HFSC Stablecoin Hearing

House Financial Services Committee

Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins

Tuesday, February 8, 2022

Topline

• The hearing focused on stablecoin risk and benefits, state regulation, and financial inclusion with much of the questioning examining fundamental concepts surrounding stablecoins.
• Liang mostly repeated recommendations and findings in the PWG report and declined to advocate for highly specific legislative proposals other than IDIs as issuers.

Witnesses

• The Honorable Nellie Liang, Under Secretary for Domestic Finance, U.S. Department of the Treasury

Opening Statements
Chairman Maxine Waters (D-Calif.)

In her opening statement, Waters discussed the end of Facebook’s digital currency Diem after intense scrutiny. She then discussed risks of stablecoin to financial stability and the President’s Working Group on Financial Market’s (PWG) Report on Stablecoins report outlining risks of stablecoin to market integrity, investor protection, and illicit finance.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry stated the need for legislation to direct regulatory action, if there should be, on stablecoin. He explained the lack of statutory law around digital assets, broke down a list of options around stablecoin regulation, and warned against regulating out of fear. He then outlines multiple issues missing from the PWG report, including the potential benefits of stablecoin.

Testimony
The Honorable Nellie Liang, Under Secretary for Domestic Finance, U.S. Department of the Treasury

In her testimony, Liang expressed Treasury’s support for clear and consistent regulation of stablecoins and concern for issues related to illicit finance, user protection, and systemic risk. She outlined the President’s Working Group (PWG) recommendations, including limiting issuance of stablecoins to insured depository institutions (IDI); giving supervisors of stablecoin issuers authority to set risk management standards for critical activities related to use of stablecoin as a means of payment; and certain measures to reduce concerns related to concentration of economic power. She then discussed the prudential risk of stablecoins, regulatory gaps in money transmitter requirements, securities regulation, and commodities regulation. She also outlined two additional digital assets issues, including regulation of intermediaries in digital asset markets and systemic risk that could result from the build-up of leverage against digital assets.

Question & Answer

Technology Companies

Waters asked if technology companies should not be allowed to create their own stablecoin or other currencies and if they should be subject to heightened scrutiny. Liang emphasized the report’s statement that only banks should issue stablecoin. She then outlined recommendations in the report for Congress to consider whether commercial entities could be providers and what wallet providers can do with transaction data.

Stablecoin Risks

Waters asked if backing stablecoins only with the dollar and U.S. Treasuries is enough to alleviate concerns of the PWG report. Liang explained a few risks identified in the report, including run risks and operational concerns, which require risk management standards to ensure that the payment system maintains its integrity.

McHenry asked if the federal government should avoid the taxpayer risk of making banks that may need a federal bailout the issuers of what the report paints as volatile stablecoins. Liang said regulators are in an uncomfortable position but that regulation is about where risk should reside. She added that if stablecoins are backed by quality assets, their risk is low and can form a stable payment system.

Rep. Emanuel Cleaver (D-Mo.) asked about consumer protection, and Liang said market regulators, the Consumer Financial Protection Bureau (CFPB), and bank entities are taking steps to protect investors and address fraud, misleading advertising, and manipulation. Rep. Joyce Beatty (D-Ohio) asked about lack of regulation, and Liang said investors need to understand risks when making stablecoin investments. Beatty asked if we should be advising investors and consumers to wait, and Liang said they should be aware of the risk.

Reps. Jim Himes (D-Conn.) and Josh Gottheimer (D-N.J.) asked what to watch out for related to systemic risk in this space. Liang said the value underlying stablecoin needs to not be based on more and more leveraged positions, which increases financial stability risk. She added that another risk is too close of a connection to the traditional financial system, and that unregulated stablecoin is a potential run risk and systemic risk for the financial system. Rep. Madeleine Dean (D-Pa.) asked if we are at risk of another bubble. Liang said volatility of unbacked assets is very high and that investors need to understand that risk and added that the risks and costs of a bubble are high when prices are supported by leverage or they are connected to highly leveraged banks. She also said that currently, digital assets are bearing the losses and gains largely on their own and that high leverage in a volatile asset can cause problems for financial stability.

State Regulation

McHenry asked about current federal law governing stablecoins or digital assets. Liang said there are laws applicable to stablecoins as an investment asset, for illicit finance, and for consumer protection but that no laws are directly about stablecoin. Reps. Barry Loudersmilk (R-Ga.), Bryan Steil (R-Wisc.), and McHenry asked about input from state regulators and the relevance of state regulatory frameworks. He then asked if PWG consulted with state regulators for the report. Liang said PWG consulted with state regulators for the report, that the PWG believes that a less fragmented regulatory framework is preferred, and that the report’s recommendations build on state frameworks and aims for consistency.

Standards for Assets Backing Stablecoin

Rep. Nydia Velazquez (D-N.Y.) asked for elaboration on the PWG report recommendation for standards for assets backing stablecoins. Liang said current market regulators can enforce market integrity and protect investors and that a regulator should be able to attest to the quality of assets backing stablecoin and oversee the entire arrangement of a stablecoin being used for payments. Rep. Trey Hollingsworth (R-Ind.) asked what type of assets should qualify as high quality. Liang said high quality assets would include be cash, Treasury securities, and possibly reserves in a central bank.

Financial Inclusion

Reps. Ann Wagner (R-Mo.) and David Scott (D-Ga.) asked how stablecoin can reduce barriers to financial inclusion and lower transaction costs. Liang said stablecoin can reduce the cost of payment and serve the underbanked who are more comfortable conducting payments on their iPhones. She added that stablecoin can make payments faster and cheaper and that the PWG report recommendations address the risks to consumer protection.

Rep. Gregory Meeks (D-N.Y.) asked about the report recommendation to require issuers to be IDIs, to what extent that recommendation was analyzed within the context of the President’s Executive Order (EO) on promoting competition as well as the EO on racial equity, and if the PWG considered the recommendation’s impact on competition and racial equity. Liang said a more consistent, comprehensive regulatory framework would benefit competition and that reiterated benefits for underbanked and underserved communities.

Rep. Al Lawson (D-Fla.) asked how the federal government should position disadvantaged groups to take advantage of digital assets. Liang explained Treasury’s new initiative on digital assets and the need to introduce digital assets to consumers, highlight the risks and opportunities, and explain the distinctions between types of digital assets.

Rep. Sylvia Garcia (D-Texas) and Meeks asked what we can do to make sure that the little guy is not left out while only big issuers can participate. Liang said the IDI proposal creates some barriers to entry but that there is a lot of flexibility in a new charter.

Recommendations, Proposals, and Legislation

Rep. Brad Sherman (D-Calif.) asked for specific legislative proposals, to which Liang responded that proposals that include an IDI as an option would be in the appropriate direction. Rep. Roger Williams (R-Texas) asked what Liang did to consult the private sector when creating the report. Liang said PWG spoke to industry and that many in industry are comfortable with the idea of an IDI bank charter.

Rep. French Hill (R-Ark.) asked if Liang would support a federal money transmission license. Liang said that is a possibility worth exploring.

Rep. Bill Foster (D-Ill.) asked how to proceed on traceable digital identity for crypto assets generally and if Treasury needs specific guidance from Congress on how to proceed. Liang said that principles of security and privacy can be in conflict and that this is an area for legislation. She added that how to secure personal data within the context of digital assets is an area for Congress to legislate.

Gottheimer asked if all stablecoin issuers should be subject to Know Your Customer (KYC) requirements and anti-money laundering laws. Liang said FinCEN has a framework in place to address these issues and is improving its framework.

Rep. Jake Auchincloss (D-Mass.) asked if there are measures recommended to mitigate systemic risk for stablecoin. Liang said, ideally, there would be a way to quantify leverage risk, but that currently does not exist.

Supremacy of the Dollar

Reps. Blaine Luetkemeyer (R-Mo.), Ritchie Torres (D-N.Y.), John Rose (R-Tenn.), and Andy Barr (R-Ky.) asked about maintaining the supremacy of the U.S. dollar. Liang said stablecoins backed by the dollar should be put under a regulatory framework to preserve the necessary stability to support the supremacy of the dollar. She also stated that issuers have a natural incentive to use the U.S. dollar to back stablecoin and that stablecoins that can deliver a stable value would benefit the U.S. dollar.

Securities Regulation

Rep. Bill Huizenga (R-Mich.) asked why securities regulation was not discussed in the report. Liang said the PWG mandate was to identify whether stablecoin would have the appropriate regulatory framework and to identify gaps in regulation. Rep. Ted Budd (R-N.C.) asked if stablecoins should be treated as securities, and Liang deferred to the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).

Central Bank Digital Currency (CBDC)

Barr asked if stablecoins issued in a regulatory framework can coexist with a CBDC. Liang said the two are not mutually exclusive. Rep. Juan Vargas (D-Calif.) asked if stablecoin risks could be corrected by CBDC. Liang said it would depend on the kind of features the CBDC would offer, that CBDC is still being investigated by many central banks, and that it could be years before introduction once the decision to be introduced was made.

IDI Regulation

Himes asked if full IDI regulation would be necessary with a fully backed stablecoin. Liang said the full set of banking regulations do not need to be applied to a stablecoin issuer that does only stablecoin issuance. Reps. Anthony Gonzalez (R-Ohio) and William Timmons (R-S.C.) also asked about an IDI framework, and Liang reiterated the report’s recommendation for issuers to be IDIs.

Financial Stability Oversight Council (FSOC)

Reps. Alex Mooney (R-W.V.) and Budd asked for a timeline for Congressional action before FSOC steps in. Liang said FSOC monitors issues on an ongoing basis but that FSOC action is not a substitute for legislation.

Inflation

Rep. Stephen Lynch (D-Mass.) asked if the introduction of stablecoins undermines the Federal Reserve’s ability to control inflation. Liang said that is a concern with large technology firms with networks that could create a closed loop.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.