Last week, Politico reported that negotiations on a bipartisan bill to regulate stablecoins had broken down. Based on the discussion draft—the one that hasn’t been officially released even though it seems like everyone in Washington, DC has seen a copy—it’s probably good that negotiations broke down.

The best part of the draft is that the House Committee on Financial Services is not trying to enact the President’s Working Group recommendation to “require stablecoin issuers to be insured depository institutions.” That heavy‐​handed approach would be counterproductive because it would perpetuate some of the worst features of the federal regulatory system and likely shut off future financial innovations.

Competition is a key driver of technological improvements and advancement. Limiting stablecoin issuers to insured depository institutions would limit competition and, therefore, stifle those improvements. That’s not a win for consumers or the U.S. economy, so it’s good that the bill avoids limiting stablecoin issuers to depository institutions.

The bill still has problems, though, because it is based on the same principles that have been misguiding U.S. financial regulations for decades. Namely, Congress continues to craft legislation based on the idea that the federal government should protect investors from losing money.

It is extremely unlikely that this Congress will do anything to fix this broader problem in its final days, but there is no need to further entrench it. These failed ideas need to be left in the past. Still, as Politico reports:

Chair Maxine Waters (D‑Calif.) and Rep. Patrick McHenry (R‑N.C.) have spent the better part of the last three months negotiating a bill that would subject the companies behind stablecoins—dollar-pegged digital assets that are typically used by crypto traders—to Federal Reserve oversight and new reserve requirements to assure that customers could be made whole in the event of insolvency.

This is the wrong approach. It leads directly to Congress and federal agencies dictating exactly what Americans should and can invest in, and exactly who can provide those investment opportunities. It substitutes federal officials’ judgement for that of investors and financial service providers under the faulty assumption that federal officials know best. And it leads to riskier, narrower markets, leaving Americans with more turmoil and federal bailouts rather than more diverse markets that are better able to withstand disturbances.

It is true that federal officials justify their approach in the name of protecting the stability of the entire financial system. But not only do they fail by this measure, they aim at the wrong target. They proclaim what’s in “the public’s” best interest and deny individuals the right to move their money as they see fit.

If there was any reason to believe that federal officials could succeed with this approach, maybe there would be a reason to listen. But no matter how many times Janet Yellen and her fellow regulators say it, “innovation without adequate regulation” is not what typically causes “significant disruptions and harm to the financial system.”

The United States has had 15 banking crises since 1837, a total that ranks among the highest of all developed countries. It is one of only three developed countries with at least two banking crises between 1970 and 2010.

The notion that there was massive deregulation in the financial sector prior to 2008 is false. The idea that federal regulators were not monitoring systemic risk prior to the crisis is false. It is also false that banking regulators were in the dark about activity in the so‐​called shadow banking sector.

It is true, though, that massive financial risks built up prior to 2008 because of the expansion of two government‐​sponsored enterprises. The rules and regulations for capital requirements magnified this risk because they resulted in virtually every U.S. commercial bank’s balance sheet looking the same.

Yet, few in Congress appear ready to back away from the business‐​as‐​usual approach to regulation. Instead, they want to use the same principles that gave the world the “appropriate” risk weights for mortgage‐​backed securities and derivatives to design the stablecoin market for safety.

To say that Americans should be skeptical is an understatement.

Congress should not dictate the number of days in which a stablecoin issuer must redeem its stablecoins. It should not dictate exactly which assets all issuers can legally use as reserves. It should not predetermine which other activities a stablecoin issuer can engage in, or whether non‐​financial companies can own stablecoin issuers. Congress certainly should not be in the business of imposing a ban on any types of stablecoins.

Despite popular arguments, Congress should not design legislation to prevent so‐​called runs by people using stablecoins. Aside from the fact that the stablecoin market remains a tiny portion of broader financial markets, making systemic risk claims vague and imaginary, a federal stability mandate is not the right solution.

But if members of Congress truly want to promote greater financial inclusion for businesses and retail customers, then they should take a less rigid approach. Doing so would promote more resilient markets through broader financial diversity.

That is why Cato scholars recently proposed a simple stablecoin framework based on preventing fraud and promoting transparency. It would provide basic collateral requirements and establish a baseline for transparency. Congress does not need to do more than that, and they can see to it that all kinds of businesses could issue payment coins. (Incidentally, Senator Toomey (R‑PA) released a discussion draft that gets much closer to this ideal than the proposal circulating from the House Financial Services Committee.)

Providing a legal framework that gives consumers more options and better protection against fraudulent behavior is the way to go. And it’s probably worth waiting till 2023 for that kind of bill.