Back to General Resources

SBC Stablecoin Hearing

Senate Committee on Banking, Housing, and Urban Affairs

Examining the President’s Working Group on Financial Markets Report on Stablecoins

Tuesday, February 15, 2022

Topline

  • While generally agreeing on the need for some form of regulation, Democrats focused on the risks associated with stablecoin while Republicans emphasized the need to foster innovation.
  • Toomey and Warren touched on their respective legislative efforts around stablecoin.

Witnesses

Opening Statements
Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown pointed out fraud, scams, theft, price swings, high fees, and lack of investor protections and oversight in crypto and compared the current situation to the run up to the financial crisis. He added that crypto is not money and is designed for speculation. He then cited the President’s Working Group on Financial Markets (PWG) Report on Stablecoins message that without regulation, stablecoins can endanger the economy, payments systems, and American’s hard-earned money. Brown explained that ordinary consumers cannot actually redeem their stablecoins for dollars from the company that issues them and that only institutions like hedge funds can redeem stablecoins, while issuers can delay redemptions or refuse them entirely. He also stated that allowing more people to trap their money in risky, speculative investments is not the kind of financial inclusion we need. He emphasized the need for a strong, proactive approach from regulators and Congress to limit stablecoins’ risks for working Americans and that this will not be the last Senate Banking Committee hearing on stablecoins.

Ranking Member Pat Toomey (R-Pa.)

In his opening statement, Toomey discussed the benefits of stablecoin and their potential to serve all the traditional functions of money. He added that a less restrictive and more appropriately tailored approach can prevent issues like run risk and then explained his stablecoin policy principles and legislation, which would preserve the current state registration regime, clarify that banks may issue stablecoin, and establish a new stablecoin charter. The bill would also require issuers to disclose assets backing stablecoins, undergo audits, and adopt redemption requirements.

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

In her testimony, Liang stated that stablecoin regulation should be clear and consistent, referenced the PWG Report, and recommended legislation to ensure that stablecoins are subject to appropriate federal prudential oversight, including by: 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 also addressed the prudential risk of stablecoins, regulatory gaps including money transmitter requirements, securities regulation, and commodities regulation, regulations regarding stablecoin issuers, and digital assets and distributed ledger technology (DLT).

Question & Answer

Stablecoin Backing

Brown asked if there is a risk that stablecoins are not backed dollar for dollar, and Liang said yes and that redemption issues create run risk. He then asked if those run risks are disclosed, and Liang said whether they are disclosed varies by issuer. Sens. Mark Warner (D-Va.) and Bob Menendez (D-N.J.)  asked if we can ensure sufficient backing for stablecoin, and if there is sufficient backing currently. Liang said some stablecoins provide audits of their backing assets and post them. He then asked if we should be concerned about the lack of transparency and volume in the assets being traded. Liang sympathized with those concerns and emphasized Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) efforts on investor protection, adding that stablecoin are a smaller subset of digital assets.

Menendez asked how Treasury intends to increase transparency so that market participants disclose assets backing stablecoin. Liang said the PWG report is in favor of disclosing backing assets but that disclosure and transparency are not enough to prevent run risks.

Sen. Cynthia Lummis (R-Wyo.) asked what kind of stablecoin backings protect consumers. Liang said high quality reserve assets and protections provided by oversight of the entities that support stablecoin as a payment, like custodial wallets and liquidators.

Issuance

Brown asked if Amazon or Walmart could start their own stablecoin. Liang said there is nothing stopping commercial companies from issuing stablecoin. Toomey asked if a narrow bank charter could accommodate stablecoin. Liang said it would be better to require stablecoins to be issued only by insured depository institutions (IDI), adding that the PWG report recommended financial firms to be issuers.

Lummis asked about insured depository institution status for stablecoin issuers. Liang stated that the PWG proposal to limit stablecoin issuance to banks does not necessarily mean that stablecoins need deposit insurance and that it would depend on the circumstances. Lummis also said that limiting stablecoin-issuance to banks would seem to limit issuance to the biggest banks.

Central Bank Digital Currency (CBDC)

Sen. Mike Rounds (R-S.D.) asked if stablecoins and a CBDC can coexist, to which Liang said she sees no reason why not. Rounds asked where the stablecoin framework should exist in the federal government. Liang said a consistent, unfragmented regulatory framework is preferred.

Risks

Menendez asked for Liang’s assessment of the level of implementation by our global partners in anti-money laundering and what Treasury’s efforts are going forward. Liang said Treasury has been leading the work in the Financial Action Taskforce and that implementation of standards is not even across jurisdictions. Sen. Elizabeth Warren (D-Mass.) asked if stablecoins, having contributed to fraud and money-laundering, are an emerging threat or a threat that could become systemic. Liang said they pose a risk.

Sen. Bill Hagerty (R-Tenn.) asked if a fully reserved stablecoin would pose a substantial run risk compared to run risk on a fractional reserve bank. Liang described the difference between money market funds (MMF) and stablecoins, explaining that MMFs are an investment and that stablecoins are a payment method.

Sen. Chris Van Hollen (D-Md.) said he wants to protect innovation but make sure we protect consumers and asked if there any protections in place currently for if a stablecoin went belly-up. Liang said there are no standards, that it would depend on what backed that stablecoin, and consumers could be out of luck.

Sen. Jon Ossoff (D-Ga.) asked about the principal risks posed by the growth of the stablecoin market. Liang said investors runs, disruptions in the payment system, and the increased risk of higher market concentrations are the three risks that Treasury identified.

Supremacy of the Dollar

Hagerty commented that we should make America a desired jurisdiction to do this rather than push this activity to an outside market. Liang agreed, adding that stablecoins that are stable are an important component of preserving the U.S. dollar as the global reserve currency.

Regulation and Legislation

Warren asked if, assuming she believes stablecoins are a serious, emerging threat, Liang has advised FSOC to use the tools that Congress gave it to mitigate threats before they get out of hand. Liang said FSOC is discussing these issues, including consumer protection, investor protection, and illicit finance. She added that PWG is making recommendations that compliment existing regulatory authority and that FSOC would act if necessary. Warren also said she was writing a bill to put guardrails around crypto. Van Hollen asked about FSOC’s power and if the executive branch has the authority to protect consumers with respect to stablecoin equivalent of depository insurance or protections from errors or fraud. Liang said that area requires legislation, and each agency will take actions consistent with their mandates, adding that FSOC has some tools but is not a substitute for a comprehensive framework.

Sen. Steve Daines (R-Mont.) asked which federal agencies can issue rules on stablecoins and where they derive their authority. Liang deferred to individual agencies and said that, currently, the SEC and CFTC are issuing guidance on crypto assets, but that no agency has the authority over stablecoins to address runs and prevent disruptions in the payments system. She added that stablecoin issuers are pursuing banking charters and that this is a possible path forward. Daines asked if a clear regulatory framework would be a catalyst for widespread adoption of digital assets. Liang said it would be a catalyst for innovation as well. Daines asked if it would it be reasonable for the stablecoin landscape to migrate offshore absent encouragement in the U.S. Liang said they will migrate to places with clearer regulations.

Sen. Catherine Cortez Masto (D-Nev.) asked if stablecoin issuers have to register as a money services business under FinCEN’s federal regime. Liang responded yes. Cortez Masto asked if Liang felt that FinCEN has the framework to prevent illicit finance as it pertains to crypto. Liang said yes and that they lead some of the international work.

Sen. Kyrsten Sinema (D-Ariz.) asked how to balance the competing priorities of protecting consumers and innovation. Liang said a clear and comprehensive framework would balance these and that stablecoins would have to be stable and provide payment services offered in a reliable way.

Sinema asked if the Treasury will work closely with Congress to ensure that the crypto tax provision from the infrastructure bill is implemented according to Congressional intent. Liang said Treasury does not want to squash crypto assets but to collect taxes from those who owe them.

Ossoff asked what regulations Liang recommends for which Treasury currently lacks statutory authority. Liang said there should be a federal agency to ensure that issuers have to be depository institutions. Ossoff also asked if regulators have the statutory authority to impose reserve or other prudential requirements. Liang said they do not.

For more information on this hearing, please click here.

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