New Crypto Czar in Congress Sees Stablecoin Regulation as Fertile Bipartisan Ground Amid Growing Regulatory Crackdown

As a storm over how to regulate cryptocurrency rages in Washington, no one has more at stake than Congressman French Hill (R-Ark). Hill is the first chairman of the new House Subcommittee on Digital Assets, Financial Technology and Inclusion, and his task is to set rules for these innovations after a year of high-profile failures and falling prices.

Hill says he’s looking forward to the challenge, and he actually sees the collapses of crypto giants like FTX, Genesis Digital Trading and BlockFi as an accelerator for the work he’s planning. Those bankruptcies have also “galvanized several members of Congress in both the Senate and the House to recognize that we need to develop this regulatory framework,” he says.

One of his first priorities is going to be stablecoins, building on what he calls a very “collaborative effort last summer and early fall between House Democrats, House Republicans and the Biden administration, in thinking through the right approach.” Although the term may sound innocuous, stablecoins have become a $100 billion business of privatized digital dollars built on blockchains that have opened up a Pandora’s box of regulatory questions, such as whether they should be considered securities, how their operations and security can monitored and whether they can co-exist with potential government-issued digital assets.

Stablecoins came front and center yesterday. Paxos, a New York-based trust company, was ordered by New York State to halt the minting of Binance USD (BUSD), a $16 billion stablecoin issued on behalf of the Binance exchange due to questions about its operation. Further confusing the picture is a warning that the company could be sued by the Securities and Exchange Commission (SEC) based on the possibility that BUSD is a security.

Bipartisan collaboration last year led to the drafting of a stablecoin bill that, according to an unpublished September version, saw off Forbes, would prohibit the issuance of such tokens unless they were created by an affiliate of an insured depository institution that has been approved to issue them or by a licensed non-bank entity under a process yet to be determined. The legislation also included guidelines for acceptable forms of reserve security, such as treasury bills with durations of less than 90 days, and processes for monitoring approved entities.

Hill would not address the controversial question of whether some digital assets can be considered securities. However, a source familiar with the congressmen’s thinking indicates that the Howey test — which is based on a nearly 90-year-old court case and looks at factors such as a platform’s level of centralization and investor profit expectations — is ill-suited as a standard for crypto.

It is uncertain whether members of Congress will be able to work together on crypto regulation and ultimately sync with the Biden White House. Perhaps reflecting the sensitivity of the case, the executive branch issued a statement on Jan. 27 calling on the legislature to “step up its efforts” in overseeing the industry by expanding the power of regulators and enforcing transparency and disclosure requirements by operating entities. While this statement can be seen as a good faith effort to spur action, it is important to remember that the administration itself, punctuated by criticism from SEC Chairman Gary Gensler for operating too slowly and being too close to actors such as the disgraced FTX- founder Sam Bankman-Fried, may be trying to deflect blame for crypto’s disastrous 2022.

Hill would not comment on the statement, but said that “I look forward to working with the administration in the coming days.”

Managing the relationship with the White House won’t be the only challenge facing Hill and his new panel. Although there is clear bipartisan interest in the industry, Democrats and Republicans tend to come down on opposite sides of the aisle. “Among some Republicans, there is a very libertarian aspect to cryptocurrency ownership and use,” Hill says. “And for some Democrats, it’s an extremely law-enforcement-oriented approach where everybody, essentially using a cryptocurrency, is somehow operating in a dark web environment. Those are two of the broadest views of the situation.” It will require a delicate balancing act to reconcile these views.

Any output from the new subcommittee must be coordinated with its parent, the House Financial Services Committee, as well as counterparts in the Senate.

In the decentralized and fragmented legislative and regulatory environment of the United States, Congress has primacy. “Congress can pass a law at any time that changes the authority that executive agencies have,” says Mick Mulvaney, the former acting White House chief of staff who is now an adviser to blockchain firm Astra. “And at the end of the day, law carries more weight than rules and regulations.”

Mulvaney adds, “The hierarchy is the constitution comes first, statute or law comes second, and then rules, regulations, etc. are 3-4-5 down the list. So the agencies will go out and figure out what authority they have under existing law, and they will promulgate rules and regulations under the existing law. But Congress can change the law at any time. And the law can change everything from what authority and agency have to changing which agencies have authority.”

Besides the draft stablecoin bill, there are many other pieces of legislation floating around Congress remaining from 2022, the most prominent of which is the bipartisan Lummis-Gillibrand Responsible Financial Innovation Act in the Senate. This legislation would give the Commodity Futures Trading Commission (CFTC) the lead role in regulating spot crypto markets, settling a turf war with the SEC. When asked for a reaction to the various bills proposed, Hill replied. “I pick and choose not here. I want to start over. I want to see where we are on the stablecoin approach, and then work with colleagues on the House and Senate Ag Committee on some guiding principles for market regulations and coins, and see where we go from there.”