Yesterday Punchbowl News reported that Senate leader John Thune had filed for a procedural vote (cloture) on the stablecoin Genius Act, the same vote that failed last week. Hence, another vote is likely to be held next week. Democrat Senator Gillibrand claimed major progress on the bill, indicating several Democrats were gearing up to support it. However, last night Punchbowl published a memo from Senator Warren highlighting ongoing problem areas.
Ongoing concerns about Trump family interests
Firstly, she objected that there’s nothing in the Bill stopping elected officials and their families from issuing stablecoins. The involvement of President Trump’s sons with crypto firm World Liberty Financial is viewed as controversial by some. That was exacerbated when its new stablecoin, USD1, was used in a $2 billion transaction by a firm chaired by the UAE’s national security adviser.
Regarding families, earlier this week Senator Gillibrand implied that family members are legally permitted to issue stablecoins. However, officials themselves cannot. Since early May there has been a Genius Act clause that states:
“For the avoidance of doubt, existing Office of Government Ethics laws and the ethics rules of the Senate and the House of Representatives prohibit any member of Congress or senior executive branch official from issuing a payment stablecoin during their time in public service.”
BigTech stablecoin issuance
Senator Warren’s second objection is that BigTech firms such as Meta or X are still allowed to issue stablecoins.
While the latest draft does not have a blanket ban, it has a significant clause addressing issuance by public non-financial corporations. They have to be approved by the Stablecoin Certification Review Committee, which will assess them based on financial stability concerns, protection of consumer data, and avoiding tying stablecoin services to other business activities. However, this only applies to public companies. For example, it would not apply to X, Stripe or other unlisted unicorns. The Stablecoin Certification Review Committee consists of the Secretary of the Treasury, the Federal Reserve Chair or Vice Chair and the Chair of the Federal Deposit Insurance Corporation (FDIC).
Terrorism and criminal activities
Next, Senator Warren is concerned about the use of stablecoins for terrorist and criminal activities. She wrote:
“New language in the draft bill imposing restrictions on when foreign companies can issue stablecoins in the United States makes no material difference, given that the coins could still be issued offshore and moved through domestic decentralized exchanges accessed by terrorists and criminals.”
Her concern might relate to a change of wording where “any person” was substituted with “digital asset service provider” (DASP) in several places. This was likely to cater for the upcoming crypto market infrastructure legislation. However, people involved in decentralized exchanges would be covered by “any person” but likely not by references to DASPs. So, this may be the loophole she is concerned about.
Stablecoins and financial stability
Stablecoins offer many potential benefits for society, but they also carry significant financial stability risks. Senator Warren believes these risks aren’t sufficiently addressed in the latest draft. It “would still allow issuers to actually invest their reserves in riskier assets, hold them in offshore accounts, engage in dangerous financial and commercial activities, and prevent regulators from applying strong safeguards – inviting a future crash and costly bailouts.”
We’d observe that most other jurisdictions have insisted that reserves of locally issued stablecoins are held onshore, so the Genius Act is different in that respect. Some have argued that investments should only be allowed directly in government securities, rather than money market funds that invest in government securities, which add a layer of risk.
However, there’s a desire to support investment of stablecoin reserves in tokenized assets, which are often tokenized money market funds. Potentially, there could be some guidelines on acceptable tokenization standards. For example, this might include safeguards regarding who provides custody for tokenized assets, audits, and preventing tokenization firms lending out the underlying assets. There’s no point in banning stablecoin issuers from lending out reserves, if the tokenization firm can do the same.
Despite these detailed concerns, it’s worth noting the broader political landscape. Senator Warren has consistently maintained firm opposition to cryptocurrencies and stablecoins, making her support for any such legislation unlikely. The key to passing effective regulation lies instead in gathering sufficient Democratic support from lawmakers who share Senator Gillibrand’s recognition that stablecoin legislation is necessary. Given that stablecoins already exist, the current regulatory vacuum only magnifies their potential risks rather than addressing them.
