On April 19th 2023, the House Financial Services Committee Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing entitled “Understanding Stablecoins’ Role in Payments and the Need for Legislation.” The witnesses in the hearing were:
- Adrienne Harris, Superintendent, New York State Department of Financial Services
- Dante Disparte, Chief Strategy Officer, Circle
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Austin Campbell, Professor of Business, Columbia Business School
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Jake Chervinsky, Chief Policy Officer, Blockchain Association
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Delicia Reynolds Hand, Director of Financial Fairness, Consumer Reports
Here is an associated piece of stablecoin legislation drafted by Chairman Patrick McHenry (R-NC) and Ranking Member Maxine Waters:
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Committee Chairman Patrick McHenry (R-NC) and Subcommittee Chairman French Hill (R-AR) said that the bill circulated last Congress and attached to today’s hearing is not perfect yet, but it still represents a significant step towards creating an environment that fosters stablecoin innovation while still imposing rigorous requirements for maintaining transparent reserves.
- Committee Ranking Member Maxine Waters (D-CA) criticized Republicans for attaching draft stablecoin language to the hearing, saying that if Republicans planned to move ahead with the bill, Democrats would have to develop their own legislation. Though Waters was originally a key part of negotiations for this bill, she said that recent crypto market events meant that the Committee needed to start from scratch on legislation.
SUMMARY
Opening Statements and Testimony
Subcommittee Chairman French Hill (R-AR)
We have made significant headway with our work on stablecoins. Ensuring that stablecoins must have 1:1 reserves and comply with redemption requirements significantly reduces run risks. This legislation also creates strong, much-needed transparency for stablecoins. Our goal is to create multiple ways for issuers to come into compliance. We must prevent regulatory arbitrage. There must be a sense of urgency to pass this legislation because innovators in this space are leaving the U.S. for more reasonable jurisdictions. The ongoing turf war between the SEC and the CFTC is unhelpful and unsustainable.
Subcommittee Ranking Member Stephen Lynch (D-MA)
Stablecoins, if well designed and properly regulated, could support faster payments and more inclusive payment options, but they present a variety of risk factors that are not currently subjected to regulatory oversight. Stablecoins are rarely used for payments and are more typically used to facilitate speculative trading. We should be pursuing the digital dollar and Fed Now payments as a safer way to improve payment systems. I am not sure why last Congress’s stablecoin legislation is being considered again since it is not cognizant of the recent disasters in the crypto space.
There should not be a state-level path for the issuance of stablecoins. I also have concerns with non-bank entities being allowed to issue shadow banking products like stablecoins without FDIC insurance.
Committee Chairman Patrick McHenry (R-NC)
We spent significant time working on this legislation in a bipartisan way. We also had numerous negotiations with the Fed and Treasury on this legislation.
Committee Ranking Member Maxine Waters (D-CA)
While we did work extensively on this legislation, we did not complete negotiations or update this legislation in response to FTX and banking collapses. This bill no longer represents any final word on these negotiations.
Adrienne Harris, Superintendent, New York State Department of Financial Services
There are three key elements to the DFS Stablecoin Guidance: strict reserve requirements, confidence in redeemability, and transparency. Any stablecoin approved by the Department and issued by a DFS-regulated virtual currency entity must be one-to-one backed at all times by cash or cash equivalents held in custody with U.S. state- or federally-chartered depository institutions with deposits insured by the Federal Deposit Insurance Corporation and/or with asset custodians approved in advance by DFS. Entities must adopt clear policies which allow for redemption not more than two full business days after the issuer receives a redemption request. Issuers are required to provide public bi-monthly attestations on the underlying reserves to provide the marketplace with the transparency needed to have confidence in their assets.
Strong regulations have drawn virtual currency companies to do business in New York, and we have seen these requirements protect customers, keep issuers safe and sound, and hold bad actors to account.
Dante Disparte, Chief Strategy Officer, Circle
Rather than disrupting traditional financial systems, we have seen growing acceptance of USDC as a dollar settlement option among major financial services firms and a broad ecosystem of developers, businesses, and individuals. While there are blurred jurisdictional boundaries for stablecoin regulation, payment stablecoin legislation can build on strong foundations that balance states’ rights and risk-adjusted Fed supervision. A comparable regime for bank and non-bank issuers can build on this federated approach and operate with a level-playing field.
The rest of the world is not waiting for the U.S. to create a workable regulatory approach to stablecoins, and many jurisdictions have already created comprehensive systems with clear treatment for payment stablecoins. If the U.S. does not act on a national level, we should expect future fraudulent offerings like Terra-Luna. In the face of continued rapid growth as well as a broad crypto market correction, the time is now for U.S. policymakers to act. Delivering a bill to the White House that simultaneously addresses the clear risks that have emerged with stablecoins, while establishing clear rules of the road such that the U.S. dollar continues to be the leading digital currency of the internet can advance U.S. leadership and economic competitiveness.
Austin Campbell, Professor of Business, Columbia Business School
Stablecoins are neither radically innovative and in need of special treatment nor a dire threat to the financial system designed to launder vast sums of money. They are fairly mundane basic cash instruments, but they are a key tool for expanding the reach of the dollar. Stablecoin wallets are also significantly easier to create and maintain than bank accounts, making stablecoins a valuable tool for financial inclusion. A large problem that we are facing today is the total lack of clarity created by regulatory confusion that is directly pushing these markets outside of the U.S. The biggest winner of this confusion has been Tether, an offshore stablecoin that provides little transparency or consumer protection.
Payment stablecoin policy should hinge around several key tenets. Stablecoins should have clear reserve guidelines that restrict assets to cash or cash equivalents; a bankruptcy remote form factor for reserves; appropriate KYC/AML processes; mandatory transparency through published reserve holdings; and should only be allowed to pay interest to holders if their wallets are known to the issuer, just like a bank account. It is also vital that it is clear that stablecoins are not securities, which would restrict transfer and trading. There should be both a state and federal pathway for stablecoins.
Jake Chervinsky, Chief Policy Officer, Blockchain Association
Neither the SEC nor the CFTC have the existing regulatory authority to comprehensively regulate stablecoins under current law, and despite claims by the SEC, they are clearly not securities under the Howey test. While stablecoins are likely commodities under the Commodities Exchange Act, its regulatory authority over spot trading in commodities is limited to fraud and price manipulation. Accordingly, absent fraud or manipulation, the CFTC lacks authority to regulate stablecoin markets well.
When considering legislation for payment stablecoins, Congress should apply some basic principles. Legislation should focus on custodial stablecoins. Legislation should provide a regulated path for banks and non-banks. Legislation should address the quality of stablecoin reserves. Legislation should set forth operational requirements to protect consumers. Legislation should clearly delineate regulatory authority on the federal level.
Delicia Reynolds Hand, Director of Financial Fairness, Consumer Reports
The last couple of years have shown that even in the areas meant to usher in more stability, consumers can be caught in a vicious cycle of the boom and bust of crypto experimentation. There continues to be no uniform and meaningful regulatory framework in the U.S., potentially creating significant risks for the entire country. The potential risks of stablecoins are significant, and they are simply too big to place on unsuspecting consumers. This very complexity tied to the state of these technologies – crypto adolescence – makes it hard to assess risk and danger for the most vulnerable communities. Congress must implement appropriate regulation before stablecoins are a risk to financial stability.
The bill introduced in advance of this hearing shows a failure to integrate lessons from the FTX and recent banking collapses. Perhaps one of the most notable things missing from this bill is the absence of any explicit recognition, consultation, or authority for the SEC, given the agency’s active role in this space and the number of interventions it has brought on behalf of consumers. This is most unfortunate as the bill goes further than the last Congress to outline consultation with the states, a role for FinCEN and recognizes even the CFPB’s authority, the lack of any role for the SEC is conspicuously absent from the bill. This bill needs explicit clarity on how the SEC can and should regulate stablecoins.
Discussion
Hill (R-AR): The CFTC and SEC are taking contradictory positions in court on whether stablecoins are commodities or securities. What is the impact of this conflict? Disparte: Regulatory turf wars are not helpful. Virtually every other country in the world treats payment stablecoins as electronic money and banking innovation, not commodities or securities; Campbell: Stablecoins fundamentally act like money. The SEC’s views are like arguing that JP Morgan’s bank deposits should be treated as securities.
Hill (R-AR): What should be the role of state regulators for stablecoin issuance? Harris: State regulators should play an important role. We believe that there should be a multi-level approach akin to what exists for banks.
Lynch (D-MA): Does the legislation tied to this hearing address the risks of stablecoins? What are the risks of allowing stablecoin issuers access to Fed accounts and tools without banking regulations? Reynolds Hand: The primary risk is the association of stablecoins with the banking system. We need a bill that strengthens rules around comingling of customer funds and conflicts of interest. There also needs to be legislation to prevent a debtor-creditor relationship so that owners of coins are not hurt disproportionately in bankruptcies. Stablecoin issuers need to be held to the same consumer protections requirements as banks.
Lucas (R-OK): What assets can back a stablecoin? Campbell: There are different types of stablecoins. There are crypto-backed, algorithmic, and fiat-backed stablecoins. The fiat-backed stablecoins have been successful, but the other two types are highly risky and should not even be called stablecoins.
Lucas (R-OK): What were the lessons learned from the collapse of SVB? Disparte: Many conversations have centered around the risks stablecoins might pose to banks, but we saw the risks of banking to stablecoin business.
Waters (D-CA): Cryptocurrency was clearly a key cause of the SVB failure. How did crypto cause the SVB failure? Harris: Crypto did not cause the SVB failure at all. Crypto withdrawals were proportionate to any other industry.
Davidson (R-OH): How do we give consumers confidence that stablecoins are legitimate? Is it concerning that Tether, the largest stablecoin issuer, is located offshore? Harris: The biggest issue is transparency and ensuring that assets are backed 1:1; Campbell: Tether became large because of their first-mover advantage coupled with regulatory uncertainty in jurisdictions like the U.S.
Foster (D-IL): If we want to prevent illicit financial activities, we cannot allow any self-custody on anonymous transactions. We need to have all digital transactions directly traceable to a digital identity to allow for extradition. Campbell: Stablecoins should and often do have freeze and seize capabilities. This does not require digital identity, as the assets can be returned from digital accounts.
Timmons (R-SC): What will happen if Congress does not create legislation for stablecoins? Chervinsky: The clear answer is that these projects will be developed in other jurisdictions. This will likely mean that we cannot ensure they live up to our standards or are even pegged to the dollar.
Torres (D-NY): Would this bill preempt state authorities? Harris: This bill does not specifically call for that, but in practice it likely would do that.
Houchin (R-IN): How does the European framework for stablecoins differ from ours? Disparte: MiCA is perhaps the most comprehensive framework for digital assets in the world. We believe that their treatment of stablecoins would allow for all the activity we support to be easily exported to other jurisdictions. MiCA’s stablecoin requirements would be comparable to the requirements laid out in the draft language considered today.
Flood (R-NE): Why is maintaining strong state regulators important? Is it still possible for new companies to compete with incumbents in this space? Harris: We see the importance of this in traditional banking regulation. States can often be more nimble in addressing new concerns. New York, Illinois, and other states are leaders in regulating digital assets; Disparte: We need to preserve a bank and non-bank pathway for stablecoin issuers to ensure competitiveness. Payments’ competition is critical.
Nickel (D-NC): How would effective stablecoin legislation bring clarity to digital asset markets? Would stablecoins enforce the dominance of the U.S. dollar? Chervinsky: It would send a message that the U.S. is open for business to this technology, which is not the message that has been sent so far. It is Congress’s role to answer the question of how to regulate digital assets; Disparte: We have had a partnership with refugee programs to design digital cash assistance programs for Ukrainian refugees. No other modern payment system could have moved at this pace and avoided fraud and abuse.