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Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.

Legislative markups don’t always make for compelling TV, although last week’s showdown at the House Financial Services Committee certainly created some memorable moments. At least that’s how I experienced it—I was blissfully on vacation and couldn’t tune in to the full marathon sessions. A special shoutout to Brendan Pedersen at Punchbowl News, who meticulously covered the hearings.

The postmortem spin has been that getting two bills—one focused on crypto-market-structure oversight, the other on stablecoins—out of the House Financial Services Committee, with a modicum of bipartisan support, was a major win. To some degree, that’s true, in that the industry’s central political goal is legitimization, whether through outright regulation or the acknowledgment from lawmakers that regulation is necessary.

Market structure legislation has always seemed like a long shot, and the above seems true—the bill’s passage is a significant step forward in advancing the conversation, passing a hurdle where others have stumbled.

It’s hard to see the stablecoin bill as anything but a failure. This was always the effort that had the best chance to become legislation, with then-chair Maxine Waters (D-Calif.) and ranking member Patrick McHenry (R-N.C.) coming close to a final version last year. With their roles flipped this year, it still seemed like there was an appetite to advance legislation. And when McHenry moved forward with a Republican-only version earlier this session, onlookers framed Waters’ frustration as political maneuvering.

Amid the markups for the two bills, however, the stablecoin bill proved more contentious—and ultimately received less support. And while a select few Democrats voted in favor, the majority voiced opposition during an increasingly heated hearing. As Pedersen noted in his live-tweet thread (live-x thread?), it was “surreal to watch several months of delicate, gradual goodwill between McHenry and Waters evaporate in just a couple hours.”

According to McHenry, the main roadblock came from the White House. Subsequent reporting has revealed the wedge was a persistent issue in debates over stablecoin regulation—whether to prioritize oversight at the state or federal level. The Biden administration, and National Economic Council Director Lael Brainard in particular, pushed for federal preemption (the Republican version would still create a federal floor for stablecoin oversight requirements).

What’s fascinating about this divide is that the split is not along partisan lines. Recall that the only comprehensive stablecoin oversight in the U.S. is in New York, thanks to its Department of Financial Services. When its superintendent, the Democratic-appointed Adrienne Harris, testified before the House Financial Services Committee earlier this year, she pushed for an approach that would preserve New York’s autonomy. There was also a strange moment from the hearing where Waters appeared unclear that New York even had a regulatory regime for stablecoins.

According to a Democratic staffer on the committee, who spoke with me yesterday on the condition of anonymity, DFS was involved in conversations around legislation, advocating for the state-only path that the White House subsequently opposed. And if you look at the five Democratic congressmen who voted for the bill, two were from New York—Ritchie Torres and Gregory Meeks. A spokesperson for DFS declined to comment for the newsletter.

The upshot is a new divide being formed around crypto regulation—not along partisan lines, but instead other questions such as state versus federal oversight. I asked the staffer why most Democrats are opposed to at least preserving New York’s system. “That’s a million-dollar question,” they replied.

Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz

DECENTRALIZED NEWS

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Binance CEO Changpeng Zhao attempted to shut down the exchange’s U.S. arm earlier this year but ultimately faced board opposition. (The Information)

Kenya suspended the rollout of Sam Altman’s eye-scanning crypto company, Worldcoin, despite the country being one of the most popular markets for the project. (TechCrunch)

Creditors for FTX criticized a plan to reorganize the failed crypto exchange, arguing they were not looped in to the decision. (The Block)

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