A stablecoin blindspot?

From: POLITICO's Morning Money - Thursday May 18,2023 12:01 pm
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POLITICO Morning Money

By Zachary Warmbrodt

Presented by U.S. Bank

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House lawmakers will face off at a hearing this morning over the details of how the U.S. should allow crypto tokens known as stablecoins to flourish as a new method of payment. House Financial Services Committee Republicans and Democrats are at odds over key points. But Yale researcher Steven Kelly sees a big flaw in the consensus forming around their approach.

Kelly’s big concern — which he outlined on his Substack and to MM this week – is that the draft bills from House Financial Services Chair Patrick McHenry and ranking member Maxine Waters would fail to wall off stablecoins from contributing to financial instability in times of stress. The reason for that, in his view, is they wouldn’t require stablecoin firms to become banks.

The theory behind stablecoins is that they’re “stable” because they hold reserves, like cash or U.S. Treasurys, that underpin their value. House Financial Services members are trying to address concerns about the integrity of those reserves by proposing requirements for their makeup and public disclosure.

But Kelly argues that the consumer protections would do little to address the broader problem that emerged in March, when $3 billion of stablecoin issuer Circle’s reserves were caught in the collapse of Silicon Valley Bank. Circle was one of the big SVB customers that rushed to pull money from the bank amid a run that led to its collapse. Kelly calls it a “fiduciary responsibility to run” – and one that poses a financial stability risk.

If stablecoin issuers were forced to become banks, Kelly argues that they would get deposit insurance for customers, discount window access and bank supervision — tools that could address stablecoin run risk. They could park money at the Fed rather than private banks.

McHenry spokesperson Laura Peavey said in response that requiring all issuers to be banks would “only protect incumbent firms” and that the two entities operate differently. Where there are dangers similar to those in banking, she said Republicans follow the principle of “same risk, same regulation,” including that stablecoins be backed by high-quality liquid assets.

“In their defense, they’re thinking about the voter,” Kelly told MM. “They want to write consumer protection laws so nobody gets ripped off that holds a stablecoin. There’s no voter who is the financial system writ large. It’s more conceptual.”

It’s Thursday — Are you a bank executive meeting with Treasury Secretary Janet Yellen today? Let us know how it goes: Zach Warmbrodt, Sam Sutton.

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Driving the day

House Financial Services has a stablecoin bill hearing at 9 a.m. … Fed Governor Philip Jefferson speaks to the National Association of Insurance Commissioners in Washington at 9:05 a.m. … Bank and credit union regulators testify at Senate Banking at 9:30 a.m. … Yellen meets with members of the Bank Policy Institute’s board

Biden signals debt limit compromise, irking Dems — President Joe Biden said it’s “possible” that a deal to raise the government’s borrowing authority might expand work requirements for certain federal programs. The suggestion is triggering louder and louder pushback from progressive Democrats.

A group of left-leaning senators including Tina Smith, Elizabeth Warren and Bernie Sanders signed a letter to Biden urging him to invoke the 14th Amendment rather than accept GOP budget cuts. “The president needs to be thinking about what McCarthy says, knowing he has the option to say, 'What you're asking is unreasonable,’” said Sen. Jeff Merkley (D-Ore.), one of the lawmakers on the letter.

But other lawmakers on both sides of the aisle saw promise in the negotiators that Biden and Speaker Kevin McCarthy recruited to find agreement: White House counselor Steve Ricchetti, budget chief Shalanda Young, legislative affairs chief Louisa Terrell and Rep. Garret Graves (R-La.).

“You wanna get a deal done? Having [Young] and Garret Graves in a room is probably the best way to do it,” Rep. Kelly Armstrong (R-N.D.) said.

On Wall Street, Sam reports the potential hangover of the stalemate — even if it’s resolved — is coming into focus, including a potential downgrade of federal debt and government spending reductions that could tie Biden’s in a recession.

 

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In Congress

Warren grills Fed IG — Katy O’Donnell reports that Sen. Elizabeth Warren on Wednesday accused the Federal Reserve's inspector general of giving officials a "free pass" and implied he makes investigative calls based on job security.

“Has there ever been a single day you woke up not remembering exactly who has the power to fire you?” Warren asked Fed IG Mark Bialek at a hearing. He said he doesn’t think about it.

Ex-First Republic exec blames SVB, Signature — Eleanor Mueller reports that former First Republic CEO Michael Roffler got a skeptical reception from lawmakers Wednesday when he said his bank nearly collapsed thanks to contagion from the failures of other lenders, rather than mismanagement.

Rep. Brad Sherman (D-Calif.) told Roffler that First Republic, SVB and Signature were the “three worst-run banks in America."

"We shouldn't be blaming the depositors," Sherman said.

 

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Crypto

Stablecoin CEO on the Hill Charles Cascarilla, CEO and co-founder of stablecoin issuer Paxos, was on Capitol Hill for a round of meetings Wednesday as lawmakers ramp up work on legislation to regulate the cryptocurrency. He told MM that federal law is needed to set "clear nationwide consumer protection standards for the chartering of state and federally approved banks and trusts while preventing regulatory turf wars."

“Without thoughtful congressional action soon, U.S. innovation is at risk of being pushed offshore, putting the U.S. dollar, American consumers and our prominence as a global financial leader at risk," he said.

More stablecoin pushback – Better Markets legal counsel Scott Farnin warned against the rush to embrace the industry: “Regulators and policymakers should first be asking themselves and debating whether or not regulating stablecoins as a payment mechanism is in the best interest of the American people and the economic effects of such a drastic shift in U.S. financial policy instead of racing to regulate them as something they are not.”

 

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