We are at the dawning of a new financial age, an age made possible by digital assets such as stablecoins. Now, members of Congress are prepared to act. There’s a rare bipartisan consensus and deep sense of urgency driving congressional leaders from both sides of the political aisle. Are we really on the verge of creating a financial citadel, or merely paving the way for a house of cards? These proposed regulations to govern stablecoins are well-meaning but deeply misguided. These problems might cause the kind of catastrophes the rules aimed to avert. Imagine patching a leak in a dam with duct tape as a hurricane forms offshore.
Tether Loophole Undermines Everything?
The most glaring vulnerability? The Tether loophole. Both the GENIUS Act and the STABLE Act, as they stand, offer a near-invitation for offshore stablecoin issuers like Tether to thumb their noses at US regulations. It’s a little bit like putting up a fancy fence all around your yard while leaving the gate open. What's to stop these entities, potentially operating beyond the reach of US law, from issuing stablecoins that fuel illicit activities, destabilize the market, and ultimately undermine the entire regulatory framework?
Imagine this: a rogue nation uses a Tether-like stablecoin, issued from a haven jurisdiction, to circumvent sanctions and fund illicit activities. Our national security is already undercut, as the dollar’s dominance is increasingly in jeopardy. Sound far-fetched? It’s exactly the sort of situation that gives regulators night sweats, in other words.
Adopt the approach outlined in the McHenry-Waters bill – a firm prohibition against the issuance of unlicensed stablecoins within the US, regardless of their origin. Close the gate. Protect the yard.
Illicit Finance Needs More Teeth
It’s time to close the Tether Loophole for good. Congress’ proposed legislation should provide the Treasury Department a greater authority to root out illicit finance in the digital asset space. Right now they need the teeth to go after bad actors involved in on-chain protocols used for illicit transactions and sanctions evasion.
Give the Treasury Department the power to issue blocking orders against on-chain protocols used for illicit activity and sanctions evasion.
Affiliate Restrictions? Dangerously Weak
Consider this: a massive tech platform, say a reborn MySpace, issues its own stablecoin through a lightly regulated affiliate. Due to network effects, it achieves lightning quick adoption, piercing itself deeply into the financial lives of tens of millions. Now, picture that affiliate takes on the kinds of predatory lending practices or speculative investments that sunk some banks in the financial crisis. If that one affiliate fails, the contagion spreads faster than wildfire, with the entire financial system being put in jeopardy. Remember 2008?
The affiliate restrictions in the current bills are not nearly strong enough to keep this scenario from happening. It’s as irresponsible as letting a bank take your deposits to Vegas and bet them all with zero accountability.
Implement strict firewalls between stablecoin issuers and their affiliates, limiting the types of permissible activities and requiring robust risk management practices. Prevent the next financial inferno.
Bankruptcy? Chapter 11 Fails Holders
Just relying on Chapter 11 bankruptcy for future insolvent stablecoin issuers is woefully inadequate. That’s akin to trying to use a butter knife to do open heart surgery. As anyone who’s worked with Chapter 11 knows, it can be slow and unpredictable. Its primary purpose is to protect creditors, which puts the ones most at risk, the token holders, in jeopardy. Picture waiting decades to get back only a fraction of your money after a supposed $1 peg stablecoin collapses. The unpredictability and uncertainty — that’s what creates the volatility.
Establish a specialized resolution procedure for stablecoin issuers, modeled after the system used for banks. Their approach ensures the fastest and most orderly resolution. It prioritizes repayment of token holders above all else and minimizes harm to the broader financial system.
Consumer Protection? Barely Existent
Unfortunately, the consumer protections contained in the proposed legislation are, frankly, anemic. That would be similar to selling a car without working brakes, let alone no airbags. Consumers require clear and conspicuous disclosures as to the risks associated with such transactions, strong showdown resolution processes as well, and protections against fraudulent transfers. Without these protections, countless unsuspecting people would be victimized without a second thought. Consider the poor widow who invests her entire life savings into a stablecoin, attracted by false marketing claims. Tragically, that’s exactly what she loses when the issuer goes under.
Strengthen consumer protections across the board, including mandatory disclosures, streamlined dispute resolution processes, and enhanced fraud prevention measures.
State vs. Federal? Needs Balancing Act
We appreciate the attempt to provide a middle ground between state and federal authority over stablecoin issuers, but this approach is underdeveloped. The Genius Act has a lower floor – stronger than the STABLE Act – for state regulation.
These aren’t just technicalities, they are fundamental flaws that could turn a new innovation with great potential to improve safety into a pervasive systemic risk. Ignoring them is preparing to play Russian roulette with the US economy. We just need Congress to act, but to act responsibly. If these bills are to truly become law, they must right these glaring wrongs first. The future of capital markets – and the soundness of our financial system – might just depend on it. The clock is ticking. Let's not sleepwalk into a financial disaster.
These aren't mere technicalities; they are fundamental flaws that could transform a promising innovation into a systemic risk. Ignoring them is like playing Russian roulette with the US economy. We need Congress to act, but to act responsibly. Before these bills become law, they must address these critical shortcomings. The future of finance – and the stability of our economy – may depend on it. The clock is ticking. Let's not sleepwalk into a financial disaster.
