State Regulators Push Back on Proposed Federal Control of Stablecoin Industry

Crypto’s biggest success story, after a litany of industry failures, has been stablecoins.

The asset-pegged digital tokens, designed to maintain their stability and facilitate non-volatile financial applications across blockchains, have to-date grown so much that there exist around $234 billion in circulation.

But while the top 10 stablecoins by market share, representing well over 90% of the tokens in issuance, are U.S. dollar-denominated, the U.S. still does not have a regulatory framework in place to govern the sector.

Lawmakers are trying to change that, particularly in light of the current administration’s comparatively warm embrace of the crypto space. Still, as Congress wrestles with establishing a coherent regulatory framework for stablecoins, the recently introduced Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act has sparked sharp opposition from certain areas.

In an April 1 letter addressed to Representatives French Hill and Maxine Waters of the House Financial Services Committee, the Conference of State Bank Supervisors (CSBS) expressed significant concerns over the bill’s approach, which it argues dangerously expands federal oversight at the expense of state regulatory authority.

The CSBS, a nationwide organization representing state banking and financial regulators, supports the concept of a comprehensive national framework for payment stablecoin issuers (PSIs). However, it emphasizes that the STABLE Act, as currently drafted, could undermine the established state regulatory systems and disrupt the delicate balance of cooperative federalism that has fostered American financial innovation.

Read also: Stablecoins Keep Racking Up Milestones, but Can They Crack B2B Payments?

State Regulators Push Back Against Federal Preemption

According to the CSBS, the STABLE Act’s attempt to centralize power over the emerging stablecoin industry within a single federal agency jeopardizes a decade of progress made at the state level. States like California, New York, Louisiana, Texas and Wyoming have established frameworks governing digital asset firms and have successfully regulated over $50 billion in stablecoin activity.

The STABLE Act, however, seeks to preempt state authority over various PSI-related activities. Specifically, it extends federal preemption to PSI subsidiaries of both national and state-chartered banks, as well as to non-stablecoin activities approved by federal regulators. The CSBS contends that such a sweeping grant of power could destabilize existing state systems and create operational risks that extend beyond the financial stability of PSIs.

The CSBS also highlights inadequacies in the bill’s capital and liquidity requirements, which it claims are insufficient to mitigate financial stability risks. By restricting capital to amounts necessary for ongoing operations and prohibiting leverage and risk-based capital requirements, the bill fails to address potential redemption runs and liquidity risks.

At the same time, the letter raises concerns over consumer protection in the event of issuer bankruptcy. The bill’s provisions regarding bankruptcy procedures are described as inadequate, with customers potentially facing prolonged delays in accessing their funds. The CSBS recommends implementing safeguards such as requiring reserves to be held in off-balance sheet trusts, which would render consumer funds bankruptcy remote and facilitate faster resolution of claims.

Read more: Why Banks Might Want to Have a Blockchain Strategy

Looking to the Road Ahead for Stablecoins in the US

Ultimately, the CSBS argues that the STABLE Act, in its current form, represents a missed opportunity to establish a balanced, effective and cooperative regulatory framework for stablecoins. While a national framework is necessary to provide consistency and consumer protection, the CSBS warns against allowing a single federal agency to exert unilateral control over the industry.

Still, the creation of a federal framework governing stablecoins is important for industry confidence, Chainalysis Co-founder and CEO Jonathan Levin said in an interview with PYMNTS CEO Karen Webster published Monday (April 7).

“Without a federal framework, it is incredibly difficult for financial services firms and international enterprises to really get comfortable in using stablecoins at scale,” Levin said.

The letter comes against a backdrop where America’s changing cryptocurrency landscape could soon bring Tether’s stablecoin to the U.S. The Trump administration has invigorated the crypto sector with its deregulatory focus and laudatory promises to make the U.S. the “crypto capital of the world,” and the Securities and Exchange Commission’s (SEC) Division of Corporate Finance also recently determined that stablecoins are not securities and do not need to be registered.

Meanwhile, a separate Senate stablecoin bill, the GENIUS Act, is reportedly on a “fast track” after being advanced by an 18-6 vote with bipartisan support in the Senate Banking Committee. This bill is said to be a priority for President Donald Trump.