US legislators oppose Federal Reserve programs that limit bank's interaction with payment stablecoins

• The US Federal Reserve had issued letters preventing the country’s banks from engaging in the payment stablecoin ecosystem.
• Specifically, the Fed does not want banks issuing payment stablecoins
• Legislators have challenged the stand, accusing the regulator of undermine Congress’ progress on legislation
• Experts have likened the Fed’s move to that of the SEC, accusing the commission of regulatory overreach.

US legislators have taken a stand, challenging the Federal Reserve’s move earlier in the month to limit the interaction of banks with payment stablecoins.

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US legislators challenge the Fed on matters of stablecoins

On August 8, the Fed issued supervision and regulation letters to the officer in charge of supervision and appropriate supervisory and examination staff at each Federal Reserve bank. The letter, titled, “Creation of Novel Activities Supervision Program” sought to limit the interaction between banks and payment stablecoins.

The Program will help ensure that regulation and supervision allow for innovations that improve access to and the delivery of financial services, while also safeguarding bank customers, banking organizations, and financial stability.

In the directive, the Fed articulated that they only want stablecoins issued (if at all) by insured depository institutions that they have supervision and enforcement authority over.

In a recent development, however, legislators have challenged this stance, with Chairman of the US House Financial Services Committee Patrick McHenry sending a letter to FED Chairman Jerome Powell opposing the commission’s regulatory letter attempting to undermine Congress' progress in establishing a regulatory framework for stablecoins.

More specifically, the lawmakers believe that the Fed’s actions could eat away at Congress's work on regulating payment stablecoins and discouraging participation in the digital asset market. They also challenge that the Fed’s approach goes against the Clarity for Payment Stablecoins Act, established to define clear standards for stablecoin issuance.

Other concerns by the legislators are that the Fed's letters could effectively prevent banks from engaging with payment stablecoins and crypto-assets, while at the same time failing to adhere to the required notice and comment process.

In a post on social media platform X, the Vice Chairman of the Financial Services Committee and Chairman of the Digital, Financial Technology and Inclusion Subcommittee, French Hill, said:

I sent a letter alongside Patrick McHenry and Rep Huizenga to the Federal Reserve, objecting to their efforts to undermine the financial committee’s progress on stablecoin legislation. The Fed has chosen to effectively prevent banks from issuing payment stablecoins.

Experts and market observers have also shared in the defense, calling out the Fed for overreach and likening that to the overarching actions by the US Securities and Exchange Commission (SEC). Bill Morgan, a digital asset enthusiast said, “Like the SEC the FED is out of control towards crypto.”

Crypto proponents see the letters as the Fed’s move to “effectively prevent banks from issuing payment stablecoins or engaging in the payment stablecoin ecosystem.” With this, the legislators accuse the Fed of camouflaging their “supervisory non-objection” as “guidance”, outlining a process where the activities are permissible.

According to the crypto supporters, however, the Fed does not have any intention to allow such activities, particularly where public permissionless blockchains are concerned. 

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