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Stablecoins would get federal rules under emerging House deal

Only banks and certain financial firms subject to oversight could issue the digital tokens under a proposal that could get a House Financial Services Committee vote as soon as next week

Reps. Patrick T. McHenry (R-N.C.) and Maxine Waters (D-Calif.) listen at a House Financial Services Committee hearing in June. (Mary F. Calvert/Reuters)

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

The bill — the product of negotiations between House Financial Services Committee Chair Maxine Waters (D-Calif.) and Rep. Patrick T. McHenry (R-N.C.), the panel’s top Republican — would limit issuers of the digital tokens to banks and certain other financial firms that submit to federal oversight, according to people familiar with the process.

Those companies would need to fully back their stablecoins with highly liquid assets, such as cash or short-term government debt. Commercial firms would be barred from issuing stablecoins — a prohibition aimed at shutting down attempts to offer financial services by companies such as Facebook, which spent years trying to win regulatory approval for its own digital currency.

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

In broad terms, the bill appears primed to follow the thrust of a Treasury Department report last fall recommending that bank regulators oversee stablecoin issuers, as opposed to the Securities and Exchange Commission, which polices markets.

Biden administration calls on Congress to take the lead regulating stablecoins

But some advocates of stricter financial regulation said they are concerned about the emerging proposal. Steven Kelly, a research associate at the Yale Program on Financial Stability, said he is skeptical non-bank financial firms can safely issue the digital tokens, even if they are subject to federal supervision and required to maintain a capital cushion to protect against sudden shocks. “It’s either bank regulation or it isn’t,” he said. “If you’re calling regulations banklike, you might as well say they’re bank-light.”

For now, stablecoins are used primarily by crypto investors to facilitate trades between digital currencies because they cut down on transaction times and costs. Regulators zeroed in on the tokens last year as their circulation climbed steeply, from $29 billion in circulation at the beginning of 2021 to roughly five times that amount by the end of the year. The trajectory suggested the digital tokens could one day pose a risk to the stability of the wider financial system, especially if the reserves backing them were too thin or illiquid to meet a sudden demand for redemptions.

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

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

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