Former CFTC Chair Critiques STABLE Act Amid Growing Calls for Urgent Crypto Regulation

During a pivotal U.S. House Subcommittee hearing on Feb. 11, key players in the cryptocurrency industry stressed the urgent need for clearer regulatory frameworks, while raising concerns about the impact of existing policies. Former Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad was among those criticizing the proposed STABLE Act, which seeks to provide clearer guidelines for stablecoin issuers. Lawmakers and industry leaders alike warned that the lack of defined regulations is not only causing uncertainty but could potentially invite the next financial disaster.

Urgency for Regulatory Clarity

Representative Stephen Lynch (D-MA) expressed concern that the lack of regulatory clarity could lead to catastrophic consequences for the financial sector. "Without proper crypto regulation, we are inviting the next financial disaster," Lynch warned, highlighting the importance of timely action from Congress.

Crypto industry advocates, particularly under the Trump administration, have seen some progress in regulatory efforts, but many feel that the previous regime's “regulation-by-enforcement” tactics have caused significant damage and uncertainty. The hearing on Feb. 11 was an opportunity for lawmakers to hear from industry leaders and experts on how to move forward.

Jonathan Jachym, Deputy General Counsel at Kraken, called for comprehensive rules specifically for centralized intermediaries in the digital asset space. Jachym suggested that the first step in creating a fair market structure would be granting spot market authority to the CFTC. This would allow the agency to regulate centralized intermediaries and secondary market transactions in digital commodities.

"We must avoid the blunt application of centralized rulebooks to decentralized protocols that do not have centralized governance systems or infrastructure," Jachym emphasized, advocating for tailored rules that respect the unique nature of decentralized finance.

Ji Hun Kim, President and acting CEO of the Crypto Council for Innovation, echoed Jachym’s call for clearer guidelines and further action to unwind the damage done by the previous regulatory approach under former Securities and Exchange Commission (SEC) Chair Gary Gensler. Kim criticized Gensler’s tenure, noting that the SEC had taken over 125 enforcement actions related to digital assets without providing clear guidelines or rulemaking on when an asset qualifies as a security.

STABLE Act Faces Criticism

A central topic of the hearing was the STABLE Act, introduced in early February by House Financial Services Committee Chair French Hill and Bryan Steil, the Chair of the Digital Assets, Financial Technology, and Artificial Intelligence Subcommittee. The draft bill aims to provide clearer regulatory guidelines for stablecoin issuers and strengthen oversight.

However, former CFTC Chair Timothy Massad raised several concerns regarding the effectiveness of the STABLE Act. While Massad acknowledged that the bill includes positive features—such as requiring stablecoin issuers to maintain full reserves for tokens and imposing limitations on issuer activities—he pointed out several critical flaws that could undermine its goals.

Massad outlined five key issues with the proposed legislation:

Weak State Standards and Lack of Federal Oversight: Massad argued that the STABLE Act creates “too much risk of weak state standards” and an insufficient review process. He noted that there is no ongoing federal supervision over state-level issuers, which could lead to inconsistent regulations across states.

Bankruptcy Concerns: The bill, according to Massad, fails to address the critical issue of what happens if a stablecoin issuer goes bankrupt. This oversight could leave consumers and investors exposed to significant risk.

Financial Crime and Sanctions Evasion: The STABLE Act does not go far enough in addressing the risks of financial crime or the potential for stablecoins to be used to evade sanctions, Massad stated, which is a significant concern for global regulators.

Weak Enforcement Provisions: Massad pointed out that while the bill prohibits the issuance of stablecoins that are not chartered, it lacks an enforcement mechanism or penalties. “It needs to have those and an explicit territoriality provision,” he said. The issue is particularly relevant in the case of Tether (USDT), the largest and most widely used stablecoin, which Massad feels could remain unaffected by the legislation.

Inadequate Regulatory Authority: Finally, Massad argued that the STABLE Act does not provide regulators with enough authority and discretion to manage the evolving stablecoin market. Given the potential for stablecoins to become a substantial part of the global financial system, he stressed the importance of empowering regulators to address unforeseen challenges.

Stablecoin Market's Growing Influence

The global market for stablecoins, including USDT, USD Coin (USDC), and PayPal USD (PYUSD), is valued at a staggering $230 billion, according to CoinMarketCap. As the market continues to grow, the need for robust regulation becomes even more urgent to ensure that stablecoins are used safely and transparently, protecting both investors and the broader financial system.

Massad concluded that while the STABLE Act offers some positive steps forward, it ultimately falls short in several critical areas. As stablecoins continue to shape the future of digital finance, lawmakers must address these concerns to ensure that regulation evolves in a way that safeguards financial stability without stifling innovation.

The debate over stablecoin regulation is likely to continue as both lawmakers and industry leaders grapple with finding the right balance between fostering innovation and ensuring robust oversight. With a market worth hundreds of billions of dollars at stake, the urgency for clear and effective regulation has never been more apparent.