The Regulatory Tides Bolstering Stablecoins

The regulation of stablecoins has undergone a dramatic shift. On June 17, the Senate passed the Genius Act with bipartisan support, a sweeping stablecoin bill creating federal frameworks for dollar-pegged stablecoins. The Stable Act, which is a substantively similar bill in the House, passed out of a committee vote in April and is waiting to be brought to the House floor for a final vote. Although the bills are similar in substance, there may need to be negotiations between the House and Senate to reconcile meaningful differences.

Stablecoins are cryptocurrencies that are most frequently tied to stable assets like the US dollar, although they may also be tied to other financial instruments or commodities. On balance, stablecoins are far less volatile than traditional cryptocurrencies. Retail investors favor them for fast, inexpensive cross-border transactions and as collateral in crypto lending.

For years, regulators discouraged stablecoin issuance through enforcement actions, creating a regulatory void with inconsistent agency positions that chilled both issuance and adoption.

But this year signals significant change: Agencies are opening doors for issuers, enforcement actions are quieting, and Congress is poised to pass comprehensive stablecoin legislation.

The legislative landscape has transformed through three key developments: agency reinterpretations scaling back jurisdiction, Securities and Exchange Commission withdrawal from major litigation, and pending congressional legislation.

Agencies Choose Not to Regulate Stablecoins

Multiple agencies have pulled back from restrictive positions on stablecoin banking activities.

In March, the FDIC stated that banks can engage in crypto activities like holding stablecoin reserves without prior approval, a reversal from previous positions. And the Office of the Comptroller of the Currency issued Interpretive Letter 1183, rescinding 2021 requirements for additional crypto approvals.

Additionally, the Federal Reserve rescinded a 2022 supervisory letter requiring advance notice for crypto activities, the Securities and Exchange Commission stated that covered stablecoins are not securities, and the Department of Labor rescinded guidance discouraging cryptocurrency—including stablecoins—in 401(k) plans.

This framework allows banks to participate in crypto activities without prior approval, removes SEC oversight of covered stablecoins, and gives plan sponsors flexibility with stablecoins.

Rescinding inconsistent regulations provides clarity for issuers and investors, potentially creating an influx of new stablecoins and strengthening investor choice.

SEC Withdraws From Stablecoin Litigation

Consistent with its position that covered stablecoins aren’t securities, the SEC has dropped major investigations against Binance and PayPal USD.

In the more recent Binance case, the SEC originally alleged that Binance misled investors about risk controls, which led to inflated trading volume in BUSD (Binance’s stablecoin that is pegged to the US dollar). At the time, the SEC asserted that BUSD was a security. The current SEC dismissed this action, stating, “In the exercise of its discretion and as a policy matter, the Commission determined that the dismissal of this action is appropriate.”

And in late April, the SEC dropped its investigation into PayPal’s stablecoin. The investigation originally began in 2023 when the SEC subpoenaed PayPal, requesting documents on its stablecoin PYUSD. The details of the investigation were not made public, but the SEC at the time was treating PYUSD as an unregistered security. Despite the lengthy investigation, the SEC decided to take no enforcement action this year and dropped the investigation.

By asserting that stablecoins are not securities, the SEC has relinquished jurisdictional claim over covered stablecoins and is allowing more flexibility for financial institutions like Binance and PayPal to issue their respective stablecoins.

Congressional Legislation Will Shape the Future of Stablecoin

As previously mentioned, the Genius Act in the Senate and Stable Act in the House aim to create federal frameworks for dollar-pegged stablecoins.

Both include similar provisions: one-to-one reserve requirements, mandated disclosures and audits, and consumer protections. Additionally, stablecoins must be 100% reserve-backed, with monthly disclosures and annual audits under both bills. Both clarify that stablecoins aren’t securities, though negotiations will have to resolve the oversight responsibilities for each of the regulators.

Several issues remain open as we move toward a final bill:

1. Whether to allow a dual-track system (federal and state) that would allow smaller stablecoin issuers to be licensed at the state level, or require a single federal license for all issuers.
2. Whether nonbank issuers will be permitted.
3. Whether the OCC would be the sole regulator in charge of issuing rules implementing the application process for approving stablecoin issuers.
4. Whether enforcement actions against foreign issuers of payment stablecoins should be allowed.
5. Whether the scope of investor protections should be defined in the statute or left for the regulators to determine.

What the Stablecoin Regulatory Landscape Means for Investors

For investors, these changes create both opportunities and challenges. The regulatory clarity should reduce compliance costs and encourage institutional participation, potentially driving market growth significantly higher.

However, investors face trade-offs. Both bills ban yield-bearing stablecoins, meaning investors cannot earn interest like traditional savings accounts. The legislation also restricts which companies can issue stablecoins, potentially limiting options but reducing concentration risk.

Critical unknowns affecting investor outcomes include which regulator will oversee their holdings and whether state regulators have adequate resources for oversight responsibilities. The choice between bank-issued and nonbank-issued stablecoins will become important, as different issuer types may offer varying risk profiles and protections.

What’s Next for Stablecoin

Stablecoin regulation has transformed dramatically through agency pullbacks, SEC litigation withdrawals, and pending congressional legislation. While agencies will likely share authority over stablecoins, comprehensive legislation will likely provide regulatory clarity and flexibility for issuance.

For investors, understanding which regulator oversees their stablecoin investments—whether federal banking regulators, the OCC, or state authorities—will be crucial. As Congress reconciles the bills’ differences, investors should monitor how these negotiations affect regulatory structure, issuer eligibility, and consumer protections in the evolving stablecoin landscape.