Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insight on policy and regulation.
When the dust settled on Monday after the failures of Silicon Valley Bank and Signature, the U.S. crypto industry found itself in an even more precarious position. Circle and its USDC stablecoin survived a harrowing weekend thanks to its SVB exposure, and the sector was forced to adjust to a new reality after the rapid culling of banking options.
For Rep. French Hill (R-Ark.), the chair of the digital assets subcommittee, the bank failures were just another sign in a long string of catastrophes that the U.S. needs a regulatory framework for crypto, lest the country loses the industry to greener pastures.
“By not developing that framework, where everybody 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 told Fortune in an interview on Tuesday.
Although Hill said that 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 a persistent plea by key industry groups—had moved even 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 broader ecosystem as an on- and off-ramp 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 to be 8% of its reserves—its USDC token, meant to maintain a $1 peg, plunged below 90 cents across exchanges until banking regulators announced on Sunday night that deposits would be protected.
Dante Disparte, Circle’s chief strategy officer, said regulation could have prevented the near catastrophe. “We have the most conservative reserves on the planet, but a bank introduced risk to Circle over the weekend,” Disparte told Fortune.
Specifically, he pointed to a proposed provision—already adopted by several countries, including Singapore, Japan, and the United Kingdom—where the central bank would have direct oversight and stablecoin issuers could custody dollar deposits with the central bank. Under this scenario, Circle would work directly with the Federal Reserve rather than having to partner with a bank like SVB.
While Hill did not explicitly endorse the provision, he said it was the direction of a bipartisan draft led by then-ranking member Patrick McHenry (R-N.C.) and chair Maxine Waters (D-Calif.) last fall.
“That’s certainly, I think, a starting place for what we’re working on this year,” Hill told Fortune.
Still, he cautioned that legislation would not magically solve all the problems of crypto companies. “There’s no regulatory framework that can replace prudence and common sense on how one manages their portfolio of assets,” Hill said.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
