Norbert Michel and Ryan Chan-Wei
Yesterday, Politico’s “Morning Money” had a great interview with House Financial Services Chair French Hill (R‑AR) discussing, among other upcoming issues, the path forward on crypto and stablecoins. While the stablecoin debate should be settled by now, it’s not behind us yet.
Despite the GENIUS Act being passed into law in July and creating the first US-based legal framework for issuing stablecoins, there remains much room for improvement.
One remaining contentious issue is the payment of interest from stablecoin issuers to people holding stablecoins, something the law prohibits. However, the law does not explicitly prohibit a crypto exchange or an affiliate, as opposed to the company that issues the coin, from indirectly paying interest to stablecoin holders.
Critics have argued that exchanges that set up rewards programs, for example, are evading the prohibition and effectively paying interest on stablecoins.
Unsurprisingly, the crypto industry and the banking industry are on opposite sides of this issue. Crypto exchanges want to provide rewards, whereas the banks argue that nobody should be able to evade the prohibition on paying interest.
Banks raise a good point: If a stablecoin issuer is engaging in activities that functionally resemble those of a bank, such as taking in money, paying interest, and accessing the federal payments system, then the stablecoin issuer should be regulated like a bank.
This view is perfectly reasonable coming from the industry that has been all but regulated to death. But the core problem is the regulatory framework itself. It’s too complex and counterproductive, and it should be overhauled.
More broadly, the similarities between stablecoins and money market mutual funds underscore another major regulatory issue: Money market mutual funds are subject to an overly complex framework that is also in dire need of reform. Congress could have addressed both issues by structuring the GENIUS Act differently, but that remains a missed opportunity.
On the positive side, there is still much potential for harmonizing the regulatory treatment of stablecoins and money market mutual funds. For example, on money market mutual funds, Congress and the Securities and Exchange Commission could revert to something like the framework that was in place in the early 1980s.
Some will view this shift as radical, but it would in fact do little more than allow fund managers the discretion they need instead of saddling them with more operating restrictions. For example, an average maturity restriction could replace dozens of prescriptive rules and regulations that dictate the structure of allowable investments. Fund boards would have maximum discretion in how to design and operate their funds, including which money market instruments they invest in.
Much like the stablecoin framework we proposed in 2021, this shift would essentially convert the regulatory framework—for stablecoins and money market mutual funds—to one that relies primarily on disclosure and transparency as its core pillars.
Ultimately, individuals should have the freedom to use and invest their money as they see fit. This is not a call to abandon oversight but to respect individual autonomy and allow markets to function properly. A regulatory framework centered on transparency and disclosure would be a welcome change for stablecoins, money market funds, and especially banks.