Stablecoin Legislation: Why Giving the Fed Regulatory Authority May Not Be the Best Approach
Stablecoin legislation has been a hot topic for quite some time now, with efforts from lawmakers like Ranking Member Maxine Waters and Committee Chair Patrick McHenry to reach a “grand bargain” before the year ends. While there is widespread agreement that legislation is necessary to address stablecoins—crypto tokens pegged to the value of assets like the U.S. dollar—the exact regulatory framework remains to be seen.
Proposed approaches have centered around giving the Federal Reserve a significant role in regulating stablecoin issuers. However, experts like Jennifer J. Schulp and Jack Solowey from the Cato Institute’s Center for Monetary and Financial Alternatives argue that this may not be the best approach. They believe that the Fed is not well-suited for overseeing a regulatory regime for stablecoins.
One of the main concerns is the potential conflict of interest. The Fed operates its own payment infrastructure, including FedNow, and is also exploring the possibility of a central bank digital currency. Regulating privately issued stablecoins that compete with these services could lead to biased decision-making. It’s like letting the fox guard the henhouse.
Moreover, the Fed’s regulatory responsibilities for bank regulation are already challenging. Adding the oversight of stablecoin issuers to their plate could spread them too thin and result in subpar regulation. Stablecoin issuers are not banks and should not be treated as such. The main risk they face is losing 1:1 redeemability with the asset they’re pegged to, such as the U.S. dollar. Basic requirements around collateral and disclosures would be more effectively overseen by regulators familiar with disclosure-based regulation.
While it’s commendable that Congress is engaging on stablecoin regulation, giving substantial regulatory authority to the Fed may not be the best move. If the Fed must be involved, Congress should limit their discretion and focus the regulatory regime on disclosures regarding reserves and restrictions on collateral.
Stablecoins have the potential to revolutionize digital payments, offering faster and cheaper transactions. However, a regulatory regime heavily influenced by the Fed could stifle innovation and hinder the technology’s potential.
In conclusion, while stablecoin legislation is necessary, the approach to regulation should be carefully considered to ensure fair competition and effective oversight. Giving the Fed too much regulatory authority may not be the best solution.
Please note that the views expressed in this article are those of the authors and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.