The issue of state versus federal regulation emerged as a pivotal point of contention during the recent hearing on stablecoins held by the United States House of Representatives on May 18. The newly formed Subcommittee on Digital Assets, Financial Technology, and Inclusion, part of the House Committee on Financial Services, convened the hearing to explore two proposed bills aimed at regulating stablecoins.
Two draft bills were being considered by the subcommittee, each with distinct origins. The Republican bill had been unveiled in April prior to a hearing in the Financial Services Committee. In response, Ranking Member Maxine Waters introduced a competing draft based on a bill that had been previously introduced but had not made progress during the previous session of Congress.
A major point of contention surrounding state-level regulation was the concern over a potential “race to the bottom.” The Republican bill proposed allowing stablecoin operators to select the state in which they register without requiring approval from the Federal Reserve Board.
Supporters of this bill argue that such flexibility would prevent a race to the bottom and align with the existing two-tiered federal/state banking regulatory system in the United States. However, Democrats remained unconvinced and favored preserving federal oversight, entrusting the appropriate regulator with the responsibility.
During the hearing, David Portilla, a partner at Davis Polk & Wardwell, advocated for a middle ground in stablecoin regulation. He suggested that federal regulation could provide uniform rules, while state regulation could foster diversity and innovation in supervision. Portilla emphasized that the approach need not be a binary choice.
“Federal regulation of stablecoin issuers would offer more uniform, consistent rules, whereas state regulation could promote more diversity and innovation in regulation and supervision. The answer to this question need not be binary.”
US on stablecoins regulation
Experts agreed that the current regulatory framework was ill-suited for stablecoins. Portilla proposed the implementation of a “floor” mechanism to establish minimum standards for federal involvement in stablecoin regulation, with the potential for a “toggle” based on the size of the issuance. In contrast, the Republican bill aimed to regulate all issuers uniformly, regardless of their size.
The notion of national interest emerged as a recurring theme throughout the hearing. Representative Brad Sherman, a vocal opponent of cryptocurrencies, expressed concerns that a dollar-backed stablecoin would pose a threat to the fiat dollar, potentially undermining its value and weakening the effectiveness of U.S. sanctions.
Matt Homer, representing venture capital firm XYZ, acknowledged that stablecoins would emerge regardless of regulatory efforts, and he stressed the importance of having them developed within the United States to facilitate effective regulation. Pro-crypto advocate Warren Davidson echoed these sentiments, highlighting the need for the U.S. to provide regulatory certainty to prevent stablecoin developers from seeking refuge in other jurisdictions.
Robert Morgan, CEO of the USDF Foundation, voiced support for the existing regulatory structure and emphasized the benefits of tokenization for traditional banks. He described tokenization as a “third way” that could offer significant advantages.
