Stablecoin bills raise a lot of questions

While the Senate Banking Committee has approved the GENIUS Act, the full Senate baulked on May 8 when it declined to advance the bill by a 48-49 vote. (60 votes were needed.) But that was not the end of the debate over stablecoin and the many issues raised by legislation to create a regulatory framework specifying who can issue it and how it can be used..Nobody wants to be accused of stifling innovation. You can’t hold back the future, so we may as well figure out how we are going to get along in it. But that doesn’t make it any easier to deal with some of the real questions that are emerging during the stablecoin debate that has sprung up around the GENIUS Act, and its companion bill in the House, the STABLE Act.For example, the GENIUS Act puts parameters on who can issue stablecoins, but includes non-FDIC insured entities regulated by the Office of the Comptroller of the Currency. That sounds like a big loophole. The U.S. Treasury could simply declare its supervisory authority over a particular company, and it becomes eligible to issue stablecoin. That doesn’t seem stringent enough.What about companies that might come to Treasury claiming a desire to issue stablecoin? The bigger the company, the more interested Treasury might become in supervising it. This provision in the legislation could poke a huge hole in the separation of banking and commerce. If a big tech company wants to issue stablecoin, seeks Treasury approval and gets it, that company begins to look like a bank. The banking trade groups have advocated that in no case should such companies be granted master accounts at the Federal Reserve, which might seem like a natural next step to some non-bank CEOs who gain the opportunity to issue stablecoin under Treasury’s supervision. As this issue goes to press, it doesn’t appear there will be any changes to the application process for a Fed master account, according to a newsletter from the Iowa Bankers Association.Another question mark: The legislation notes that stablecoin will be backed by dollars or equivalents, such as Treasury bills or even repurchase agreements, on a one-to-one basis. This reserve is required to be segregated from the issuer’s other cash. For issuers that are banks, it means the money is not treated as a liability like the rest of the bank’s deposits. This, of course, raises questions about FDIC insurance and capital requirements. Most importantly, however, those reserve dollars are not available to lend out to customers. The traditional purpose of safekeeping deposits has been to fund loans. That would not apply in the case of stablecoin reserves.The GENIUS Act also says that issuers can be bank subsidiaries chartered by state authorities, but only if the bank has a market capitalization of less than $10 billion. Supervisory authority over larger players automatically reverts to federal regulators. Ten billion is a big number, to be sure, but I don’t like the idea that all the big players are automatically subject to federal regulators, leaving state regulators on the sidelines. I find this to be somewhat ironic given that nearly all of the stablecoin, or crypto, regulation established so far has come from the states. State regulators are the ones with the experience.Federal regulation generally means a one-size-fits-all approach. It’s the states that can customize their approach to regulation based on the unique qualities of their geography and population. That’s the beauty of the dual banking system.While innovation in payments is important, policymakers must not rush to a system that encourages disintermediation from the traditional banking system. A banking system that facilitates payments, protects deposits and allocates credit is a very special thing. We don’t want to mess this up! If handled poorly, stablecoin could become a Trojan horse that kills the community banking world as we know it today.