Bank failures could spur Congress to act on stablecoins

by Arthur · March 15, 2023

Dante Disparte, Head of Strategy and Head of Global Policy at Circle. Sarah Silbiger—Getty Images

Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on politics and regulation.

When the dust settled on Monday after the failures of Silicon Valley Bank and Signature, the US crypto industry found itself in an even more precarious position. Circle and its USDC stablecoin survived a harrowing weekend thanks to the SVB exposure, and the sector was forced to adjust to a new reality after the rapid elimination of banking alternatives.

For rep. French Hill (R-Ark.), chairman of the House Digital Assets Subcommittee, said the bank failures were just one more sign in a long line of disasters that the U.S. needs a regulatory framework for crypto, lest the country lose the industry to greener pastures.

“By not developing that framework, where everyone knows the rules of the road and we can encourage digital asset innovation, we’re going to disable that market here and it’s going to move offshore,” he said Fortune in an interview on Tuesday.

Although Hill said the collapse of SVB and Signature, as well as Silvergate a few days before, did not change his approach to legislation, it seemed clear that stablecoins — already a priority for the committee and the focus of a sustained plea from key industry groups — had shifted further up the queue. The most immediate impact of the bank failures on the crypto industry had been to Circle, whose USDC serves as a crucial cog in the wider ecosystem as an on and off to fiat currency, as well as a building block for many DeFi protocols.

After traders realized Circle had exposure to SVB on Friday — which the company later revealed was 8% of reserves — the USDC token, intended to maintain a $1 peg, sank below 90 cents on exchanges until banking regulators announced Sunday night that deposits would be protected.

Dante Disparte, Circle’s chief strategy officer, said regulation could have prevented the near disaster. “We have the most conservative reserves on the planet, but a bank introduced risk to Circle over the weekend,” Disparte said Fortune.

In particular, he pointed to a proposed provision – which has already been adopted by several countries, including Singapore, Japan and the UK – where the central bank would have direct oversight and issuers of stablecoins could deposit dollar deposits with the central bank. Under this scenario, Circle would work directly with the Federal Reserve rather than having to work with a bank like SVB.

While Hill did not explicitly support the provision, he said that was the direction of a bipartisan draft led by then-Ranking Member Patrick McHenry (RN.C.) and Chairwoman Maxine Waters (D-Calif.) last fall.

“It’s certainly, I think, a starting place for what we’re working on this year,” Hill said Fortune.

Still, he cautioned that legislation would not magically solve all the problems of crypto companies. “There is no regulatory framework that can replace prudence and common sense about how to manage one’s portfolio of assets,” Hill said.

Leo Schwartz
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