Stablecoins will receive federal oversight under the emerging House agreement

Stablecoins will receive federal oversight under the emerging House agreement

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Top House lawmakers are nearing a bipartisan deal on proposals to regulate stablecoins, a type of cryptocurrency often pegged to the dollar, and the subject of intense scrutiny in Washington since last year.

The bill — sponsored by House Financial Services Committee Chair Maxine Waters (D-Calif.) and the panel’s top Republican, Rep. Patrick T. The outcome of negotiations between McHenry (RNC) — digital token issuers — would limit banks and some other financial institutions that submit to federal oversight, according to people familiar with the process.

These companies must fully back their stablecoins with highly liquid assets such as cash or short-term government debt. Commercial firms will be barred from issuing stablecoins — a ban aimed at halting efforts to offer financial services by companies such as Facebook, which has spent years seeking regulatory approval for its own digital currency.

The text of the bill could be unveiled as soon as this week, and leaders are considering a July 27 markup, people familiar with the process said. Spokespeople for Waters and McHenry did not respond to requests for comment.

In broad terms, the bill appears to follow last fall’s Treasury Department report’s emphasis that bank regulators oversee stablecoin issuers, as opposed to the Securities and Exchange Commission, which regulates the markets.

The Biden administration has called on Congress to take the lead in regulating stablecoins

But some advocates of tighter financial controls say they are concerned about the emerging proposal. Steven Kelly, a research associate at the Yale Program on Financial Stability, said he’s skeptical non-bank financial institutions can safely issue digital tokens, even if they are subject to federal oversight and must maintain a capital cushion to protect against sudden shocks. . “It’s either bank regulation or it’s not,” he said. “If you say the regulations are bank-lite, you might say they’re bank-lite.”

For now, stablecoins are primarily used by crypto investors to facilitate transactions between digital currencies as they reduce transaction times and costs. Regulators zeroed out the tokens last year as their circulation nearly quintupled by the end of the year from $29 billion in circulation at the start of 2021. The trajectory suggests that digital tokens could one day pose a risk to the stability of the broader financial system, especially if the reserves backing them are too thin or illiquid to meet sudden demands for redemption.

Crypto’s plummet tests the sustainability of a hype-driven industry

The collapse of stablecoin Terra in May helped crystallize those fears. The token — called an “algorithmic stablecoin” because it relies on complex financial engineering rather than real-world asset reserves to maintain its peg to the dollar — saw $40 billion worth of value evaporate in a matter of days, taking away savings. A countless number of retail investors along with it. It also started a chain-reaction across the crypto economy that prompted the failure of once highflying firms.

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