Senator Sherrod Brown, Chairman of the Senate Banking Committee isn’t convinced stablecoins will offer what they intend, voicing concerns that lax oversight could result in a repeat of a financial crisis.
But in an interview with Yahoo Finance, the Ohio Democrat described himself as open-minded on how to regulate the cryptocurrency asset class, and doesn’t want to kill innovation.
“My job is not to resist or say no to cryptocurrency generally, but to make sure that they follow rules, that they are regulated, and transparency for sure. And consumer protections for sure, but that they don't take advantage of others at the expense, especially of our economy overall,” Brown said on Wednesday.
When asked whether only banks should be limited to issuing stablecoins – a hotly debated topic in the broader conversation about crypto regulation, Brown took a wait and see stance, but said “ I want people issuing stablecoins living under some specific rules and regulations.”
He thinks at a minimum, stablecoins should be brought within the banking system and regulated using current banking rules, and that stablecoin issuers should be transparent about their reserves. Brown argued they should hold a ratio of 1 to 1 in U.S. dollars and short-term Treasuries, and ensure those reserves are audited.
His comments come after the Biden administration recommended that only banks be allowed to issue stablecoins, and tasked Congress with coming up with a new framework to regulate issuers, tailored according to the amount of risk they pose to users and the financial system.
“I'm hopeful next year the Senate Banking Housing Urban Affairs Committee working with the House and Senate colleagues can put some rules on the table about how to do this,” Brown told Yahoo Finance.
“But right now, the Securities and Exchange Commission, the Federal Reserve, and the Department of Treasury are all looking at what we do about stablecoins generally,” he added.
Brown added that he and his staff are looking seriously at proposing legislation in the New Year and consulting with regulators.
“I'm ready and willing to do that,” the senator said. “I'm not yet able to do that in the sense of knowing specifically how to do that, and which direction. I mean, I know the general direction, but I don't know the specifics yet.”
Facebook under the microscope
Yet when it comes to Facebook parent Meta platforms’ (FB) pursuit of a stablecoin, Brown said he’s reluctant to allow the social network to pursue one.
“I'm concerned about tech companies' power,” Brown argued. “I'm concerned about their reach… I'd be reluctant to give them the authority to get into this business. We've got to figure that out.”
Depending on how lawmakers and regulators write the rules, Facebook could either be forced to become a bank if it pursues issuing a stablecoin – or essentially shut out given that Congress historically has not allowed non-banks to offer banking services.
The risk is that competitors could be disadvantaged, or certain partners may receive special treatment, which may distort the allocation of credit in the economy.
The President’s Working Group on Financial Markets has recommended digital wallets — such as Meta’s Novi, which is still in development — be subject to oversight. That includes restricting digital wallet companies from lending stablecoins, and requiring them to meet capital requirements.
The report stated that Congress should consider limits on use of users’ transaction data and limiting digital wallets’ relationships with major companies — in line with banking laws that prohibit major corporations like Walmart (WMT) from also housing a bank.
As both parties think through how to regulate stablecoins, ranking member of the Senate Banking Committee, Senator Pat Toomey, released a set of stablecoin principles to guide future legislation.
The Pennsylvania Republican does not think stablecoin issuance should be limited to insured depository institutions, noting that issuers have different business models than traditional banks. His position is that requiring all issuers to become banks would stifle innovation.
Toomey offers three options for stablecoin issuers based on their business models: operate under a conventional bank charter; get a special-purpose banking charter designed for stablecoin issuers under new legislation; or register as a money transmitter under an existing state law and as a money services business under FinCEN’s federal law.
Under that approach, all stablecoin issuers would be required to adopt clear redemption policies and disclosure requirements of their reserve backings.
Now a rapidly growing market that sits at over $163 billion worldwide, officials are worried about runs on stablecoins, even as some market participants have argued that scenario does not pose a major risk.
Ohio’s Brown worries that if you put your money in stablecoins, there’s no guarantee you’re going to get it back, and said the wild price swings and high transaction fees for many cryptocurrencies make them useless for payments.
“We've seen that movie, as I said many times, but is it a way to serve the public? Is it going to make transactions among businesses and individuals quicker and safer? Is it going to help reach the unbanked?” the senator asked.
“They've said over and over that they want to reach people who aren't in the financial system. They haven't really shown that that's really what they want to do and how they're actually going to do it,” he added.
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