HFSC leadership clashes as the stablecoin debate heats up | Carta

HFSC leadership clashes as the stablecoin debate heats up

Author: The Carta Policy Team

Published date: May 18, 2023

AI gets its day on the Hill, and seems to be a bipartisan rallying point.

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White House sends in the cavalry as debt limit talks advance

As of this writing, there is still no debt limit deal as the June 1 X-date approaches, though the sentiment is trending positive and a path forward seems to be coming into focus. After months of posturing, the White House and McCarthy designated top advisers to lead negotiations. There is growing consensus that a final deal will include concessions on annual spending caps, permitting reform, and the reallocation of unused COVID-19 relief funds. While negotiators negotiate, they’re also running up against the clock and the logistical realities of enacting legislation.

Why it matters: Both sides want a deal. But the question remains whether Speaker McCarthy can negotiate a deal his right flank will accept. The debt ceiling was a major negotiating point in McCarthy’s speakership bid. Even if the majority of Republicans support his efforts, if certain factions feel betrayed, McCarthy’s gavel could be in jeopardy. Still more to do, and with a ticking clock.

Stablecoin debate heats up as HFSC leadership clashes

The House Financial Services digital asset subcommittee held its second contentious hearing on stablecoin legislation. At last month’s hearing, Democrats accused Republicans of taking bipartisan elements out of the proposed draft stablecoin bill put forth by Chairman McHenry. In response, Ranking Member Waters released her own draft stablecoin bill last week. McHenry’s version of the bill gives more power to the states for regulation, whereas Waters’ bill focuses more on consumer protection and gives more power to the Federal Reserve to regulate. Chairman McHenry seeks to move stablecoin legislation forward by the end of June, though a bipartisan path forward is not clear.

The stablecoin framework debate occurs amid a larger continued shift in the crypto ecosystem that sees other countries advancing regulation while the U.S. stalls. And for the first time, a region other than the U.S. accounted for the biggest proportion of crypto-related venture funding for a quarter. This comes as Europe completes final passage of its Markets in Crypto Assets (MiCA) rules, which will go into effect next year. The EU also approved rules to extend tax reporting requirements for crypto asset transfers based on standards published by the OECD.

Why it matters: Stablecoin legislation was supposed to be the low-hanging fruit in terms of crypto legislation, but progress has stalled due to conflicting priorities on both sides of the aisle. The breakdown of bipartisan work on the stablecoin bill is not a good sign for Congress making progress on this or any broader crypto legislation. However, despite the roadblocks, expect a continued focus on crypto, particularly as our friends across the Atlantic begin the implementation of MiCA. Without regulatory clarity, the trend of crypto investments will likely continue to flow overseas.

AI gets its day on the Hill, and seems to be a bipartisan rallying point

AI was in the spotlight this week, as OpenAI CEO Sam Altman and other AI experts testified before the Senate Judiciary Committee. There is bipartisan concern around potential risks posed by AI and the need to provide regulatory guardrails, but we are far from agreement on the contours of that regulatory regime. Below are the flashpoints policymakers seem to be coalescing around:

There is an urgency in Washington to get a handle on how to regulate the rapidly developing technology. Senate Majority Leader Chuck Schumer recently circulated a broad AI framework, in addition to a plethora of overlapping proposals from other members of Congress. The White House has also announced initiatives to promote responsible AI innovation, including a $140 investment into AI research and a public assessment of existing generative AI systems.

Why it matters: Washington knows it is behind in understanding and regulating AI technology—and policymakers are desperately trying to catch up. While both the White House and Congress want to build a policy framework, there is still a long path forward on achieving comprehensive regulation. For the time being, expect more hearings and scrutiny, but little legislative progress.

Committee focus on bank failures yields few insights

Former bank executives from SVB, Signature Bank, and First Republic Bank were grilled by Congress this week on the failures of their institutions. Lawmakers used the hearing to condemn the former executives over gross mismanagement and perceived greed, both in terms of risk-taking and executive compensation arrangements. SVB took most of the heat, though its former head pointed to rapidly rising interest rates and the unprecedented size and speed of the bank runs as the primary causes of the bank’s failure. Signature’s ex-CEO criticized the regulators for shuttering the bank, which he characterized as well situated to weather the storm unleashed by SVB’s collapse. FRB blamed the contagion effects resulting from the previous bank collapses, noting FRB had no supervisory issues. Federal and state bank regulators also testified this week on the recent turmoil in the regional banking system. The Federal Reserve signaled it will apply tougher capital rules to larger financial institutions.

Why it matters: This week likely marked the pinnacle of congressional scrutiny of the collapses, barring additional bank failures or extreme volatility. In the immediate aftermath of the SVB and Signature Bank collapses, some policymakers homed in on ties between the venture ecosystem and the banks. Efforts to distance the venture ecosystem from these failures have been working: fewer policymakers are focused on the nature of the deposit base being the venture ecosystem. Regulators, however, will continue to review existing bank capital standards, which will likely increase for larger institutions. These actions could further constrain credit for the venture ecosystem, which lost its biggest banking partners amid challenging macroeconomic circumstances generated by the rate hikes.

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