GW Law Faculty Publications & Other Works

Document Type

Article

Publication Date

2025

Status

Working

Abstract

On February 4, 2025, Senators Bill Hagerty, Tim Scott, Cynthia Lummis, and Kirsten Gillibrand introduced a bill that would create a dangerously weak and deeply flawed regulatory regime for stablecoins. Their bill (the “Hagerty bill”) would allow stablecoins to be offered to the public without the protections provided by federal deposit insurance and other safeguards governing banks insured by the Federal Deposit Insurance Corporation (FDIC). The Hagerty bill would greatly increase the likelihood that future runs on stablecoins would trigger systemic crises requiring costly federal bailouts to avoid great harm to our financial system and economy.

A stablecoin is a crypto-asset whose issuer represents that the stablecoin will maintain parity with a designated fiat currency or another referenced asset. The vast majority of global stablecoins are linked to the U.S. dollar and are functionally equivalent to bank deposits. The issuers of those stablecoins promise to redeem them or transfer them to third parties upon the holder’s demand or within a specified time.

Stablecoins have proven to be anything but stable. More than twenty stablecoins collapsed between 2016 and 2022. Each of the world’s leading stablecoins lost its “peg” to the U.S. dollar (or other designated reference value) between 2019 and 2023.

Recent stablecoin runs resemble the runs that occurred on uninsured deposits and other uninsured short-term financial instruments during U.S. financial crises stretching from the nineteenth century through 2023. The Hagerty bill ignores the lessons of those crises by failing to establish a strong and effective regulatory regime for stablecoins, and by failing to provide a credible federally-supervised fund to ensure their timely repayment.

The Hagerty bill would allow issuers of nonbank stablecoins to pay interest and compete with FDIC-insured banks. The bill’s lax regulatory regime would allow stablecoins to pay higher interest rates and divert deposits away from FDIC-insured banks. Thus, the Hagerty bill would undermine our banking system and disrupt the flow of credit from FDIC-insured banks to consumers and Main Street businesses.

The Hagerty bill would also enable Big Tech firms and other commercial enterprises to acquire nonbank stablecoin issuers and use stablecoins as “shadow deposits” to enter the banking business. Big Tech firms would gain access to information about their customers’ financial dealings, thereby leveraging their ability to exploit private customer data.

Congress should reject the Hagerty bill. Congress should instead approve legislation requiring all issuers and distributors of stablecoins to be FDIC-insured banks. That requirement would keep Big Tech firms out of banking and maintain our nation’s longstanding policy of separating banking and commerce. It would also ensure that stablecoins are provided in a safe, well-regulated manner that protects consumers, investors, our financial system, and our economy.

The Hagerty bill has many other defects, which are described in this Policy Brief. Those shortcomings provide additional reasons for Congress to reject the Hagerty bill and require all stablecoin providers to be FDIC-insured banks.

GW Paper Series

2025-14

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