A bipartite majority in the Senate has just passed the engineering law to provide a regulatory framework to Stablecoins. A similar bill, the stable act, makes its way through the chamber. President Trump wants to sign a Stablecoin bill this year, so it seems that we are on the right track to a regulatory plan expected for a long time for Stablecoins.
Where are we? We should not count our chickens before hatching. The proposed legislation is imperfect and can and must be fixed quickly to eliminate unnecessary duplication which will impose excess costs on industry and taxpayers.
Fortunately, legislation can easily be fixed. The bills of the Chamber and the Senate, although largely similar, have differences, and the two chambers will have to reach an agreement. Will the resulting bill be known as the stable engineering law? There is still time to avoid problems such as the choice of 55 different regulators, or to keep the stablecoins carrying interest outside the regulatory framework.
The problems of our obsolete regulatory framework contributed to the desolate state of the regulation of cryptography in the United States, we literally have hundreds of different financial regulation organizations at the levels of the state and federal, and they do not play well together. The regulators engage in lawn battles to extend their areas, while other important problems fall into the neglected cracks. The FTX has been regulated by the regulators of the state transmitter of the state, of all people. How brilliantly was it?
This fragmentation of our regulatory system was one of the contributing factors to the 2008 financial crisis. The conference response in Dodd-Frank legislation was to add another layer of bureaucracy, the Financial Stability Oversight Council (FSOC). The idea behind the FSOC is that the dukes and the counts in charge of regulatory fiefs would meet in a committee and would cooperate more than before. The congress is about to repeat this error by requiring joint regulation of alphabet soup agencies.
This Byzantine bureaucracy has slowed down a solid approach to digital assets. An example is the battle to know if a particular digital asset is a security as part of the infamous test Howy, and therefore subject to the whims of the dry, or something else, and therefore subject to the different dictates of regulators of something else (CFTC? CFPB? State bank or monetary transmitter regulator?).
We know all the contortions that the transmitters of digital assets have lived to avoid the experience of Kafka-Esque dry. Even tradfi issuers of titles do their best to take advantage of the many exceptions to recording the dry each time they can. Dry surveillance is too expensive and heavy, especially for more recent and smaller companies. The dry has been spectacularly unsuccessful over the years in the correct scaling of recording requirements to the size of the range of newer and smaller companies.
The bills proposed would allow transmitters to choose from 55 different regulators by establishing themselves in good jurisdiction with the right type of charter. In addition to the alphabet soup at the federal level (FDIC, OCS, FED, NCUA and, for security automations, the dry), stablecoin issuers could also choose a state regulator. With a choice of 55 different regulators, what could be wrong? Lots of things.
First of all, there is the danger of a race down. Stablecoin transmitters will be tempted to choose the regulator with the most laxual and least costly surveillance. This increases the chances that regulators are missing something important. To remedy this, the bills require that the secretary of the Treasury certifies that the regulations of a State are “significantly similar” to federal regulations. If it is “significantly similar”, why bother with such redundancy? In addition, the secretary of the Treasury must go through an official regulatory process to find principles to establish a substantial similarity. Talk about a waste in double resources!
But wait, as in a good infoppitation, there are more! No more waste and redundancy, that is to say. The Chamber’s bill requires the OCC, the FDIC and FED to engage in joint regulations in consultation with state regulators on capital requirements for stablecoins. Any veteran of the development of joint rules can attest to which long and painful process it is for different federal agencies to work together on joint regulations.
The joint regions take place very slowly because the agreement between agencies is a long, slow and often controversial process. A survivor of such joint regulations concerned me an incident in which a cries match between the staff of the various agencies almost led to a handgun. The congress can establish deadlines for the development of the rules, but there is generally no punishment if an agency falls for years after a deadline.
Speaking of lawn battles, the stablecoins that pay interest is not covered. Who regulates them? A Stablecoin which is a “security” is not covered by invoices either. These parts are probably regulated by the dry. We can expect the regulators and the courts constantly competing themselves if a future stable product is regulated by one of the 55 stablecoin regulators, or by the dry or CFTC, or CFPB or someone else.
At a time when the administration is to have government agencies in its attempts to release to eliminate waste and redundancy, building a regulatory regime in which the overlap of jockey regulators for the position and the duel in the joint rules is an absurd contradiction. The congress must choose a single regulator and get rid of joint regions and state gaps.
Of course, before we talk about who and how we have to regulate the stablecoins, we must be clear about the reasons why we regularly regulate stablecoins. This will help determine the best approach to regulate stablecoins. In general, financial regulations have certain common sense objectives:
- The economy will not die when something bad happens.
- Customers are protected when an intermediary fails.
- The economy can grow and be stable.
- Market players have the information they need to make good decisions.
- Fraudsters do not sell false instruments.
- Intermediaries who have customer assets can trust.
- The prices are fair and not manipulated.
Stablecoins are an important innovation in the global payment system. They help consolidate the role of the dollar in the world economy. They are likely to grow considerably from their current size and become systemally important. The failure of a very large stablecoin could transmit distress throughout the economy.
Those who lose funds in such a failure could in turn by default on their obligations, threatening to reduce other entities without direct stables of stablecoins. A race on a stablecoin would make him empty his assets of American treasury bills, causing distress on the treasury market. It is the quintessence of systemic risk, and it must be monitored and managed by our de facto Systemic risk regulator, Fed.
Congress can and should repair defects in stable engineering bills. Congress should choose the Fed as a single stablecoins regulator. Stablecoins with interest must be brought to the stablecoin regulation scheme. These fixes can be carried out simply and quickly with existing texts. Congress should also start to think seriously about how to repair our dysfunctional regulatory structure later.
A more intelligent and agile regulatory structure would have more quickly entered the many advantages of blockchain technology and propose appropriate means to promote innovation safely and ensure American leadership. We have to start the discussion on the best way to proceed. Financial technology will continue to evolve, and our obsolete regulatory structure will hinder this innovation unless we install it and soon.
