U.S. House Stablecoin Hearing: The Battle for State and Federal Regulatory Authority Becomes a Bipartisan Focus

Written by: Mary Liu, BitpushNews

During the hearing on stablecoins held by the U.S. House of Representatives on May 18, the newly formed Subcommittee on Digital Assets, Financial Technology, and Inclusion of the House Financial Services Committee heard testimony from five experts as it reviewed two proposed stablecoin bill drafts. A key point of contention between the two parties during the hearing was the jurisdiction of state versus federal regulation, with Republican and Democratic lawmakers failing to reach an agreement on the distribution of regulatory authority over stablecoins.

Power Debate: State vs. Federal Control

The proposal led by Republican Representative French Hill (R-Ark.) was unveiled in April before the hearing in the Financial Services Committee. In response, senior Democratic lawmaker Maxine Waters introduced a competing draft based on a previously proposed bill that did not make progress during the last congressional session.

In the version of the proposal advocated by Republicans, the bill allows stablecoin operators to choose which state to register in without going through the Federal Reserve, with states free to set their own standards, and issuers having 180 days to submit all necessary registration materials to federal regulators. Supporters of the bill argue that this will prevent a "race to the bottom" and align with the U.S. dual federal/state banking regulatory framework.

In the Democratic proposal pushed by Maxine Waters, the Federal Reserve plays a leading role, with Democrats proposing to grant state regulators the power to approve issuer registrations, while the Fed retains the authority to approve or deny federal registrations. Democrats are particularly concerned about the qualifications of issuers, such as requiring that issuers be federally insured depository institutions. It is also anticipated that stablecoin issuers and/or distributors will be required to comply with certain Know Your Customer (KYC) and anti-money laundering standards.

Some Democrats on the panel objected to allowing state regulators to set standards for stablecoin issuance, arguing that the thresholds might be lowered too much, prompting crypto companies to shift to states with the least regulation. Waters believes that the Republican proposal lacks "several key positions," and the top Democratic lawmaker on the subcommittee, Stephen Lynch (D-Mass.), stated, "We seem to have diverged further. My sense is that if we point this toward 50 states and territories, this practice may continue, and the crypto industry will look for those areas that provide them with the best opportunities, those jurisdictions to maximize profits and avoid cumbersome and expensive regulation and disclosure."

However, Hill stated, "We are not starting from scratch; there is a strong similarity between the two proposals, and we are not that far apart."

Areas of consensus currently include: the composition of stablecoin reserves (both bills include cash, short-term Treasury bills, and central bank reserve deposits), requiring issuers to apply for approval or denial within 90 days, and recognizing stablecoins as non-securities, allowing the U.S. Securities and Exchange Commission (SEC) to "take a back seat" in this area.

David Portilla, a partner at Davis Polk & Wardwell, expressed support for a middle ground during the hearing. He said, "Federal regulation of stablecoin issuers would provide more uniform and consistent rules, while state regulation could promote more diversity and innovation in regulation; the answer to this issue is not necessarily binary." Portilla indicated that, in any case, existing regulations are not suitable for stablecoins, and besides the "baseline" mechanism of federal involvement in setting minimum standards for stablecoin regulation, there could also be "switching" based on the scale of issuance.

Stablecoins and the Crypto Market

Stablecoins like Tether's USDT and Circle's USDC have been a significant part of the crypto market, and both House Republicans and Democrats agree on common goals, including addressing risks to consumers and maintaining the dollar's status in global trade, which could be achieved through regulation of dollar-pegged stablecoins.

For the crypto industry eager for regulatory clarity in the U.S., several hearings on stablecoins or broader crypto topics have been held recently, and most members of the House and Senate seem to advocate for action. If they can reach cooperation on the issue of stablecoins, it would represent a significant advancement in U.S. crypto regulation.

However, any legislation must pass through the Senate Banking Committee, and its chair, Senator Sherrod Brown (D-Ohio), has not indicated a willingness to advance such a bill, posing another obstacle on the path to comprehensive stablecoin regulation.