A bipartisan majority in the Senate has just approved the genius law to provide a regulatory framework for the stables. A similar bill, the stable act, is making its way through the house. President Trump wants to sign a Stablcoin bill this year, so it seems that we are on its way to a very delayed regulatory regime for Stablecoins.
Or are we? We must not count our chickens before they hatch. The proposed legislation is defective and can and should be solved rapidly to eliminate unnecessary duplication that imposes excessive costs to the industry and taxpayer.
Fortunately, legislation can be easily solved. Chamber and Senate’s bill, although widely similar, have some differences, and the two chambers will have to reach an agreement. Will the resulting bill be known as the stable genius law? There is still time to avoid problems such as the choice of 55 different regulators, or maintain the stable that generate interest outside the regulatory framework.
The problems in our obsolete regulatory framework have contributed to the unfortunate state of cryptographic regulation in the US. We literally have hundreds of different financial regulatory agencies at the state and federal level, and do not play well. Regulators participate in grass battles to extend their domains, while other important issues fall into careless cracks. FTX was regulated by regulators of state money transmitters, of all people. Who was the brilliant idea?
This fragmentation of our regulatory system was one of the factors contributed to the financial crisis of 2008. Congress response in Dodd-Frank legislation was to add another layer of bureaucracy, the Financial Stability Supervision Council (FSOC). The idea behind the FSOC is that the Dukes and them count them in charge of the regulatory fiefs would meet in a committee and cooperate more than they had before. The Congress is about to repeat this error by requiring the joint regulations of the alphabet soup agencies.
This Byzantine bureaucracy has slowed a solid approach to digital assets. A case in question is the battle on whether a particular digital asset is a security under the infamous Howey test, and therefore subject to the whims of the SEC, or something else, and therefore subject to the different dictates of the regulators of something else (cftc? Cfpb?
We are all familiar with the contortions that digital assets have passed to avoid the experience of Kafka SEC. Even tradfi values emitters do everything possible to take advantage of the many exceptions to the record of the sec as long as they can. The supervision of the SEC is a process that is too expensive and cumbersome, especially for the newest and smaller companies. The SEC has not been successful over the years by properly climbing the registration requirements to the size of the newest and smaller companies.
The proposed bills would allow the issuers to choose between 55 different regulators establishing themselves in the correct jurisdiction with the correct type of letter. In addition to the alphabet soup at the federal level (Fdic, Occ, Fed, NCUA and, for Security-Stablecoins, the SEC), the stablecoin emitters could also choose a state regulator. With an option of 55 different regulators, what could go wrong? Many things.
First, there is the danger of a race towards the bottom. Stablecoin emitters will be tempted to choose the regulator with the most lax and less expensive supervision. This increases the possibilities that regulators are lost something important. To remedy this, the bills require that the Secretary of the Treasury certify that the regulation of a State is “substantially similar” to federal regulation. If it is “substantially similar”, why bother with such redundancy? In addition, the Treasury Secretary has to go through a formal regulation process to create principles to establish substantial similarity. Talk about a waste of duplicate resources!
But expect, as in a good infomercial, there is more! More waste and redundancy, that is. The Chamber’s Law project requires that the OCC, the FDIC and the food participate in a joint regulations in consultation with the state regulators on the capital requirements for the stable. Any veteran of joint regulations can attest to the long and painful process that is for different federal agencies to work together in a joint regulations.
The joint regulations come very slowly, since reaching an agreement between the agencies is a long, slowly controversial process. A survivor of said joint regulations related to me an incident in which a party of shouts between employees in the different agencies almost led to a fight to punch. The Congress can establish deadlines for regulations, but there is generally no punishment if an ATUDE agency for years after a deadline.
Speaking of grass battles, the stable that pays interests are not covered. Who regulates those? A stablecoin that is a “security” is not covered by invoices either. Such currencies are presumably regulated by SEC. We can expect regulators and courts to discuss incessantly about a future product similar to Stablecoin is regulated by one of the 55 regulators of Stablecoin, or by the SEC or CFTC, or CFPB or another person.
At a time when the Doge Administration is eviscaing government agencies in their bungling attempts to eliminate waste and redundancy, build a regulatory regime in which overlapping regulators joockey for the position and duel in the joint rules is an absurd contradiction. Congress needs to choose a single regulator and get rid of joint regulations and state lagoons.
Of course, before talking about who and how we should regulate the stable, we must be clear about why we are regulating the stable. This will help discover the best approach to regulate Stablcoins. In general, financial regulation has some 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 participants have the information they need to make good decisions.
- Scammers do not sell false instruments.
- You can trust intermediaries that have customers assets.
- 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 global economy. They are likely to grow substantially from their current size and become systemically important. The failure of a very large stable could transmit anguish throughout the economy.
Those who lose funds in such a failure could in turn a breach of their obligations, threatening to demolish other entities without direct holders of Stablecoins. A career in a stablcoin would make him throw his holdings of the treasure bonds of the United States, causing anguish in the treasure market. This is the epitome of systemic risk, and must be monitored and administered by our de facto Systemic Risk Regulator, Fed.
Congress can and should fix the defects in the stable genius bills. The Congress should choose the Fed as the Single Regulator for Stablecoins. The stables that carry interests must be taken to the regulatory regime of Stablecoin. These corrections can be done simply and immediately to existing texts. Congress should also serve to think seriously about how to fix our dysfunctional regulatory structure later.
A smarter and agile regulatory structure would have captured the many benefits of blockchain technology and elaborated appropriate ways to promote innovation safely and guarantee US leadership. We need to start the discussion about the best way to do this. Financial technology will continue to evolve, and our obsolete regulatory structure will hinder that innovation unless we fix it and soon.
