Demand for Stablecoin Rules, Legislation Ramps Up

With stablecoin markets even more distressed than earlier in the week, today’s HFSC hearing with Secretary Yellen was even more emphatic than senators two days before on the need for action (see Client Report FSOC26). Chairwoman Waters (D-CA) urged FSOC quickly to implement the key regulatory recommendations in the PWG report (see Client Report CRYPTO16). Ranking Member McHenry (R-NC) emphasized instead the need for federal legislation to define this new framework but did not clearly object to any regulatory action. Instead, he and Rep. Torres (D-NY) argued that fully reserved stablecoins do not engage in financial intermediation and, since this makes them different than banks, bank regulation for any such stablecoins would be inappropriate. Secretary Yellen countered that there are many different types of banks and this business model distinction is thus not grounds for different regulation. She demurred on the extent to which stablecoins pose systemic risk, but urged rapid action to ensure that this does not prove the case. Pressed on whether CBDC would obviate stablecoins, the Secretary echoed the arguments for CBDC in the President’s executive order (see Client Report CRYPTO26) but noted also that design factors addressing issues such as privacy must first be resolved by the Federal Reserve.