The Fed Sees Stablecoins as Money — Could USDC Avoid SEC Crackdown with Proposed Stablecoin bill?

• FED’s Chair Jerome Powell said crypto legislation is expected to be marked up in July
• If passed, the Republican-sponsored stablecoin measure would be the nation’s first piece of crypto law
• According to CFTC, USDC is a commodity and not a security
• Powell said the U.S. is a long way from establishing digital currency

Jerome Powell, the chairman of the Federal Reserves (FED), stated on Wednesday that the U.S. central bank should have a “robust federal role” in managing stablecoins, a significant portion of the entire cryptocurrency market for which lawmakers are working to develop regulations. In addition, Powell stated that digital currencies like Bitcoin had “staying power.”

Powell: Central Bank Needs ‘Robust’ Role Supervising US Stablecoins

Powell’s remarks were made on Capitol Hill during the House Financial Services Committee’s semi-annual hearing on monetary policy , which was chaired by Patrick McHenry (R-NC).

Maxine Waters (D-CA) asked Powell about FED stance toward stablecoins, which are private company-issued tokens tethered to the value of a national currency like the dollar. Powell responded that the technology should be subject to strict federal regulation.

According to Powell, FED sees payments stablecoins as a form of money. And since, in all advanced economies, the central bank is the ultimate source of credibility in money, it would be appropriate, said Powell, for the federal government to play a significant role in future developments involving stablecoins.

During the hearing, Waters expressed concern that if stablecoin issuers could register directly with states—an option currently included in the draft law on stablecoins—the Fed would be “hamstrung” to do anything.

If passed, the Republican-sponsored stablecoin measure  would be the nation’s first piece of crypto law.

According to Waters, the legislation of stablecoins per se would result in the creation of “58 different licenses, with FED approval over only two of the licenses.” This “takes state preemption to a whole new level,” she said, as the remaining permits would be granted by states, territories, and other governments.

Powell noted that “leaving the Fed with a weak role and allowing a lot of private money creation at the state level would be a mistake.” He gave the impression that the Fed saw itself as a crucial component of the regulatory framework for tokens collateralized by dollars.

FED Vs. SEC

These words aren’t surprising coming from Powell. Back in 2021, FED very strongly advocated  the thesis that stablecoins should be subject to stricter regulation and handled similarly to bank deposits or money market funds. He then said that stablecoins are economic activities that should be regulated in a manner that is similar to how bank deposits and money market funds are regulated.

During the recent hearing, Powell took a stance that is opposed to that of Securities and Exchange Commission (SEC) Chair Gary Gensler by commenting on the draft bill. Last year, Gensler testified before the Senate Banking Committee and suggested that stablecoins might need to be registered and regulated. Gensler has previously claimed that all cryptocurrencies, with the exception of Bitcoin, are securities.

SEC Vs. CFTC

The CFTC has a strong foundation for regulating the cryptocurrency sector because it views cryptocurrencies like Bitcoin as commodities.

The SEC, on the other hand, has stated that even though altcoins as is Ripple are securities, neither Bitcoin nor Ethereum are regarded as securities, notwithstanding the CFTC’s recognition of Bitcoin as a commodity. The SEC faces a big challenge since these two cryptocurrencies serve as models for many other digital assets.

Cryptocurrencies like Bitcoin and Ethereum will be outside the SEC’s regulatory scope if they are not classed as securities, which will be less advantageous for the SEC. The SEC makes up for its lack of stated jurisdiction by displaying its will to regulate.

This provides the CFTC the power to control the underlying markets for these goods as well as the derivatives markets that trade these digital assets. Additionally, Gensler has publicly requested that Congress give the SEC more control over cryptocurrencies, indicating the agency’s desire for additional power.

Stablecoins and decentralized finance (DeFi) are anticipated to be the next sectors the SEC targets in its campaign against the cryptocurrency market, according to a research study recently published by the investment firm Berenberg.

Therefore, the SEC might focus on bringing stablecoins and decentralized financial protocols into regulatory compliance, including the two biggest by market cap, Tether (USDT) and USD Coin (USDC). However, with the new bill and CTFC’s definition of stablecoins, USDC just might escape SEC’s dilligence.

Understanding Stablecoins

Speaking at a hearing on “Understanding Stablecoins’ Role” in Payments and the Need for Legislation” on April 18 was Subcommittee Chair Rep. French Hill, R-Ark, who also brought up the dispute between the SEC and CFTC.

Hill made the argument that the ongoing battle for control of digital assets between the SEC and the CFTC is both unproductive and unsustainable. The subcommittee chair asserts that when two organizations differ on whether one of the most popular stablecoins on the market is a security or a commodity, there is doubt.

In March, at a Senate Agriculture Comittee hearing , Rostin Behnam, the chair of the Commodity Futures Trading Commission (CFTC), has stated that stablecoins will be deemed to be a commodity, and Powell’s opinion does not conform any better to hers.

Although there is no readily available definition of money from the Fed, it is generally understood to be a medium of exchange.

According to American law, commodities are “goods and articles […] and all services, rights, and interests […] in which contracts for future delivery are now or will be dealt in.” A security, on the other hand, has a much more nuanced definition.

In short, according to the CFTC, “Certain digital assets, such as bitcoin, ether, and USDC, are encompassed in the definition of a “commodity” under Section 1a(9) of the Act, 7 U.S.C. §1a(9), and contracts for their sale are subject to the prohibitions of Section 6(c)(1) of the Act, 7 U.S.C. § 9(1), and Regulation 180.1, 17 C.F.R. § 180.1 (2022).”

Also on June 21, Chris Giancarlo, a former chair of the CFTC, offered his opinion  on the proposal saying all licensing agencies would have “the discretion to coerce stablecoin protocols to deny services to lawful but politically disfavored businesses,” he claimed.

He referred to that fact as a “glaring omission” that would allow for a government strategy akin to Operation Choke Point under the Obama administration.

“The simple fix to this problem is to provide that government licensing authorities have no discretion to pick and choose among otherwise lawful activities and condition licensure on the stablecoin’s denial of legal transactions,”Giancarlo commented and added that alternatively, “stablecoin transactions will be frighteningly beholden to the shifting political winds of Washington”.

CBDC is Not Happening Soon In U.S.

The Fed Chair also discussed the possibilities for a Central Bank Digital Currency (CBDC), but her response—that the US was far from implementing one—was unsatisfactory.

In response to the possibility of a CBDC, Powell stated that the central bank would not be in charge of monitoring retail accounts, or those held by a single person. These accounts would instead be administered by the nation’s banks.

Crypto Bill – the Timeline

Several measures that would have addressed stablecoin regulation have stalled out since the 2021 hearing. However, McHenry stated that the current stablecoin measure that is in the works would be pushed to the Senate if a favorable consensus is formed after hosting a session where members may iron out suggested adjustments in July.

Also, Powell went on to discuss the development of cryptocurrency law and mentioned that two proposals are anticipated by July.

The legislation would advance for a Committee vote after they had undergone discussion and editing. This would introduce regulation to the cryptocurrency market, which Powell claimed will endure as a form of investment.

Just for a reminder, in January this year, the White House criticized  Congress for delaying the creation of a comprehensive, national regulatory framework for cryptocurrencies and listed a number of steps that legislators may take to combat fraud and dishonest individuals in the industry.

These actions consisted of enhancing the authority of federal regulatory organizations like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), enhancing the transparency and disclosure standards for cryptocurrency businesses, assisting law enforcement by increasing funding, toughening the penalties for current financial regulations, and improving those regulations to penalize intermediaries, as well as passing stablecoin regulation legislation.