It’s a volatile time for the global financial system: cryptocurrency is gaining traction, financial institutions are collapsing, and stablecoin regulations remain elusive. With regulatory excess threatening financial stability, the debate over the regulation of stablecoins rages on, as U.S. lawmakers attempt to craft legislation that protects consumers and fosters a healthy financial ecosystem.
Concern on How Congress Could Address Stablecoins Used for Payments
The debate was highlighted at an April 19 hearing of the U.S. Subcommittee on Digital Assets, Financial Technology, and Inclusion. Some lawmakers echoed concerns about the proposed legislation, with U.S. House Financial Services Committee Chair Patrick McHenry releasing a discussion draft bill on how Congress could address stablecoins used for payments and a central bank digital currency.
U.S. Representative French Hill, who chairs the Digital Assets Subcommittee, referred to the previous bill as an “ugly baby” due to its lack of a bipartisan consensus, while House Financial Services Committee Chairwoman Maxine Waters said that negotiations for the bill were incomplete and that starting from scratch was necessary.
Experts Concern on US Regulatory Environment
However, some experts expressed concerns about the United States’ hostile regulatory environment. Austin Campbell, an adjunct assistant professor at the Columbia Business School, pointed to other countries’ relatively more inviting regulatory frameworks when discussing fiat-backed stablecoins. Singapore, Dubai, Abu Dhabi, and the U. (Klonopin) K.–all of which have proposed frameworks for stablecoins–offer a competitive edge for issuers, compared to the U.S.
“If we don’t act, those are the best options and people will take advantage of them,” said Campbell.
Stablecoin Bankruptcies Raise Questions on Prudence
Recent market events have raised grave questions about the prudence of stablecoin enterprises. Last May saw the collapse of Terra’s ecosystem, leading to numerous bankruptcies. The most recent U.S. stablecoin bankruptcy was the sudden closure of Silicon Valley Bank in April of 2021, sparking a 10 percent flash crash of the value of USD Coin (USDC), a major CoinDesk-tracked stablecoin, compared to the U.S. dollar.
Both the proposed bill and the proposed ban on algorithmic stablecoins such as the now depegged TerraUSD Classic (USTC) may help protect consumers and bolster the stability of the U.S. financial system. But until legislative action is taken, the discussion is set to continue as to what regulation of stablecoins– if any– is necessary, and to what degree regulation should be applied.
Balancing Innovation and Oversight
As the debate continues, it is critical that lawmakers and policymakers are mindful of the delicate balance of regulations and the implications that too much government oversight can have on the innovative and fluid cryptocurrency industry. This uncertain regulatory landscape has caused some companies to hold off on launching their own stablecoins, as Fintechz Holdings CEO Ana Arino explained: “The lack of concrete regulation means that it is impossible to consider launching in a meaningful and responsible way…Nobody wants to risk a sizable portion of their own funds without feeling confident that the rules won’t change before they implement their stablecoin launch.”
In addition to the U.S., many other jurisdictions are considering their own regulations for stablecoins. Only time will tell whether U.S. lawmakers and policymakers can catch up and create a regulatory framework that is proportionate to the technology, a move which, if successful, could have a major impact on the landscape and ultimately help protect consumers from malicious actors in the market.
