As the end of July arrived, House Financial Services Committee Republicans achieved its goal of passing a bipartisan stablecoins bill. Still, they left D.C. without the broad bipartisan vote Chair Pat McHenry had labored to achieve. The session ended with new recriminations over old disputes, namely the degree of federal vs. state regulation in a new regulatory framework, casting a dark cloud over the prospect of legislation that could garner support from McHenry, Ranking Member Maxine Waters, and the Biden White House.
John Rizzo is Senior Vice President for Public Affairs at Clyde Group. Rizzo most recently served as the Senior Spokesperson at the U.S. Department of the Treasury where he led public affairs strategy on digital assets, among other issues.
And then PayPal and Paxos entered the chat. The surprise unveiling of PYUSD may be the accelerant needed to forge compromise in D.C. and bring about the legal enshrinement of a comprehensive regulatory framework for stablecoins. It may also represent a new, more aggressive strategy for how American fintech companies deal with the federal government and D.C. regulators.
To understand why PYUSD’s launch is so monumental, one must recognize that it comes from one of the world’s largest digital payment companies, which boasts 430 million accounts. With the flip of a switch, hundreds of millions of users can access and transact in stablecoins through a service with which they are already familiar. It will speed up crypto adoption and make the ecosystem more challenging to bring to heel through Congressional action.
The prospect of a significant market participant exploring a stablecoin project is a dynamic I observed up close while serving as a senior spokesperson at the U.S. Department of the Treasury in 2021 and 2022. Those years saw the federal government attempting to implement a comprehensive regulatory framework for stablecoins in the backdrop of Diem, Meta’s stablecoin project’s failure during the summer of 2021 (when it was announced, the project was known as Libra and Meta was called Facebook).
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Had it succeeded, Diem would have presented two challenges, which were discussed publicly at the time, for the federal government to wrestle with. Libra’s stablecoin would have launched when the U.S. lacked a comprehensive regulatory framework for stablecoins, meaning it would exist in a legal and regulatory gray space. And, while that reality would pose a challenge to the federal government, other stablecoin projects have and will exist in the same regulatory gray space. What was different about Diem was that its regulatory challenge would have been turbocharged by the fact that Facebook’s billions of users would have had access to this sort-of-regulated, sort-of-not-regulated crypto token overnight.
PayPal is not Meta/Facebook, but the prospect of hundreds of millions of users soon having easy access to a stablecoin on a platform they already use and are comfortable with creates a new urgency for lawmakers in D.C. to reach a compromise on a regulatory framework for stablecoins. That didn’t exist when just a handful of Democrats voted in favor of Chair McHenry’s stablecoins bill.
Before PYUSD’s unveiling, the stablecoin market was somewhat steady, consisting of the same players and similar levels of adoption. Hundreds of millions of PayPal users will soon have a crypto asset closer to their fingertips. Democratic policy makers in D.C. who resisted McHenry’s stablecoins bill in search of a better deal must account for the prospect that stablecoin adoption and usage could speed up rapidly soon, heightening some of the risks that D.C. policymakers identified when assessing stablecoin regulation.
The legislative calculation isn’t the only equation that has changed for Democratic policymakers after the unveiling of PYUSD. The regulatory calculation has also changed, potentially ushering in a new era of how American crypto market participants engage with D.C.
According to reports, Libra’s stablecoins project backers extensively sought D.C. policymakers' approval before launching its token. On paper, it made sense. Unlike transportation policy, which Uber and Lyft showed can be changed by the force of will and mass adoption, financial services are highly regulated at the federal level. Forcing financial policy innovation without the pre-approval of regulators is daunting unless you operate in the one area of financial services primarily regulated by states.
That’s PayPal’s ace in the hole. It’s the reason it could partner with Paxos Trust and change the pool of potential stablecoin users overnight. Its core business, money transmission, is regulated through a state-by-state licensing regime, meaning the federal government’s ability to impose a cost on PYUSD’s backers for launching a stablecoin without seeking prior approval is limited.
The lobbying strategy for PYUSD may herald a somewhat new approach to D.C. by American crypto companies. Instead of asking permission, they’re demanding a seat at the table and bringing with them potentially hundreds of millions of users who will speed crypto adoption and make stablecoins a part of everyday economic life.
Having observed power up close during 14 years of federal service between Congress and a presidential administration, achieving a result in D.C. is not always about winning the competition of ideas. Instead, influencing policy is about power and leverage. More often than not, those who have it get their way in D.C., and those who don’t, don’t.
Supporters of stablecoins and market participants now have leverage over the federal government, including regulators and lawmakers, in a way that didn’t exist weeks ago. It could grease the wheels for a comprehensive regulatory framework for stablecoins in Congress and begin an era in which American crypto companies force the federal government to deal with them on their terms.