Capitol Hill Might Boost Stablecoins

Capitol Hill Might Boost Stablecoins. But Don’t Count On It Too Much.

18 April 2023

Stablecoins, a sort of cryptocurrency often pegged to the US dollar, might benefit from a long-awaited proposal unveiled on Capitol Hill. However, persuading Congress to approve the bill would be difficult.

The bill, which was presented over the weekend by the House Financial Services Committee, would establish new restrictions for so-called “payment” stablecoins, which issuers hope would be used to purchase everything from furniture to groceries.

Limiting stablecoin reserves to ultrasafe investments like cash and short-term Treasuries and imposing a two-year ban on the creation of stablecoins collateralized by related cryptos, a structure that proved disastrous a year ago with the $60 billion collapse of “algorithmic” stablecoin TerraUSD.

Stablecoins are believed to constitute the crypto markets’ secure base. Issuers attempt to keep their dollar peg by keeping an identical amount of reserves in secure assets and allowing coin holders to redeem their coins for dollars delivered to a bank account at any time. Though businesses want stablecoins to be used for payments, the coins are now used to exchange other tokens, such as Bitcoin.

Crypto supporters hailed the proposed bill as a historic moment for the sector.

“It’s an extraordinary moment for the future of the dollar in the world and the future of a currency on the internet,” wrote Jeremy Allaire, who heads Circle, which issues $31.7 billion stablecoin USDC.

Even while issuers like Circle claim that they have never failed to redeem coins, the tokens occasionally fail. In March, the secondary market price of USDC temporarily dipped below $1 when Circle announced that it held more than $3 billion in reserves at Silicon Valley Bank, which failed due to a bank run.

The plan would allow banks to issue such coins while granting non-bank issuers, such as Circle, access to some of the same benefits as banks, including deposit accounts at Federal Reserve Banks and short-term funding through the Fed’s discount window.

Because stablecoins are the primary mechanism crypto traders use to purchase and sell Bitcoin and other tokens, the measure may remove a significant amount of risk for investors, perhaps luring more institutional investors into the sector.

However, those very benefits are one of the reasons why long-time cryptocurrency detractors are already queuing up against the law.

“It won’t fix problems with stablecoins (which aren’t used for payments anyway), but it will extend [the government] safety net to more firms,” wrote American University professor Hilary Allen on Twitter.

Aside from crypto skeptics, the measure may meet opposition in the Senate, where Senate Banking Committee Chair Sherrod Brown (D., Ohio) has demonstrated less inclination to push crypto-related legislation than his House colleagues.

In a research note issued on Monday, TD Cowen analyst Jaret Seiberg stated that his concern is not with this measure or the House. It is attempting to persuade the Senate to follow the same strategy, which might result in the 60 votes required to break a filibuster. He and his colleagues are still skeptical that this will happen.

The bill, negotiated by committee Chairman Patrick McHenry (R-NC) and ranking member Maxine Waters (D-CA), is largely identical to a proposal from last year that was never revealed following the fall of crypto exchange FTX, which shook the crypto sector to its core. The House committee will have a hearing on Wednesday.

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