Congress must pass stablecoin legislation, top crypto group tells lawmakers

House Financial Services Committee Chairman Patrick McHenry (right) and Ranking Member Maxine Waters. Ting Shen—Getty Images

As Congress considers the future of crypto, a leading industry association is urging lawmakers to begin stablecoin legislation.

The Blockchain Association – made up of top companies including Kraken, Ripple, Anchorage Digital and Grayscale – released a letter, exclusively shared with Fortune, to House Financial Services Committee Chairman Patrick McHenry (RN.C.) and Ranking Member Maxine Waters (D-Calif.) on Thursday ahead of a key hearing on crypto.

“There’s pretty much a bipartisan, bicameral consensus, as well as in the administration, that something needs to be done on stablecoins,” said Kristin Smith, executive director of the Blockchain Association. Fortune. “It’s very clear that this is something Congress needs to legislate.”

Stablecoins have emerged as a major point of contention in the crypto-legislation debate. The digital tokens are usually linked to underlying assets, such as the US dollar or gold, but can also be backed through a blockchain-based algorithm. TerraUSD, which collapsed in May and helped fuel the ongoing crypto winter, is an example of an algorithmically stable coin.

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 struggled with how to approach the diverse — and often risky — landscape.

In November 2021, the President’s Task Force on Financial Markets published a report recommending that Congress pass 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 among regulators about how to classify stablecoins. The Securities and Exchange Commission, chaired 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 Chairman Rostin Behnam said at a Senate Agriculture hearing Wednesday that he believed stablecoins were commodities, barring new regulations.

McHenry and Waters came close last session of Congress to introducing a bipartisan stablecoin bill, with McHenry expressing confidence at an October conference in DC that they could iron out differences over state and federal regulation. He described the status of the legislation as an “ugly baby”.

Jake Chervinsky, head of the Blockchain Association, noted that stablecoins are an area where many crypto companies require robust oversight.

“This is us being proactive and saying that this industry understands the importance of regulation,” he said Fortune.

The Blockchain Association released a set of recommendations for legislation, which Smith and Chervinsky argued would help lawmakers distinguish 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 – as well as ensuring reserves are maintained in high-quality liquid assets – a criticism often leveled at leading stablecoin Tether.

Other principles included in the letter relate to public disclosure and the types of companies allowed to issue stablecoins, with the Blockchain Association arguing that both insured depository institutions and non-banking firms should be included, as opposed to just firms with bank charters.

Chervinsky told Fortune that limiting stablecoin issuance to banks would create a “regulatory moat around older incumbents who do not need more government help to exclude innovators and competitors from the market.”

The last point of the letter calls for clarity about the supervisory regulator that will oversee stablecoins. Given the divergent views between the SEC and the CFTC, the classification and regulation of stablecoins can 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 Thursday on crypto, Federal Reserve Deputy Chairman Michael Barr noted that stablecoins have the potential to scale quickly and come with high operational risk, requiring federal regulatory oversight and oversight.

“We must learn from the past to ensure that we do not allow new forms of unregulated private money subject to classic forms of risk,” he said.