Failure to advance crypto legislation could make the US less attractive, Moody's analysts say

If Democrats and Republicans don’t reach consensus on how to regulate cryptocurrencies, the U.S. will become less attractive for firms and investors as other countries move ahead with their own rules, according to a Moody’s Investors Service report.

The report comes as the House Financial Services Committee is discussing two legislative proposals to regulate stablecoins and another that more comprehensively regulates crypto. A hearing last week showed divides between the two parties on that larger picture, though there could be hope for a consensus on stablecoins. 

Despite some agreement on topics such as protecting consumers, both Republicans and Democrats have differing opinions on the process, the Moody’s analysts said.

"Failure to reach bipartisan agreement and to advance digital assets-specific legislation could make the United States comparatively less attractive for both firms and investors, particularly in a context where many other jurisdictions are moving forward with comprehensive rules," the Moody’s analysts said in a report on Tuesday.

Market structure bill

The comprehensive market structure bill, proposed by House Financial Services Chair Patrick T. McHenry, R-N.C., would create a pathway for a digital token to go from being treated as a security to a commodity. 

Former House Financial Services Chair Maxine Waters, D-Calif, said she was concerned about consumer protection in that bill during the hearing last week.

"The bill appears to halt any enforcement actions by the SEC against crypto firms, even when they have committed fraud," Waters said. "This provisional registration could reward bad actors with a 'get out jail free' card and allow them to continue harming consumers and investors."

Stablecoin legislation

Lawmakers have also gone back and forth on a stablecoin bill since last year. Republicans have recently received feedback from Democrats and said they worked that into an updated version. Waters, too, has said she was "encouraged by the legislative process being made" on the stablecoin bill. 

"I do believe that Mr. McHenry and I have gotten a long way in dealing with stablecoins, and I’m sorry that it got interrupted somehow, but I’m looking forward to getting back and negotiating to see if we can move stablecoins forward," Waters said last week. 

Moody’s analysts warned that the McHenry draft could possibly bring more regulatory arbitrage and harm consumers. Under the draft framework, the Federal Reserve would not be the primary supervisor of stablecoin issuers, and state regulators would supervise issuers, according to Moody’s. 

"By differentiating between bank and non-bank stablecoin issuers at the state and federal level, and by allowing each category of issuer to be supervised by a different body, the proposed framework could lead to regulatory fragmentation and create risk asymmetries between issuers since they would not all be submitted to the same set of rules, which could, in turn, increase regulatory arbitrage and harm consumers’ protections," Moody’s said.