The introduction of the Lummis-Gillibrand Payment Stablecoin Act has spurred all sorts of speculation and criticism. The big question is whether members of Congress will attach the bill to “must pass” legislation, such as the reauthorization of the Federal Aviation Administration. If not, it’s unlikely this Congress will enact any stablecoin bill.

Separately, nobody seems to really love the bill, and some critics hate it.

For instance, the American Prospect’s Robert Kuttner thinks that Senator Chuck Schumer (D‑NY) is “carrying water” for the cryptocurrency industry. And American University law professor Hillary Allen complains that the bill “provides a way for big tech platforms to basically become unregulated banks with implicit guarantees of access to the Fed discount window and FDIC insurance.”

Regardless of how likely it is Congress will pass a stablecoin bill this year, claims that this new bill—or even the efforts taking shape in the House—are some kind of big win for the crypto industry are rather strange.

If anything, what’s taking shape looks and feels like it will fulfill the Biden administration’s initial wish list for stablecoins. That’s a huge win for the banking industry because it keeps competition in the payments space at bay. But that’s precisely the kind of win that comes at a cost to everyone else.

As my colleagues Jack Solowey and Jennifer Schulp point out at CoinDesk, the bill’s approach makes it very difficult for anyone other than a depository institution to issue stablecoins. Worse, it all but ensures the Fed will “have the power to decide which banks are allowed to issue stablecoins.”

So, the bill won’t even enhance competition among banks.

Congress would do much more for American consumers by starting over and avoiding the Biden administration’s approach to regulating stablecoins. Aside from being so anticompetitive, this approach makes little sense because it treats fully backed stablecoin issuers as if they are banks.

This extreme position even conflicts with remarks in 2022 by Treasury Under Secretary for Domestic Finance, Nellie Liang. Perhaps Liang misstated the administration’s policy position, but she publicly agreed that stablecoin issuers who back tokens with low-risk assets do not need to be regulated as if they are commercial banks.

On this point, Liang was right.

Issuing fully backed tokens is not the same as taking deposits and making loans, and it is not creating new money. Issuing fully backed stablecoins merely tokenizes existing money, kind of like creating digital poker chips. It makes no sense to regulate these issuers as if they are commercial banks. Even under the current legal definition of a bank it’s a stretch to say firms are in the business of banking if all they’re doing is issuing fully backed stablecoins.

Just as importantly, there is absolutely no reason that stablecoin issuers should be given access to FDIC insurance or the Fed’s discount window, and now is the perfect time to create a legal framework that explicitly prohibits it.

Providing a simple framework for fully backed stablecoins, one that prohibits fraud and makes it easy to verify reserves, is a no brainer. It’s a great way to let people figure out if the technology is worthwhile. If the fully backed tokens work as some people think they will, it will only strengthen the payments system and the status of the U.S. dollar. There is no downside.

If, however, they stay on the current path, Congress and the administration will all but ensure that innovation in the payments sector continues to occur outside the United States.

Ironically, while the Fed is normally quick to defer to Congress on what its mission should be, it has waded directly into the question of stablecoin regulation. In June 2023, for example, Fed Chair Jerome Powell told Congress that the Fed does “see payment stablecoins as a form of money,” and that leaving the Fed with a weak regulatory role in stablecoins and “allowing a lot of private money creation at the state level would be a mistake.”

It’s hard to fault Powell, or anyone at the Fed, for protecting the central bank’s self-interest. But Powell’s comments are way off on the money creation issue. In the first place, the United States still has more state-chartered banks than national banks, and they do engage in private money creation. But, again, issuing fully backed stablecoins—tokens that represent existing money—is not private money creation.

Regardless, Congress should ignore the Fed’s attempt to further entrench itself into regulating the payments sector because the Fed’s ever-expanding regulatory role—not just in the narrow payments sector—is already counterproductive. The federal financial regulatory framework, of which the Fed is an integral part, has repeatedly failed to maintain financial stability or protect taxpayers.

Rather than doubling down and further expanding the federal regime, Congress should provide a straightforward legal framework that fosters competition in financial markets. A great place to start is with the payments sector and stablecoins, but they should wait and start over rather than continue on the current path.

To date, most cryptocurrency innovation—just like most other advances in U.S. payments technology—has been taking place outside of the banking sector. Congress is responsible for this problem and should fix it.