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U.S. senators want a comprehensive legal and regulatory framework for stablecoins in place by the end of the year, but congressional witnesses warned Wednesday that the proposals pitched to date fall short in key areas and must be adjusted in any future bill.

The opening hearing of the Senate Banking Subcommittee on Digital Assets on Wednesday afternoon took a bipartisan and even friendly tone, an increasing rarity in the overcharged climate on Capitol Hill, as members and witnesses discussed three bills for comprehensively regulating stablecoins without reaching consensus on a favorite.

Two of the bills—the GENIUS Act, co-authored by Subcommittee Chair Cynthia Lummis (R-WY), and the STABLE Act, a nearly identical proposal from House Financial Services Chairman French Hill (R-AR)—make passing references to the Anti-Money Laundering Act of 2020 but otherwise stay silent on AML and financial crime.

“The [GENIUS] Act makes the U.S. dollar fit for the digital age, creates additional demand for U.S. debt and makes payments both faster and cheaper,” Lummis said in opening the hearing. “The legislation fully protects the dual banking system and creates parity between both state and federal stablecoin charters.”

The third bill, introduced Feb. 10 by Rep. Maxine Waters (D-CA) with the backing of former Rep. Patrick McHenry (R-NC), would meanwhile ban anyone convicted of insider trading, embezzlement, cybercrime, fraud, money laundering or terrorist financing from holding an executive role at a stablecoin issuer or owning more than 5 percent of that company’s shares.

Timothy Massad, former chair of the Commodity Futures Trading Commission, showed tentative support for the GENIUS Act at Wednesday’s hearing, but also criticized the bill as “substantially weaker” than the McHenry-Waters proposal and the EU’s own, recently adopted framework: the “markets in crypto-assets” regulation, also known as MiCA.

The GENIUS Act “has many features I support,” said Massad, but does not address the risk of illicit finance that stablecoins pose; leaves questions over issuer bankruptcy, competition and access to master accounts unanswered; and lacks a strong enforcement mechanism.

“We need to extend the regulatory perimeter and be more creative in tackling the AML [anti-money laundering] and CFT [combating-the-financing-of-terrorism] challenges,” Massad told lawmakers.

Playing catchup

Other witnesses lamented what they described as the bifurcated market-regulatory structure for governing stablecoins and other cryptocurrencies in the U.S., where the Consumer Financial Protection Bureau and Securities and Exchange Commission share oversight.

Lewis Cohen, an attorney with Cahill Gordon & Reindel in New York, advised lawmakers to erect a “clear policy around how market participants can determine [whether they are] engaged in a securities transaction [or not],” Cohen said. “That’s caused immense consternation for everyone in the space.”

A third regulator, the Treasury Department’s Financial Crimes Enforcement Network, which supervises virtual asset service platforms for AML purposes, views stablecoins as “convertible virtual currencies” that fall under the regulatory obligations of the Bank Secrecy Act.

Massad, now director of digital assets researcher at Harvard, opined Wednesday that no party has found a “secret sauce” for reliably identifying suspicious transactions in cryptocurrency, but said regulators should consider studying the technology that underpins digital assets.

“These ideas of essentially being able to program smart contracts so that transactions can’t go through unless someone has been properly vetted is one that I hear a lot of conversation about,” Massad said, who cited Japan as an example. “We’ve seen other countries … require more aggressive monitoring and freezing of stablecoins.

Lummis and other lawmakers have sought to overhaul federal digital-asset regulations prior to Wednesday, most recently in July 2023.

The Responsible Financial Innovation Act, legislation that she co-authored with Sen. Kirsten Gillibrand (D-NY), ultimately stalled in the Banking Committee.

Contact Charlie Passut at cpassut@acams.org