Stablecoin regulation wobbling in US Senate

In March, the US Senate Banking, Housing and Urban Affairs Committee voted with bipartisan support to move forward the GENIUS Act, which would create a framework for regulated stablecoin issuance in the United States.

That bipartisan approach appears to have fractured, with 9 Democrats, including 4 of the 5 Democrats who signed on in committee to support the bill now signing a letter saying they can no longer support the bill in a letter which included demands for:

stronger provisions on anti-money laundering, foreign issuers, national security, preserving the safety and soundness of our financial system, and accountability for those who don’t meet the act’s requirements.

Today, Senator Warren, a staunch crypto-critic, said:

First, a bill must include basic rules so government officials can’t use stablecoin ventures to line their own pockets and so that foreign governments and giant corporations cannot use stablecoins to pay bribes to the President of the United States. Second, the bill must prevent Big Tech and other commercial firms from issuing stablecoins, preserving America’s historical separation between banking and commerce. Third, the bill must include basic consumer protections—the same as for any other financial transaction. Fourth, the bill must safeguard national security, providing the same guardrails as other payment systems to make sure we’re not turbocharging the financing of drug traffickers, terrorists, adversaries like North Korea, and scammers. And, fifth, the bill must have sufficient safeguards so that a stablecoin meltdown won’t trigger an economy-wide financial meltdown. 

The Trump family's announcement last week in Dubai that a company they helped launch's stablecoin would be used for a US$2B investment, making it instantly the 7th largest stablecoin, seems to have triggered at least part of the opposition. Senator Warren's complaints that buying a stablecoin grants an 'interest free loan' to the issuer stand in contrast to objections over yield based stablecoins, where the underlying profits are shared with holders.

The US Treasury last week issued comment on yield bearing stablecoins, noting that:

banks may be required to increase interest rates to maintain funding or find alternative funding sources

In Europe, yield bearing stablecoins have been banned under MiCA.

If the GENIUS Act passes, there is hope that it might spur change and innovation in combatting financial crime, which makes Senator Warren's position somewhat strange. Presently around 1-5% of illicit funds are intercepted, with an incredible time and cost burden on business as well as customers and significant identity theft risk created by copies of personal information being retained in increasing numbers of computer systems. Section 9 of the bill requires public comment and research into ways to better tackle financial crime. Self-declared Democrat Austin Campbell posted a critique of the opposition to the GENIUS Act, flagging that a regulated US stablecoin would address key Democratic goals, saying:

Regulated stablecoins are safer than banks. Stablecoins are better for financial inclusion. Stablecoins are better for fighting financial crime. Stablecoins expand the reach of US law and dollar norms. Stablecoins fund the deficit. Stablecoins break down bank cartels and oligopolies. Every single one of these positions is a mainline Democratic priority. Every. Single. One.

The GENIUS Act is vying with a competing bill, the STABLE Act, which imposes tighter federal oversight over stablecoins and limits the pool of potential stablecoin issuers.

With debate on the GENIUS Act starting later this week, and Republicans holding only 53 of the required 60 senate seats to pass the bill, some negotiation is likely needed if stablecoin regulation in the US is to find firmer ground. By Michael Bacina with Steven Pettigrove