Republicans and Democrats on the House Financial Services Committee are at loggerheads over a provision on how to treat digital wallets for draft legislation to regulate stablecoins, according to a person familiar with the matter.
The bill is now not likely to get marked up until September, though it’s possible some sort of draft language could be released this week. But a source tells Yahoo Finance even that’s up in the air.
At issue: including strong provisions for digital wallets to protect consumers.
Democrats at Treasury — who went back and forth with the Committee all weekend — want a federal standard for wallets that would bar custodial wallets from becoming a shadow bank.
Democrats also want to ban custodians from taking customers’ stablecoins and using them as liabilities to make loans or hold other riskier assets.
Democrats are proposing a requirement that digital wallets segregate proprietary assets from customer assets, aimed at ensuring customers will not sustain losses should a custodian fail.
While Democrats have pushed for this treatment of wallets, it’s not included in the bill and remains an outstanding issue to be resolved.
It remains unclear if this proposal would require FDIC insurance for individual wallets, or if wallets would be subject to the same rules that govern brokerage accounts.
The Biden administration, led by Treasury, last November recommended that all stablecoin issuers be banks. Though more recently, the administration said the President’s Working Group on Financial Markets is open to regulating stablecoin issuers through methods other than as insured depository institutions.
Democrats also want risk management standards and financial resource requirements to manage operational risks.
Republicans feel digital wallets are outside the scope of the legislation, but have offered the idea that states could issue their own wallet regulations — a nonstarter for Treasury and Democrats on the committee.
Treasury won’t back the bill without strong provisions for digital wallets to protect consumers.
In the absence of any agreement on this issue by September, it is hard to see this bill moving forward.
Spokespeople for Representatives Waters (D-CA) and McHenry (R-NC), the chair and ranking member of the Committee, respectively, did not immediately respond to requests for comment.
The House Financial Services Committee is working on legislation to regulate stablecoins after a run on stablecoin TerraUSD caused major losses for investors, with at least three firms filing for bankruptcy amid the fallout from this event.
Jennifer Schonberger covers cryptocurrencies and policy for Yahoo Finance. Follow her at @Jenniferisms.
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