As Congress considers the future of crypto, a leading trade association is urging lawmakers to start with stablecoin legislation.
The Blockchain Association—composed of top companies including Kraken, Ripple, Anchorage Digital, and Grayscale—released a letter, shared exclusively with Fortune, to House Financial Services Committee chair Patrick McHenry (R-N.C.) and ranking member Maxine Waters (D-Calif.) on Thursday ahead of a pivotal hearing on crypto.
“There’s pretty much a bipartisan, bicameral consensus, as well as within the administration, that something needs to be done on stablecoins,” Kristin Smith, CEO of the Blockchain Association, told Fortune. “It’s very clear that this is something that Congress needs to legislate.”
Stablecoins have emerged as a major point of contention in the debate over crypto legislation. The digital tokens are typically pegged to underlying assets, such as the U.S. dollar or gold, but can also be backed through a blockchain-based algorithm. TerraUSD, which collapsed in May and helped spur the ongoing Crypto Winter, is an example of an algorithmic stablecoin.
While companies like Circle and Paxos argue that stablecoins provide an essential service by offering users an on-ramp into the crypto ecosystem and enabling financial accessibility, lawmakers have grappled with how to approach the diverse—and often risky—landscape.
In November 2021, the President’s Working Group on Financial Markets published a report recommending that Congress enact legislation establishing a federal framework for stablecoins, a sentiment later echoed by Treasury Secretary Janet Yellen during testimony before Congress in May 2022.
The vacuum has led to disagreement between regulators on how to classify stablecoins. The Securities and Exchange Commission, led by Gary Gensler, has told crypto firm Paxos that it plans to sue the company for violating investor protection laws, alleging that its stablecoin, Binance USD, is an unregistered security. In contrast, Commodity Futures Trading Commission chair Rostin Behnam said at a Senate Agriculture hearing on Wednesday that he believed stablecoins were commodities, barring a new regulatory framework.
McHenry and Waters came close last congressional session to introducing a bipartisan stablecoin bill, with McHenry expressing confidence at an October conference in D.C. that they could work out differences over state and federal regulation. He described the status of the legislation as an “ugly baby.”
Blockchain Association chief policy officer Jake Chervinsky noted that stablecoins are an area where many crypto companies are calling for robust oversight.
“This is us being proactive and coming out to say, this industry understands the importance of regulation,” he told Fortune.
The Blockchain Association laid out a set of recommendations for legislation, which Smith and Chervinsky argued would help lawmakers differentiate between different classes of stablecoins. This includes focusing on “custodial” stablecoins—tokens that are issued, maintained, and redeemed by a firm that holds the backing assets—as well as ensuring that the reserves are maintained in high-quality, liquid assets—a criticism often levied against leading stablecoin Tether.
Other principles included in the letter relate to public disclosures and the types of companies allowed to issue stablecoins, with the Blockchain Association arguing that both insured depository institutions and nonbank firms should be included, as opposed to only firms with bank charters.
Chervinsky told Fortune that limiting stablecoin issuance to banks would create a “regulatory moat around legacy incumbents that don’t need any more help from the government in order to exclude innovators and competitors from the marketplace.”
The letter’s final point urges clarity around the prudential regulator that would oversee stablecoins. Given the diverging views between the SEC and the CFTC, the classification and regulation of stablecoins could emerge as a wedge between different agencies. Chervinsky argued that either the Federal Reserve or the Office of the Comptroller of the Treasury should regulate stablecoins, as opposed to the SEC or CFTC.
In a speech on Thursday on crypto, Federal Reserve vice chair Michael Barr noted that stablecoins have the potential to scale quickly and come with high operational risks, calling for federal prudential regulation and supervision.
“We must learn from the past to ensure that we do not allow for new forms of unregulated private money subject to classic forms of run risk,” he said.
Fortune’s CFO Daily newsletter is the must-read analysis every finance professional needs to get ahead. Sign up today.