Leading Republican House Financial Services Committee members have voiced deep concerns over recent actions taken by the Federal Reserve Board (Fed) that they believe undermine the progress made by Congress in establishing a regulatory framework for payment stablecoin. 

In a letter addressed to Fed Chairman Jerome Powell, Representative Patrick McHenry, Representative French Hill, and Representative Bill Huizenga, they criticized the Fed’s issuance of supervision and regulation letters, expressing fears that such actions could deter financial institutions from participating in the digital asset ecosystem.

The House Financial Services Committee had previously advanced a comprehensive regulatory framework for stablecoins in the United States. However, the bill’s prospects of becoming law were doubted after negotiations between congressional Democrats, Republicans, and the White House broke down last week.

The lawmakers highlighted their understanding of the necessity for regulatory certainty in the payment stablecoin sector and the broader digital asset ecosystem to protect consumers and provide confidence to market participants. 

They emphasized that this recognition resulted from the Clarity for Payment Stablecoins Act, which received favorable bipartisan support from the House Committee on Financial Services.

Despite the Committee’s proactive approach, the Fed’s release of supervision and regulation letters, known as SR 23-7 and SR 23-8, has raised concerns among the Republican lawmakers.

According to the letter, SR 23-7 and SR 23-8 appear to contradict the Committee’s efforts by effectively preventing banks under the Fed’s purview from issuing payment stablecoins or engaging in the payment stablecoin ecosystem.

While the Fed’s supervisory no-objection process is presented as guidance outlining permissible activities, the lawmakers argue that the Fed intends to prohibit any such activities, particularly those related to public, permissionless blockchains. The letter includes:

The Fed has chosen to effectively prevent banks from issuing payment stablecoins—or engaging in the payment stablecoin ecosystem. While the supervisory nonobjection process is masked as guidance outlining a process by which these activities can be permissible, it is clear the Fed does not intend to allow any such activity, at least as it relates to public, permissionless blockchains.

Furthermore, the lawmakers express reservations about the Novel Activities Supervision Program established under SR 23-7, which they believe imposes additional regulatory burdens on banking institutions seeking to engage with crypto-assets. 

They assert that when combined with previous policy statements and decisions, this approach could eventually lead to a de facto prohibition on banks interacting with the digital asset ecosystem.

The letter also points out that SR 23-7 and SR 23-8 were not issued in compliance with the notice and comment process required by the Administrative Procedure Act. The lawmakers argue that the Fed’s issuing such guidance without accountability to market participants and the public is unacceptable.

The concerns raised by these leading Republican committee members highlight the increasing tension between Congress and the Federal Reserve regarding the regulation of stablecoins and the broader digital asset industry. 

It remains to be seen how the Federal Reserve will respond to these objections from Republican lawmakers and whether there will be further dialogue and potential revisions to the supervision and regulation letters. 

As the debate continues, stakeholders in the digital asset industry will closely monitor the developments, as the regulatory landscape for stablecoins hangs in the balance.

Featured image from iStock, chart from TradingView.com

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