Competing federal agencies have raced to regulate stablecoins without clear authority. At last, Congress may step in.
On Tuesday, the Senate passed the GENIUS Act, a bill that would create a new federal regulatory regime for a type of cryptocurrency known as stablecoins. Having exploded in popularity since the Covid-19 pandemic, reaching hundreds of billions of dollars in market capitalization, stablecoins are designed to maintain a constant value rather than fluctuate based on market demand. Whereas cryptocurrencies like Bitcoin might be purchased as a risky investment, stablecoins are more often used to send money around the world instantaneously without the need for banks or wire transfers.
To maintain their value, stablecoins are typically pegged to fiat currencies (most often the dollar) and backed by nominal assets held in reserve, such as cash or U.S. treasuries. They are thus considered the safest form of cryptocurrency, as they should always be redeemable one-to-one for dollars, except in cases of fraudulent reserves. Yet that relative safety has not stopped calls for the federal government to regulate stablecoins. The GENIUS Act is a flawed but admirable answer.
Spearheaded by Senate Republicans, the bill mainly seeks to resolve regulatory uncertainty around stablecoins by enshrining a light-touch framework into law. Without statutory categorization of this new asset class, executive branch agencies have raced to claim stablecoins under their respective jurisdictions. In doing so, bureaucrats have once again displayed their limitless ingenuity to stifle the ingenuity of others. The Securities and Exchange Commission insisted under the Biden administration that stablecoins are “securities,” so issuers needed to follow its many rules. In turn, the Commodity Futures Trading Commission has fought to define stablecoins as — you guessed it — “commodities,” and thus subject to its rules.
The GENIUS Act is an example of how most federal policymaking is supposed to work but rarely does, with Congress laying down intelligible instructions for the executive branch to enforce, not broad mandates for creative bureaucrats to fill in. Usually, Congress is all too content to let executive agencies exploit vague language and essentially legislate on its behalf, allowing members to avoid responsibility for policy decisions. But the cryptocurrency industry has found new friends in the Republican Party, and stablecoin issuers would rather deal with a set of unchanging rules than competing regulatory whims. So, for a change, lawmakers’ political interests may have moved them to rediscover their constitutional role.
On the bill’s merits, most of its rules for stablecoin issuers are straightforward anti-fraud and transparency provisions, such as a requirement to periodically disclose their reserves, that should garner little pushback. Other restrictions are to guarantee consumer confidence by limiting which sorts of assets can be used as backing. In a win for both federalism and economic freedom, stablecoins worth $10 billion or less can choose between state and federal regulation.
Other parts of the GENIUS Act are more problematic from a free-market stance. It would prohibit stablecoins from offering interest to holders generated by reserve assets like short-term Treasuries, just as countless savings accounts do. Moreover, nonfinancial firms would not be allowed to issue stablecoins directly. The Competitive Enterprise Institute notes that these bans seem “more about protecting banks from competition to their deposit accounts than any concern about financial stability.”
Things could have been worse, however, as Democrats had sought much stricter rules in their long-running effort to replace individual due diligence with government fiat. What passed the Senate was ultimately conservative enough to remain worthwhile, but contained just enough regulation to win 18 Democratic votes and overcome the filibuster. How the narrowly divided House now handles the bill is more of a coin toss.