McHenry Challenges Powell: Federal Reserve Preventing Banks from Participating in Stablecoin Payment Systems, Contrary to Payment Legislation

Chairman of the House Financial Services Committee Patrick McHenry, Vice Chairman of the Financial Services Committee and Chairman of the Subcommittee on Digital Assets, Financial Technology, and Inclusion French Hill, along with Subcommittee on Oversight and Investigations Chairman Bill Huizenga, jointly released a press release and sent a letter to Federal Reserve Chairman Jerome Powell, opposing recent guidance issued by the Fed, arguing that it undermines legislative progress in Congress on establishing a regulatory framework for stablecoin payments.

Guidance from the Federal Reserve

The U.S. Federal Reserve issued Guidance SR 23-7 and SR 23-8 on August 8, requiring state member banks to obtain written regulatory approval from the Federal Reserve before issuing, holding, or transacting with U.S. dollar tokens.

This requirement aims to ensure that banks adopt appropriate risk management practices, including identifying and monitoring systems for potential risks such as cybersecurity threats and illicit financial activities. National member banks engaged in activities related to U.S. dollar tokens will also be subject to ongoing regulatory reviews and enhanced monitoring.

The Federal Reserve has also established a new activities monitoring plan to oversee new activities undertaken by banking organizations, including activities involving cryptocurrencies, Distributed Ledger Technology (DLT), and establishing technology-driven partnerships with non-bank entities to provide financial services. The goal is to complement existing regulatory processes and strengthen oversight of technology-driven activities.

In a statement released, the Federal Reserve stated:

The goal of the new activities monitoring plan is to promote the benefits of financial innovation while identifying and addressing risks appropriately to ensure the safety and soundness of the banking system. This plan will be integrated into the Federal Reserve's existing regulatory processes, and experts on the plan will collaborate with the current regulatory teams to oversee banks engaging in novel activities.

In Contrast to the "Clarity for Digital Tokens Act"

However, Congress does not seem to agree, issuing a press release expressing opposition. Three lawmakers, led by Patrick McHenry, the Chairman of the House Financial Services Committee, jointly stated that the Federal Reserve's actions are undermining Congress's progress in establishing a regulatory framework for stablecoin payments. This move is seen as hindering financial institutions from participating in the digital asset ecosystem.

The lawmakers have been pushing the "Clarity for Digital Tokens Act," but the Federal Reserve did not collaborate with Congress to establish a viable system, instead directly releasing the guidance of SR 23-7 and SR 23-8. This guidance is in contradiction to the spirit of the current bill.

The Federal Reserve has chosen to effectively block banks from issuing stablecoin payments or participating in the stablecoin ecosystem. Clearly, the Federal Reserve does not intend to allow any such activities as they involve public, permissionless blockchains.

Finally, the lawmakers also pointed out that the Federal Reserve's guidance of SR 23-7 and SR 23-8 was not issued in accordance with the notice and comment procedures required by the Administrative Procedure Act, which is deemed unacceptable.