We Need to Fix the So-Called GENIUS Bill
A bipartisan majority in the Senate has just passed the GENIUS Act to provide a regulatory framework for stablecoins. A similar bill, the STABLE Act, is working its way through the House. President Trump wants to sign a stablecoin bill into law this year, so it looks like we are well on our way to a long overdue regulatory regime for stablecoins.
Or are we? We shouldn't count our chickens before they hatch. The proposed legislation is flawed and can and should be fixed promptly to eliminate needless duplication that will impose excess costs on the industry and the taxpayer.
Fortunately, the legislation can easily be fixed. The House and Senate bills, although broadly similar, have some differences, and the two chambers will have to come to an agreement. Will the resulting bill be known as the STABLE GENIUS Act? There is still time to avoid problems like the choice of 55 different regulators, or keeping interest-bearing stablecoins out of the regulatory framework.
The problems in our obsolete regulatory framework have contributed to the sorry state of crypto regulation in the U.S. We have literally hundreds of different financial regulatory agencies at the state and federal levels, and they don't play nicely together. The regulators engage in turf battles to extend their domains, while other important issues fall into the neglected cracks. FTX was regulated by state money transmitter regulators, of all people. Whose bright idea was that?
This fragmentation of our regulatory system was one of the contributing factors to the financial crisis of 2008. Congress's response in the Dodd-Frank legislation was to add yet another layer of bureaucracy, the Financial Stability Oversight Council (FSOC). The idea behind the FSOC is that the dukes and earls in charge of the regulatory fiefdoms would get together in a committee and cooperate more than they had before. Congress is about to repeat this mistake by requiring joint rulemaking from the alphabet soup agencies.
This byzantine bureaucracy has slowed a sound approach to digital assets. A case in point is the battle over whether a particular digital asset is a Security under the infamous Howey test, and thus subject to the whims of the SEC, or a Something Else, and thus subject to the different dictates of the Something Else Regulators (CFTC? CFPB? state banking or money transmitter regulator?).
We are all familiar with the contortions that issuers of digital assets have gone through to avoid the Kafka-esque SEC experience. Even TradFi issuers of securities do their best to take advantage of the many exceptions to SEC registration whenever they can. SEC oversight is an overly expensive and cumbersome process, especially for newer and smaller companies. The SEC has been spectacularly unsuccessful over the years in properly scaling registration requirements to the size of scope of newer and smaller enterprises.
The proposed bills would permit issuers to choose from 55 different regulators by establishing themselves in the right jurisdiction with the right kind of charter. In addition to the alphabet soup at the federal level (FDIC, OCC, Fed, NCUA, and, for security-stablecoins, the SEC), stablecoin issuers could also choose a state regulator. With a choice of 55 different regulators, what could go wrong? Lots of things.
First, there is the danger of a race to the bottom. Stablecoin issuers will be tempted to choose the regulator with the laxest and least costly oversight. This increases the chances that the regulators will miss something important. To remedy this, the bills require that the Secretary of the Treasury certify that a state's regulation is 'substantially similar' to the federal regulation. If it is 'substantially similar,' why bother with such redundancy? Also, the Secretary of the Treasury has to go through a formal rulemaking process to come up with principles for establishing substantial similarity. Talk about a duplicative waste of resources!
But wait, like in a good infomercial, there is more! More waste and redundancy, that is. The House bill requires the OCC, FDIC, and Fed to engage in a joint rulemaking in consultation with the state regulators on capital requirements for stablecoins. Any veteran of joint rulemaking can attest to what a long and painful process it is for different federal agencies to work together on a joint rulemaking.
Joint rulemakings proceed very slowly as getting agreement between agencies is a long, slow, and often contentious process. One survivor of such joint rulemaking related to me an incident in which a shouting match between staffers in the different agencies almost led to a fist fight. Congress can set deadlines for rulemaking, but there is usually no punishment if an agency dawdles for years past a deadline.
Speaking of turf battles, stablecoins that pay interest are not covered. Who regulates those? A stablecoin that is a 'security' is also not covered by the bills. Such coins are presumably regulated by the SEC. We can expect regulators and the courts to wrangle incessantly over whether a future stablecoin-like product is regulated by one of the 55 stablecoin regulators, or by the SEC or CFTC, or CFPB or someone else.
At a time when the DOGE administration is eviscerating government agencies in its bungling attempts to eliminate waste and redundancy, constructing a regulatory regime in which overlapping regulators jockey for position and duel in joint rulemakings is an absurd contradiction. Congress needs to pick a single regulator and get rid of the joint rulemakings and state loopholes.
Of course, before we talk about who and how we should regulate stablecoins, we need to be clear about why we are regulating stablecoins. This will help to figure out the best approach to regulating stablecoins. In general, financial regulation has some common-sense objectives:
The economy won't 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.
Fraudsters aren't selling bogus instruments.
Intermediaries who hold customer assets can be trusted.
Prices are fair and not manipulated.
Stablecoins are an important innovation in the global payment system. They help to cement 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 stablecoin could transmit distress throughout the economy.
Those losing funds in such a failure could in turn default on their obligations, threatening to bring down still other entities with no direct holdings of stablecoins. A run on a stablecoin would cause it to dump its holdings of U.S. Treasuries, causing distress in the Treasury market. This is the epitome of systemic risk, and it needs to be monitored and managed by our de facto systemic risk regulator, the Fed.
Congress can and should fix the flaws in the STABLE GENIUS bills. Congress should pick the Fed as the single regulator for stablecoins. Interest-bearing stablecoins should be brought into the stablecoin regulatory regime. These fixes can be done simply and promptly to the existing texts. Congress should also begin giving serious thought to how to later fix our dysfunctional regulatory structure.
A more intelligent and nimble regulatory structure would have more quickly grasped the many benefits of blockchain technology and come up with appropriate ways to promote innovation safely and ensure American leadership. We need to begin the discussion on how best to do this. Financial technology will continue to evolve, and our obsolete regulatory structure will hamper that innovation unless we fix it and soon.
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