As they try to draft legislation to regulate stablecoins, Republicans and Democrats on the House Financial Services Committee have been unable to agree on a provision detailing how to treat digital wallets.
Although a source familiar with the matter says some sort of draft language could be released this week, the overall bill will not likely be marked up until September, and even the release of draft language is presently up in the air.
At issue is the way digital wallets will be handled in the legislation. Democrats at Treasury want federal standards for wallets which will prevent custodial wallets from becoming a “shadow bank.”
Democrats also want to make it illegal for custodians to use a consumer’s stablecoins in their possession as liabilities to make loans, or invest in other riskier assets.
Democrats want legislation to force digital wallets to segregate proprietary assets from customer assets, so if a custodian should fail, customers will not sustain additional losses.
Even though there has been considerable pressure to structure the bill such that it will handle wallets this way, so far the bill does not address the issue, and it is one of the factors preventing the bill from moving forward.
It is unclear if the proposal will involve granting FDIC insurance for individual wallet holders, or if wallets would merely be treated as brokerage accounts, and subject to the same rules which govern them.
Led by Treasury, last November the Biden administration made a recommendation that all stablecoin issuers be banks. More recently however the President’s Working Group on Financial Markets has indicated it might be open to regulating stablecoin issuers through methods other than as insured depository institutions.
Republicans have indicated they feel regulating wallets is outside the scope of the legislation, and would be an issue for states to manage, however Treasury and the Democrats on the committee are adamantly opposed to that, with Treasury indicating it will not back any bill without strong regulation of digital wallets.
In the absence of an agreement it is believed the bill is presently dead.
The push to regulate stablecoins came after a run on stablecoin TerraUSD caused major losses for investors, and at least three firms were forced to file for bankruptcy over it.
