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Understanding Stablecoins’ Role in Payments – House Financial Services

House Committee on Financial Services

Subcommittee on Digital Assets, Financial Technology, and Inclusion

Understanding Stablecoins’ Role in Payments and the Need for Legislation

Wednesday, April 19, 2023

Topline

  • Republicans discussed the importance of building off the negotiations around stablecoin legislation during the 117th Congress to keep innovation in the U.S.
  • Democrats said the current legislation does not account for risks given recent market events.

Witnesses

  • The Honorable Adrienne A. Harris, Superintendent, NY Department of Financial Services (DFS)
  • Dante Disparte, Chief Strategy Officer and Head of Global Policy, Circle
  • Austin Campbell, Adjunct Assistant Professor of Business, Columbia Business School
  • Jake Chervinsky, Chief Policy Officer, the Blockchain Association
  • Delicia Reynolds Hand, Director, Financial Fairness, Consumer Reports

Opening Statements

Subcommittee Chairman French Hill (R-Ark.)

In his opening statement, Hill highlighted the Committee’s work in the last Congress on a proposal to bring payment stablecoin issuers under a regulatory framework. He said he shares the Chairman’s commitment to working across the aisle to pass this legislation and build on the foundation of this work. Hill also highlighted multiple aspects of the proposal, including that it requires payment stablecoins to be backed one for one by high quality liquid assets and requires issuers to comply with redemption requirements, monthly attestation and disclosures, and risk management standards. He said that a goal of his is to provide different ways for issuers to maintain compliance. Finally, the chair expressed the urgency of passing this legislation, as reports indicate that digital asset developers are leaving the U.S. for countries with more established regulatory frameworks.

Subcommittee Ranking Member Stephen Lynch (D-Mass.)

In his opening statement, Lynch said that the last several months have marked the effective collapse of much of the crypto industry, including the massive failures of Silicon Valley Bank (SVB) and Signature Bank, which was a crypto-centric bank. Lynch mentioned the bipartisan investigation last Congress which was used to examine the risks to investors, market integrity, and financial stability associated with stablecoins, and also to examine their role in potentially promoting financial inclusion. The Ranking Member said that stablecoins are rarely used for payments, but mostly used to facilitate speculative cryptocurrency trading and investments. He also noted that they are vulnerable to runs and pose risks to monetary policy, national security, financial security, and fair competition. He added that he thinks it may be worth revisiting whether they are even needed since they are hardly used for the purposes intended and advocated for advancing the FedNow system and a publicly issued digital dollar.

Finally, Lynch said that the proposed bill does not address the risks that result from the comingling of customer funds, nor how conflicts of interest will be managed between issuers and exchanges. He also expressed concerns about allowing non-bank entities to issue bank-like products.

Full Committee Chairman Patrick McHenry (R-N.C.)

In his opening statement, McHenry said the hearing is a continuation of the stablecoin work from last Congress. He said that while the bill is imperfect in many ways, it is important to acknowledge the intellectual framework around a modern financial regulatory regime at the federal level.

Full Committee Ranking Member Maxine Waters (D-Calif.)

In her opening statement, Waters noted that they did not finish the negotiations last Congress. She said that the current bill does not represent any final work or reflect what has happened since then. She suggested that if there is going to be a Republican bill, Democrats will create their own as well before coming together to work out the differences.

Testimony

The Honorable Adrienne A. Harris, Superintendent, NY Department of Financial Services

In her testimony, Harris said that strengthening regulatory oversight of virtual currency is critical to protecting consumers and ensuring the stability of institutions. She explained that New York’s virtual currency framework is the most comprehensive in the country, built on the model of full scope banking supervision, but tailored for unique considerations of the industry. She added that the core provisions of the framework are robust capital standards, strong consumer protections, sophisticated cybersecurity requirements, and strong anti-money laundering provisions. She also said that the DFS stablecoin guidance requires one to one reserving, redemption fulfilment within two business days, and public independent audits. Finally, Harris argued that the committee should build on the dual banking regulatory system, as preempting states’ ability to regulate innovative financial services would be harmful.

Mr. Austin Campbell, Adjunct Assistant Professor of Business, Columbia Business School

In his testimony, Campbell said that it is important to define stablecoins and understand that they are not new and are actually relatively mundane financial instruments. He noted that in frameworks like the New York DFS has, they look like conservative banks or government money market funds that the U.S. already knows how to address and regulate. He added that for small to medium size stablecoins, the state level is fine, but when large and systemic, they should exist at the federal level. Finally, Campbell argued that the current system is unworkable and means that firms are moving offshore, which is bad for jobs, the dollar, status as the reserve currency, and national security.

Mr. Jake Chervinsky, Chief Policy Officer, the Blockchain Association

In his testimony, Chervinsky argued that the current financial system is stuck in the analog era of last century, constrained by intermediaries who act as gatekeepers and middlemen to outdated infrastructure that has failed to keep pace with the digital age. He added that the payment system is slow, inefficient, unreliable, and inaccessible to many, but public blockchains are the solution. He also said that the status of the U.S. Dollar as the global reserve currency is under threat by foreign adversaries, and the best way to maintain dominance is to spread stablecoins all over the world.

Mr. Dante Disparte, Chief Strategy Officer and Head of Global Policy, Circle

In his testimony, Disparte said that it has been five years since the first USD Coin (USDC) was issued, which can be considered dollar-denominated payment stablecoin. He added that there is a growing acceptance of the USDC as a dollar supplement option among major financial firms, including Visa, MoneyGram, and WorldPay. He also said that enterprise use-cases for USDC run the gamut, from Treasury management to easing the exacting cost and slow speeds of cross-border payments, which remain stubbornly high, inconveniently slow, and with little meaningful competition. Disparte continued by explaining that Circle has always operated under the highest prevailing regulatory standards for electronic stored value and money transmission in the U.S. and noted that the U.S. framework empowers state-banking and money transmission supervisors to foster, develop, and regulate the payment industry at the state level. He concluded by saying that Circle has gone from a mere idea ten years ago to a business with 1,000 employees in 35 states and 12 countries, with strong prospects and desire to become a US listed company.

Mrs. Delicia Reynolds Hand, Director, Financial Fairness, Consumer Reports

In her testimony, Hand noted how cryptocurrency can be appealing to consumers whom traditional financial services have never appropriately served. Currently, however, consumers are caught in a vicious cycle of boom and bust of crypto experimentation. She said that it is a public policy disaster that there are no uniform regulatory frameworks in the U.S., and expressed support for commonsense, consumer-first, comprehensive regulation. The bill under discussion today creates concerns for Harris, however. Specifically, she noted that:

  • It creates the potential for regulatory arbitrage.
  • It outlines an important role for federal oversight and requires parent companies of bank subsidiaries that are issuers to be insured depository institutions, but it does not include the same requirements for non-bank issuers.
  • It does not outline how payment activities conducted or facilitated by the issuers or their coins will have adequate consumer protections.

Finally, Harris expressed support for additional language associated with custodial wallets, moving away from outdated notice and disclosures, prohibiting comingling of funds, requiring a 24-hour calendar day redemption requirement, and ensuring no debtor/credit relationships.

Question & Answer

Stablecoins as Securities vs. Commodities

Hill asked about the conflict between stablecoins as securities versus commodities. Disparte responded that there is a proliferation of digital assets in circulation, but most countries treat stablecoins under an equivalent national regime that would conform with electronic money rules and as a payments and banking innovation, not as securities or commodities innovation. Hill also asked if non-interest bearing payment stablecoins should be considered securities. Campbell said no, as these work like money and operate like banking products.

The Role of State Regulators

Hill also asked about the role that state regulators should play. Harris replied that state regulators can nimbly respond to changes in the marketplace, and added that the dual regulatory framework used in banking should be duplicated for cryptocurrency and stablecoins. Rep. Mike Flood (R-Nebr.) asked the same question, and Harris reiterated the ability of states to be nimble.

Federal Regulation

Hill noted that one of the benefits of creating regulatory certainty in America is preserving innovation at home and preserving the U.S. dollar’s status as the global reserve currency.

Lynch asked about the risks that come with allowing stablecoin issuers to act like banks without the regulatory framework that provides protection to depositors and integrity to the system. Hand said that clarity is needed, as non-bank entities cannot be treated like banks without the equivalent restrictions on access to consumers and consumer protections.

Rep. William Timmons (R-S.C.) said that many stablecoin products are fleeing the U.S. for countries that have clear frameworks for payment stablecoin issuance. He asked about the impact of legislation not being enacted. Chervinsky replied that stablecoins will be issued in other countries, the U.S. will not be able to ensure stablecoins are based on U.S. principles, and many may not be based on the dollar.

Rep. Warren Davidson (R-Ohio) said that Congress needs to create legal clarity. He also asked why Tether has been able to become the largest stablecoin in the ecosystem. Campbell explained that they are the largest player because of a first mover advantage. He added that Tether has not faced regulatory uncertainty, and they do not have concerns about conforming with something strict or demanding like the New York DFS guidance.

Rep. Erin Houchin (R-Ind.) asked how the regulatory regime in the EU compares to the proposal attached to this hearing. Disparte said that the EU framework contemplates broader activities than just payment stablecoins, but it does have comparable aspects such as the disclosures highlighted in the hearing. Houchin also asked about the implications of the U.S. not being the first mover in this space. Campbell replied that legislation on fiat-back stablecoins is emerging around the world, many of which are substantially similar to what was proposed last Congress. He said that the U.S. can do better than these other options, but if Congress does not act those will be the best options.

Rep. Sean Casten (D-Ill.) noted that Section 103 of the draft legislation says that a stablecoin issuer could ask for approval from a state, and if the state accepts then the Federal Reserve would have to approve it within 60 days. He asked if this could create a situation in which states just ask for stablecoins to backstop risk. Campbell pointed to the reserve guidelines within the bill. Casten also asked how to remove the moral hazard in the legislation. Hand said a clear backstop is needed, and at a minimum the Federal Reserve should have the ability to reject applications.

Rep. Wiley Nickel (D-N.C.) said that without clear rules of the road, this innovative technology could move overseas. Chervinsky agreed, adding that stablecoin legislation would also send a message that the U.S. is open for business to this technology, which is not the message they have been receiving from other regulators.

Recent Volatility in the Crypto Market

Lynch also asked about the risks that have been exposed in recent months. Hand said that one primary risk is that despite recent instability and volatility that has impacted the fiat currency banking system, the financial industry continues to invest in USDC at the risk of consumers. She said that clear activity limitations that reflect the issues of recent months are needed, including limitations on commingling and self-dealing.

The New York State Regulatory Regime

Rep. Frank Lucas (R-Okla.) asked about the supervisory agreements in the New York framework. Harris explained that there is a licensing and a chartering regime in New York to give companies the flexibility to choose a regime that matches their business model without sacrificing regulatory rigor. Harris also said after they have a license/charter, the state negotiates a supervisory agreement to tailor oversight to risk and that there is also a pre-approval process for every new product or material change in business a licensee seeks to offer.

Waters asked what Harris has learned about assets and whether or not they are credible. Harris said that the state did not license FTX, Voyager, or Celsius because they did not meet the standards. She also noted that no New York licensed entity has gone bankrupt.

Rep. Ritchie Torres (D-N.Y.) said that he will not support any legislation that preempts the DFS or encroaches on the sovereignty of New York. He said that stablecoin issuance should have both a federal and a state option. Torres also said that SEC Chair Gary Gensler asserts that an alternate regulatory framework for crypto would undermine securities law. He asked if this hypothesis has been proven right or wrong in New York. Harris said that the state’s authorities do not depend on definitions of securities, commodities, or currencies, adding that they have blanket authority over virtual assets, which has proven successful. Torres said that New York DFS is the most rigorous regulator of crypto in the country, and Gensler’s argument has been definitively disproven in New York.

The Failures of SVB and Signature Bank

Lucas also noted that SVB was a bank that Circle used to manage cash reserves and asked Disparte about the lessons learned from the SVB collapse. Disparte said that Circle learned they have to protect the business from risks in banking. He added that now, as they advocate for this legislation, they can separate payments activity from banking because Circle – like any other company that relies on banks for payments – had an exposure with uninsured deposits in the banking system.

Waters noted that there was just a big bank failure in New York, and asked how it related to crypto. Harris said that it is a misnomer that the failure of Signature Bank was related to crypto. She explained that Signature banked a healthy proportion of crypto customers, but only 20% of the deposits that left the bank were crypto. She said there was a broad base of depositors that left the bank.

Ransomware and Illicit Finance

Rep. Bill Foster (D-Ill.) said that the U.S. needs the equivalent of a license plate on every digital wallet. The license plate is anonymous under most circumstances, but it can be de-anonymized if need be.

Rep. Brad Sherman (D-Calif.) said that Apple Pay is not as good as what the crypto world promises to deliver in a future decade, but it is way better than what the crypto world delivers now. He added that payment systems using the dollar will get better. Sherman also asked if there would be anything stopping a state from creating a regulatory system perfect for tax evaders. Hand said currently no, because there is no overarching federal framework. Sherman said that cryptocurrency is all about a fair system to have a concealed currency for tax evasion and drug dealers.

For more information on this meeting, please click here.

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