ABA: Draft stablecoin regulatory framework needs further tuning

Proposed legislation to establish a federal regulatory framework for stablecoins has merits but also contains several significant flaws, particularly in its handling of nonbank entities, the American Bankers Association said this week in a statement to House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion. The subcommittee held a hearing today on a discussion draft of the bill.

In its statement, ABA pointed to several areas of broad support in the draft. The legislation distinguishes bank-tokenized deposits from payment stablecoins. It includes requirements for custody and safekeeping services. It limits the activities of payment stablecoin issuers to issuing, redemption, managing reserves, and providing custodial or safekeeping services, and it restricts transactions between affiliates of payment stablecoin issuers. Still, there are areas of significant concern, according to the association. For instance, while the bill establishes a federal framework for supervision of licensed nonbank entities, the regulation is not as robust as that provided for in a bank charter. It also would allow nonbanks to seek state licenses to issue stablecoins.

“The [Federal Reserve] does not appear to have discretion to approve or reject these state-qualified nonbanks,” ABA said. “A federal banking regulator must have adequate authority to license and supervise nonbank stablecoin issuers, and the proposed state-based model is insufficient.”

The bill would also create a category of nonbank entities eligible for Fed master accounts, despite the fact that such entities lack bank charters and are therefore not are subject to robust regulatory oversight, ABA said. In addition, the association pointed to areas in the draft that needed further work, such as the application process used to authorize stablecoin issuers and the short timeframe given to the Fed to make decisions on nonbank applications.

Lawmakers Divided on Bill

House Republicans and Democrats remained split on the proposed regulatory framework, which started life last year in bipartisan negotiations. Subcommittee Chairman French Hill (R-Ark.) said time ran out on those negotiations due to the fall elections, and the ultimate result “is not necessarily a beautiful baby, but it is our baby.” Committee Democrats questioned why the bill was being brought forward at this time, saying the legislation largely reflected Republican priorities.

“It does not represent a final product of any kind, so I think we are starting from scratch,” said Ranking Member Maxine Waters (D-Calif.).

In response, Hill said House Republicans welcomed any legislative efforts from Democrats. “We have been making our own changes and doing our own due diligence, and that’s what this hearing is all about,” he said.