in crypto are watching the House also announced another hearing for This week that will probably be a lot More productive on Wednesday the house Financial Services committee’s digital Asset Focus subcommittee will hold a Hearing on this stablecoin legislation Witnesses for that hearing include the New York Department of Financial Services superintendent Adrian Harris Who of course oversaw the shutdown of Signature Bank in March as well as the Winding up of paxos issues stablecoin Busd in February but the subcommittee Will also hear from three crypto Advocates including Jake travinsky the Chief policy officer at the blockchain Association Dante desparte the chief Strategy officer at Circle and Columbia Business school Professor Austin Campbell who was previously the head of Portfolio management at paxos this is Honestly the first time in a very long Time that we’ve actually had really good Witnesses at a hearing and when I say That I do include Adrian Harris because At least this is a person who is Actively engaged aged in the Implementation of policy rather than

Just some Professor who has an Intellectual bone against crypto so Hopefully it will be productive Jake Travinsky tweeted on Wednesday I will Testify before the house Financial Services committee on digital assets and A hearing on stablecoin legislation last Month the blockchain association urged Congress to move forward on stablecoin Legislation and outline five principles That a good stablecoin bill must follow I’m excited for the chance to testify About why stablecoin legislation should Be top priority now here are the Principles he’s referring to from an Earlier Twitter thread first Jake writes Congress should focus on custodial Stable coins meaning those issued and Redeemed by firms holding assets backing The stablecoin in a bank or other Financial institution second both Banks And non-banks should be allowed to issue Stable coins there is no valid reason to Require all stablecoin issuers to get Bank Charters non-banks can issue stable Coins that are just as safe as those Issued by Banks given the right rules And regulations third assets held by Stablecoin issuers to back the stable Coin should be limited to specified high Quality liquid assets that meet a Minimum standard of say safety and Soundness the regulator authorized to Oversee issuers should also be allowed

To approve other assets fourth Stablecoin issuers should be subject to Operational requirements such as making Public disclosures regarding assets held As backing for stable coins segregating Those assets from corporate funds Conducting routine audits or evaluations By public accounting firms and fifth Stablecoin should be overseen by a Prudential regulator such as the fed or The OCC and should be exempt from Overlapping regulation by the SEC or the Cftc this is necessary to provide Regulatory Clarity and clear delineation Of responsibility between agencies So that’s what Jake and the blockchain Association thinks should go into these Rules but what about the critics well Professor Hillary Allen who I just Mentioned as someone who had just Written about why crypto should be Banned entirely unsurprisingly had some Problems with this it seems like her Biggest issue is the idea of stablecoin Issuers having access to Fed Services She writes so the hfsc stablecoin bill Dropped tldr it won’t fix problems with Stable coins which aren’t used for Payments anyway but it will extend Government safety net to more firms the Bill contemplates that stablecoin Issuers bank and non-bank get access to Discount window and to Fed Master Accounts which presumably will come with

Daylight overdraft protection from the Fed the financial safety net here is Being extended to non-banks now to me This seems like a kind of weird thing to Have as the centerpiece of your critique Of this specifically because these Stable coin issuers are huge holders of U.S treasuries so I’m not sure why you Wouldn’t want those large holders of Treasuries to not have discount window Access it’s hard not to read this Critique and go back from the position Of the folks who killed stablecoin Legislation last year that any Regulation would in fact legitimize the Industry if that’s the issue then it’s Just about finding things to complain About because you don’t want any Regulation at all so that is what’s Happening with the house now what about With the SEC well the big thing is that It’s going after another exchange this Time bittrex on Sunday night news broke That the embattled us-based crypto Exchange had received a Wells notice From the SEC informing them of incoming Enforcement action the strange thing About this notice was that bittrex had Already announced last week that they Would be winding down U.S operations Starting next month in 2017 bittrex was The largest us-based crypto exchange by Volume but has struggled in recent years Most notably they agreed to pay a fine

In more than 29 million to the U.S Treasury for sanctions violations in October of last year and agreed to Undertake intensive rectification work On their compliance system according to Bittrex’s general counsel David Maria The Firm had discussed with the SEC in Late 2022 how to register as crypto Operations but found as so many others Have found that there was no Pathway to Registration without ceasing all of Their revenue generating operations in The U.S Maria said quote the lack of Regulatory Clarity here results in Substantial costs and no certainty as to What can and can’t be offered now on Monday this was all followed up by an Actual lawsuit press release reads SEC Charges crypto asset trading platform Bittrex and its former CEO for operating An unregistered exchange broker and Clearing agency bittrex Global gmbh also Charged for failing to register as a National Securities Exchange one of the Most important parts from the press Release was this paragraph the complaint Further alleges that bittrex and Shahara Who is the company’s CEO from 2014 to 2019 coordinated with issuers who sought To have their crypto asset made Available for trading on bittrex’s Platform to first lead from public Channels certain quote problematic Statements that Shahara believed would

Lead a Regulators such as the SEC to Investigate the crypto asset as the Offering of a security for example in an Effort to avoid regulatory scrutiny Before bittrex would make an asset Available on its platform bittrex and Shahara instructed issuer applicants to Delete statements related to price Predictions expectation of profit and Other investment related terms genzer Tweeted today’s action yet again makes Plain that the crypto markets suffer From a lack of Regulatory Compliance not A lack of regulatory Clarity Austin Campbell retweeted that saying says the Guy alleging things are securities that They never set as Securities now for Reasons they won’t explain beforehand or In the suit they just filed as of yet While multiple other Regulators also Claim jurisdiction and where if you try To comply you get shut down Jacob Frantic writes crypto asset security is Not a thing genzler made it up and Thinks if he repeats it enough it will Magically become law and indeed a lot of What crypto Twitter was discussing was The fact that the SEC claims specific Tokens were Securities that includes Most notably algo and dash but there Were also another handful accused of Being Securities as well medalama and James Murphy writes another classic Gary Gunster move bittrex announces two weeks

Ago that it was exiting the U.S market Because of the chaotic regulatory Environment here so Gensler sues them on The way out the door reminds me of the Time Gensler sued FTX after it declared Bankruptcy proof of talent’s Rob pione Wrote something similar Gary going after Companies that haven’t been relevant in Years very brave much investor Protections Brown redneck partner Preston Byrne writes here’s what’s going To happen to American Securities Regulation in this area inside of a Decade some crypto Biz based in Nigeria Facilitating trade flows to China will Have 20x the number of clients that Schwab does and absolutely nobody’s Going to care what U.S Regulators think Speaking as one who will never benefit From Social Security missed the Boomer Housing boom and who can get 0.5 percent Of the bank when inflation is at 10 Percent the fact that the SEC is trying To Bar the exits to this system while Making no allowance for legit projects Is a disgrace the risk isn’t the issue People buy high-risk stuff all the time Via EG crowdfunding platforms the Europeans are creating a disclosure Regime so should we and the fact that we Don’t betrays the government’s Intentions they don’t want the sector Regulated they want it dead Mike wazizek The General Counsel at Alliance style

Writes at some point SEC lawyers need to Step up and advise their client Non-lawyer Gary Gensler that the law Doesn’t say what he thinks it does and That what he’d like to do is not exactly Legally coherent and that of course is What’s going to be on trial at the Hearing tomorrow the oversight of the SEC hearing with just genzer test Certifying is set to start at 10 A.M on Tuesday April 18th and you better Believe that we will be watching and Reporting on what happens alright guys That’s it for today as always I Appreciate you listening don’t forget to Go subscribe to the breakdown Main feed Again Sunday April 23rd is the last day That the breakdown will be on the Coindesk podcast Network feed and until Tomorrow be safe and take care of each Other peace