House punts on stablecoin bill after Yellen raises flags over key provision

House Financial Services Committee lawmakers will delay the markup of a widely anticipated bipartisan stablecoin bill this week after Treasury Secretary Janet Yellen pushed for changes in a key provision of the legislation.

The delay will push back the timeline for when Congress could start moving stablecoin legislation until after the August recess, according to multiple sources familiar with the discussions. The move underscores Washington's struggle to create new rules for digital asset marketplaces that have been roiled by uncertainty following the collapse of several multibillion-dollar crypto startups.

Committee Chair Maxine Waters (D-Calif.) and ranking Republican Patrick McHenry of North Carolina have been negotiating a bill that would give banks the ability to issue their own stablecoins — digital assets whose value is pegged to fiat currencies like the U.S. dollar — and put nonbank issuers under the oversight of the Federal Reserve.

While the draft text has largely been kept under wraps, details of the proposed framework have rankled watchdog groups and banking lobbyists who have warned that it might not protect the financial system from risk. Late last week, the Independent Community Bankers of America sent a letter to Waters and McHenry encouraging them to delay the July 27 markup.

Lawmakers were said to be close to a final agreement on the bill late last week. Yellen raised concerns with Waters in a call on Friday over how it addressed digital assets held in custody on behalf of consumers. Treasury sought changes that would require digital wallet providers to keep customer assets segregated — ensuring their preservation in the event of insolvency, according to one source familiar with the discussions.

Democratic efforts to incorporate Treasury's desired changes complicated negotiations over the weekend. Though multiple sources say lawmakers are still pushing to release the text of the bill this week, they couldn't coalesce around a framework in time for Wednesday's markup.

Spokespeople for Waters and McHenry did not immediately respond to requests for comment.

Both Waters and McHenry identified stablecoins as a top legislative priority in the aftermath of a President’s Working Group report warning that the tokens could pose systemic risks if they continue to grow unchecked. The same report encouraged lawmakers to pass legislation that would regulate the tokens like banks.

Many industry people have considered this Congress’ clearest shot at developing a rulebook for the popular digital assets, which are typically used to acquire popular cryptocurrencies like Bitcoin and Ether. The value of the most widely used stablecoins is pegged to the U.S. dollar that’s supported by financial reserves.

The collapse of the broadly used stablecoin TerraUSD earlier this year contributed to declines across crypto markets, which ultimately forced a pair of major digital lending platforms into bankruptcy. Unlike reserve-backed stablecoins, TerraUSD's peg was maintained through a combination of computer code and market incentives.

“If stablecoins are backed by high-quality assets, their risk is quite low and they can form a building block — a cornerstone — of a payment system,” Treasury undersecretary for domestic finance Nellie Liang told the Financial Services panel earlier this year. “If there's questions about the quality of the assets in the reserve pool backing them, then they create risk.”