[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


                     DIGITAL ASSETS AND THE FUTURE
                      OF FINANCE: THE PRESIDENT'S
                       WORKING GROUP ON FINANCIAL
                     MARKETS' REPORT ON STABLECOINS

=======================================================================

                             HYBRID HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 8, 2022

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 117-68
                           

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
47-106 PDF                 WASHINGTON : 2022                     
          
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York           BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            ANN WAGNER, Missouri
ED PERLMUTTER, Colorado              ANDY BARR, Kentucky
JIM A. HIMES, Connecticut            ROGER WILLIAMS, Texas
BILL FOSTER, Illinois                FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio                   TOM EMMER, Minnesota
JUAN VARGAS, California              LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey          BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas              ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida                   WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam            TED BUDD, North Carolina
CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York             JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts      BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina           LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan              WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania         VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York   PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts

                   Charla Ouertatani, Staff Director
                           
                           
                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 8, 2022.............................................     1
Appendix:
    February 8, 2022.............................................    65

                               WITNESSES
                       Tuesday, February 8, 2022

Liang, Hon. Nellie, Under Secretary for Domestic Finance, U.S. 
  Department of the Treasury.....................................     4

                                APPENDIX

Prepared statements:
    Liang, Hon. Nellie...........................................    66

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Written statement of the American Bankers Association........    72
    Written statement of the Bank Policy Institute...............    79
    Written statement of the Chamber of Digital Commerce.........    87
    Written statement of Creative Investment Research............   104
    Written statement of the Credit Union National Association...   115
    Written statement of the Electronic Transactions Association.   116
    Written statement of the Independent Community Bankers of 
      America....................................................   118
    Written statement of the National Association of Federally-
      Insured Credit Unions......................................   121
    Written statement of the North American Securities 
      Administrators Association, Inc............................   123
Liang, Hon. Nellie:
    Written responses to questions for the record from Chairwoman 
      Maxine Waters..............................................   128
    Written responses to questions for the record from 
      Representative Anthony Gonzalez............................   153
    Written responses to questions for the record from 
      Representative French Hill.................................   148
    Written responses to questions for the record from 
      Representative Nikema Williams.............................   146

 
                     DIGITAL ASSETS AND THE FUTURE
                      OF FINANCE: THE PRESIDENT'S
                       WORKING GROUP ON FINANCIAL
                     MARKETS' REPORT ON STABLECOINS

                              ----------                              


                       Tuesday, February 8, 2022

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:01 a.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the committee] presiding.
    Members present: Representatives Waters, Velazquez, 
Sherman, Meeks, Scott, Green, Cleaver, Perlmutter, Himes, 
Foster, Beatty, Vargas, Gottheimer, Lawson, Axne, Casten, 
Torres, Lynch, Adams, Tlaib, Dean, Garcia of Illinois, Garcia 
of Texas, Williams of Georgia, Auchincloss; McHenry, Lucas, 
Posey, Luetkemeyer, Huizenga, Wagner, Barr, Williams of Texas, 
Hill, Emmer, Zeldin, Loudermilk, Mooney, Davidson, Budd, 
Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil, Timmons, 
and Sessions.
    Chairwoman Waters. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Before I begin, I will call up the two resolutions noticed 
for today's hearing, reauthorizing the Committee's Task Forces 
on Artificial Intelligence and Financial Technology, and ask 
unanimous consent that the resolutions be adopted.
    Without objection, it is so ordered.
    Today's hearing is entitled, ``Digital Assets and the 
Future of Finance: The President's Working Group on Financial 
Markets' Report on Stablecoins.'' I now recognize myself for 5 
minutes to give an opening statement.
    Today's hearing is part of this committee's ongoing review 
of digital assets. This committee has been at the forefront of 
congressional oversight of cutting-edge technology in financial 
services. Through our Task Forces on Artificial Intelligence 
and Financial Technology, and our Digital Assets Working Group 
of Democratic Members, we have continued to explore how 
emerging technologies impact our financial system, including 
the emergence of cryptocurrencies.
    Soon after learning of Facebook's plans to launch a global 
stablecoin in 2019, I asked Facebook to immediately pause its 
work until regulators and Congress had an opportunity to review 
the project. I invited Mark Zuckerberg to testify at a hearing 
where we scrutinized their plans, and I led a bipartisan 
delegation to Switzerland to meet with officials to discuss 
their plans to oversee the Libra Association, which was later 
rebranded as Diem.
    After deep scrutiny from me, the members of this committee, 
and our nation's regulators, Diem relented and recently sold 
its assets, effectively, and, I hope, permanently ending 
Facebook's misadventures in cryptocurrency. I am pleased that 
our committee's leadership on this issue has made an impact, 
including helping to focus the attention of regulators on these 
issues.
    Last December, the committee convened a first-of-its-kind 
hearing with a panel of cryptocurrency CEOs, building on 
earlier subcommittee hearings to understand where crypto 
products, services, and technologies were heading and how they 
should comply with applicable financial regulations. From the 
start, our committee has recognized that the explosive growth 
of digital assets presents a variety of risks and opportunities 
for our economy and communities, especially communities of 
color that have been left behind by our financial system. Their 
voices must be heard in the decision-making and regulatory 
process.
    Today's hearing focuses on stablecoins, which are a subset 
of cryptocurrencies pegged to a reserve asset such as the U.S. 
dollar. Stablecoins are primarily used in the United States to 
facilitate trading, lending, or borrowing of other 
cryptocurrencies. Troubling investigations have shown that many 
of these so-called stablecoins are not, in fact, fully backed 
by reserved assets. Moreover, due to speculative trading and a 
lack of investor protections, stablecoins could even threaten 
U.S. financial stability.
    The President's Working Group on Financial Markets (PWG) 
published its report on stablecoins, reviewing the regulatory 
landscape of this fast-growing type of cryptocurrency. The 
report outlined various risks that stablecoins may present to 
market integrity, investor protection, and illicit finance.
    The report also highlighted systemic risk concerns due to 
the threat of stablecoin runs when they are not fully backed, 
including concentration of economic power concerns, and 
regulatory gaps in effectively overseeing the stablecoin 
market. These risks could harm both ordinary users of these 
products, as well as our financial system overall, and the PWG 
recommended that Congress take action.
    As more people invest in and use cryptocurrencies, 
including stablecoins, the committee will continue its efforts 
to look at how they are affecting many aspects of our lives and 
our financial system. In particular, regulators and 
policymakers must work to ensure that any innovation in this 
space is responsible, that it provides robust consumer and 
investor protection, that it mitigates environmental impact, 
and that financial inclusion is front and center.
    We will also continue to investigate the development of a 
U.S. central bank digital currency (CBDC) that may provide a 
safe, stable, and secure method of instantaneous digital 
payment.
    I thank the ranking member for his recent letter on this 
committee's approach on digital assets, and I hope to continue 
working with him in a bipartisan way as we move forward.
    I now recognize the ranking member of the committee, the 
gentleman from North Carolina, Mr. McHenry, for 5 minutes.
    Mr. McHenry. Thank you, Madam Chairwoman.
    I do welcome that bipartisan approach, and I am grateful 
that we are undertaking these hearings to learn more before we 
seek to take action.
    Under Secretary Liang, thank you, and I appreciate your 
participation in today's hearing on behalf of the Presidential 
Working Group on Financial Markets.
    What is clear is that we need legislation. We agree on 
that. Regardless of what some may believe, it is our job on 
Capitol Hill to develop legislation to direct regulatory 
action, if there is to be regulatory action. And let me be 
clear, it is specifically the House Financial Services 
Committee that will lead this legislative effort and bring 
clarity to this ecosystem.
    Currently, there is no Federal law to address digital 
assets. With nearly a quarter of American adults now investing 
in crypto, we must move quickly to put in place a framework 
that clearly defines the rules of the road. The good news is 
that Financial Services Committee Republicans have already laid 
the foundation for the work that must be done to maintain the 
U.S. as a leader in digital assets and the digital asset 
revolution.
    In fact, committee Republicans released a set of principles 
on the central bank digital currency question, one of which 
emphasized the potential that stablecoins hold if issued under 
a thoughtful regulatory framework. The Working Group's report 
outlines a model that could be pursued. However, it does not 
take into account the full picture and the array of options 
available to us. So, let's break that down.
    We know that the Democrat debate here in Washington has 
been focused in the last decade on de-risking the financial 
services arena. Beginning with the Dodd-Frank Act, they have 
talked about de-risking banks in particular.
    And as you state in the President's Working Group report 
here, and as I expect many Democrats will say today, 
stablecoins are viewed as extremely risky. So, what is the 
solution of this Working Group? How do they mitigate this 
alleged risk? Well, they make them all banks. They regulate 
them all as banks, and they give them a Federal taxpayer 
backstop, which is completely the opposite direction we have 
been moving in for the last decade in Washington. We are trying 
to de-risk, not add risk to the Federal taxpayer. So, that 
doesn't make any sense to me.
    Now, let me be clear, I am not saying that there is zero 
risk, but Washington's knee-jerk reaction to regulate out of 
fear will not allow stablecoins to achieve their full potential 
and the myriad of solutions that they may be able to present. 
This new technology, like all financial technology, deserves 
appropriate and thoughtful regulatory approaches.
    The report also includes an analysis of the stablecoin 
market. Yet in this analysis, in this paper, there was 
absolutely no discussion of existing regulatory frameworks for 
stablecoin issuers at the State level. These issuers are 
subjected to a comprehensive set of supervisory regimes, 
including reserve requirements, examinations, compliance with 
anti-money laundering (AML) rules. And that is being done in a 
couple of States. We should be examining all existing 
regulatory frameworks and structures for best practices and 
taking advantage of the lessons learned from those operating on 
the forefront at the State level.
    Another critical component missing from this report was the 
potential benefits of stablecoins, not just the risks, but the 
potential benefits. In this committee, we have witnessed the 
payments industry address shifts in customer and consumer 
demand and the never-ending race to move money faster, cheaper, 
and better. Digital currencies like stablecoins are a natural 
continuation of the same issues we have addressed in this 
committee over the years and, I might add, in a bipartisan way.
    We cannot regulate out of fear of the future. It is 
Congress' role to seek solutions that directly address the 
risks at hand and ensure that the benefits are also part of 
those discussions. Requiring stablecoins to only be issued by 
banks would be a major obstacle for us to continue to foster 
innovation within this nascent industry.
    My friends across the aisle would like to force new 
products into unfitting and often inappropriate existing 
regulatory structures. I think we need to move forward and 
think of this in a new approach.
    And while I recognize the Working Group's inclination to do 
what has been Democrat orthodoxy, I hope that today we can 
think bigger and more comprehensively and discuss the potential 
benefits of increased use of stablecoins. The policies we 
develop must promote private sector innovation and foster 
competition to build a resilient product without creating risk 
in other areas.
    We should not, as this report does, limit our focus to only 
the risks, and we should not focus only at a Federal structure. 
We should understand what is being done at the State level as 
well. But to only focus on the risks would be shortsighted and 
would not allow us to realize the potential to the digital 
ecosystem of stablecoins and what the consumers want.
    Madam Chairwoman, thank you. Thank you for this 
undertaking, and I hope we can have a thoughtful discussion 
about what is a really important subject matter for so many 
Americans and for us here on Capitol Hill. I look forward to 
working with you in the months to come.
    Chairwoman Waters. Thank you, Ranking Member McHenry.
    At this time, I want to welcome our distinguished witness, 
the Honorable Nellie Liang, who is the Under Secretary for 
Domestic Finance at the United States Department of the 
Treasury.
    You will have 5 minutes to summarize your testimony. You 
should be able to see a timer that will indicate how much time 
you have left in your testimony. And without objection, your 
written statement will be made a part of the record
    Under Secretary Liang, you are now recognized for 5 minutes 
to present your testimony.

 STATEMENT OF THE HONORABLE NELLIE LIANG, UNDER SECRETARY FOR 
       DOMESTIC FINANCE, U.S. DEPARTMENT OF THE TREASURY

    Ms. Liang. Thank you very much for having me today.
    Chairwoman Waters, Ranking Member McHenry, and members of 
the committee, thank you for the opportunity to testify this 
morning on the stablecoin report by the President's Working 
Group on Financial Markets (PWG).
    The PWG is chaired by the Secretary of the Treasury, and is 
composed of the Federal Reserve Board, the Securities and 
Exchange Commission, and the Commodity Futures Trading 
Commission. It was formed by a Presidential Executive Order in 
response to the 1987 stock market crash, and regularly produces 
reports on financial market issues for the President, which may 
include recommended legislative changes.
    For the stablecoin report, the PWG was joined by the 
Federal Deposit Insurance Corporation and the Office of the 
Comptroller of the Currency.
    stablecoins are part of an emerging set of digital assets, 
activities, and services that could have profound implications 
for the U.S. financial system and economy. The distinguishing 
feature of stablecoins, as compared to other digital assets, is 
that they are designed to maintain a stable value relative to a 
reference asset, often the U.S. dollar. Stablecoins have grown 
rapidly from a market capitalization of roughly $5 billion at 
the start of 2020, to approximately $175 billion today.
    The PWG report focused on stablecoins because the offer of 
a stable value means they have the potential to be widely used 
as a means of payment by households, businesses, and financial 
firms. This potential use could create significant benefits for 
stablecoin users and payments transactions, but it could also 
pose risks.
    The PWG report focused on three prudential risks associated 
with the use of stablecoins for payment. First, run risk, a 
scenario in which loss of confidence in the stablecoin triggers 
a wave of redemptions, which could have broader spillover 
effects for the financial system.
    Second, payment risk, including operational issues that 
could interfere with the ability of users to store stablecoins 
or use them to make payments.
    And third, concerns related to concentration of economic 
power, for example, if a stablecoin provider scaled quickly and 
gained market power as a provider of payments.
    The PWG report found significant gaps in authority that 
would address these prudential risks. Some of the largest 
stablecoin issuers operate with limited regulatory oversight, 
raising significant questions about whether their stablecoins 
are adequately backed. Even where a stablecoin issuer is 
subject to oversight, supervisors may not have sufficient 
visibility into the broader operations that support the use of 
stablecoins, which may be distributed among multiple entities.
    Neither State money transmitters nor securities law 
requirements were designed to address the financial stability, 
payment system, or concentration of economic powers for a 
payment instrument that is based on new distributive ledger 
technology. To fill this regulatory gap, the PWG report 
recommended legislation to ensure that stablecoins are subject 
to a consistent and comprehensive framework that is 
proportionate to the risks posed. Such legislation would 
complement existing authorities with respect to market 
integrity, investor and consumer protection, and illicit 
finance.
    Specifically, the report recommended limiting issuance of 
stablecoins to insured depository institutions, giving 
supervisors of stablecoin issuers visibility into the broader 
stablecoin arrangement and the authority to set risk management 
standards for critical activities related to the use of 
stablecoins for payment, and certain measures to reduce 
concerns about concentration of market power.
    In developing this recommendation for stablecoin issuers to 
be insured depository institutions, the PWG report relied on 
the flexibility that the banking agencies would have to adjust 
for differences between stablecoin issuers and traditional 
commercial banks and to adjust to new products and structures 
that may emerge over time.
    As noted at the beginning of my testimony, stablecoins are 
a subset of a larger and quickly evolving digital assets 
market. The Treasury Department supports responsible 
innovations from digital assets but is also committed to 
protecting against risk to users, the financial system, and the 
broader economy.
    The Biden Administration continues to work across the 
agencies to develop a comprehensive strategy for all digital 
assets, with the goals of ensuring that cryptocurrency is not 
used for illicit finance, addressing risks related to financial 
stability and consumer investor protection, and furthering 
financial inclusion and our continued leadership in the global 
financial system.
    We look forward to partnering with Congress on these 
critical issues as we make progress, and I appreciate the 
committee's leadership in this area.
    Thank you again for the opportunity to testify this 
morning. I would be happy to answer any questions from the 
committee.
    [The prepared statement of Under Secretary Liang can be 
found on page 66 of the appendix.]
    Chairwoman Waters. Thank you, Under Secretary Liang.
    I now recognize myself for 5 minutes for questions.
    Ms. Liang, after much scrutiny from this committee, as well 
as from regulators, the Diem Association, which was founded by 
Facebook, announced last month that it had sold its stablecoin 
project to a bank, effectively exiting the cryptocurrency 
market. Facebook attempted many times to enter the 
cryptocurrency market, including in 2019 when Facebook formed 
the Libra Association in Switzerland to create a stablecoin.
    However, Facebook slowed down its activities after this 
committee held hearings and raised significant concerns leading 
to a number of Libra Association members pulling out. To 
address systemic risk and concentration of economic power 
concerns, the President's Working Group report, among other 
things, recommends that stablecoin issuers should be required 
to restrict their activities to limit affiliation with 
commercial entities, similar to the separation we impose 
between banking and commerce.
    In your view, does that mean technology companies such as 
Facebook that have access to huge amounts of sensitive personal 
data should not be allowed to create their own stablecoin or 
other cryptocurrencies? And if they do, should they be subject 
to heightened scrutiny?
    Ms. Liang. Thank you, Chairwoman Waters, for that question.
    I would answer that in two parts. I think the first 
question is, should technology companies be allowed to issue 
stablecoins? The report recommends that stablecoins be issued 
by insured depository institutions. And in that sense, we would 
not recommend that stablecoins be issued by technology 
companies.
    This is the issue of the separation of banking and 
commerce, and it has been an issue that Congress has grappled 
with for many years. In this case, we believe stablecoins, as a 
payment instrument, should not be issued by a technology firm.
    Second, there is a question of whether technology providers 
could be providers of other parts of the stablecoin 
arrangement, including custodial wallet providers and providing 
some of the other services involved with the use, the storage, 
and the transfer of stablecoins for payments.
    The recommendation in the report is for Congress to 
consider this particular issue as to whether commercial 
entities could be providers. A more targeted solution that was 
included in the report is to consider restrictions on what 
wallet providers can do with the customer transactions data 
that they would have access to, and whether there are 
limitations on privacy and security that could address the 
concerns about concentrations of economic power if commercial 
companies were involved in the stablecoin arrangement.
    Chairwoman Waters. Thank you.
    Stablecoins have grown at an incredible rate in the past 
year, going from $30 billion late last year, to over $170 
billion today. However, simply labeling something as stable or 
overly relying on one-to-one ratio does not, in itself, mean it 
maintains a stable value. We learned that lesson painfully when 
money market funds crashed in 2008 and needed a Federal bailout 
to protect investors and markets.
    Recently, some stablecoin issuers transitioned from having 
their stablecoins being backed by various forms of debt 
securities to now supposedly being backed only by the U.S. 
dollar and short-term U.S. Treasuries. Do you think this is 
enough to address the systemic risks and the run risk concerns 
of stablecoins that the President's Working Group report 
highlighted?
    Ms. Liang. Thank you for the question.
    The stablecoins that the PWG report focused on, focused on 
the function that they could provide because of their stable 
value to be widely used as a means of payment by households, 
businesses, financial firms, and governments. We identified 
three risks, and one is the run risk that you referred to, and 
that is the ability, if investors were to lose confidence in 
the quality of the assets backing the stablecoin, there could 
be a run, which has potential systemic risk consequences.
    But in addition, stablecoin is not just the creation and 
redemption of the stablecoin. It is also, as a payment 
mechanism, involved in the operations that involve the storage, 
and the transfer of stablecoins for payments. And that is what 
the President's Working Group added to the conversation, that 
that part of the arrangement is also important for supervisors 
to have some visibility to and to establish some risk 
management standards to ensure that the payment system retains 
its integrity.
    So, while an insured depository institution allows for 
sufficient confidence in the value of the assets backing the 
stablecoin, the supervision also allows some oversight of the 
overall payment arrangement.
    Chairwoman Waters. Thank you very much.
    The gentleman from North Carolina, Mr. McHenry, the ranking 
member of the committee, is now recognized for 5 minutes.
    Mr. McHenry. Thank you, Chairwoman Waters.
    And Under Secretary Liang, thank you. Thanks for your 
engagement and for running points on this report, and I do 
appreciate the conversation that we have had and that you have 
had actively on Capitol Hill, on both sides of the aisle. I 
think that is very good.
    But just so we are on the same page, I want to make sure 
that we are looking at this in a similar fashion. Is there 
current Federal law that governs stablecoins or, frankly, 
digital assets, for that matter?
    Ms. Liang. There are Federal laws that apply to various 
aspects of stablecoins that address illicit finance, address 
stablecoins as an investment asset, and consumer protection 
laws would apply to stablecoins.
    Mr. McHenry. But nothing that is explicitly about 
stablecoins?
    Ms. Liang. Nothing explicitly, but the function, yes.
    Mr. McHenry. And that's what we try to address, right? So, 
yes, of course. And by that same measure, something 100 years 
in the future, we currently have laws for, so that is a pretty 
expansive response you have given me.
    But there is no notion of a stablecoin in current law or 
digital assets in current law that is explicit about those 
things. This question wasn't meant to be a, ``gotcha.'' The 
answer is no.
    Ms. Liang. I do not believe so. I don't believe so, yes.
    Mr. McHenry. Right. That is it. I'm sorry. This was 
supposed to be the easy question.
    Ms. Liang. Absolutely.
    Mr. McHenry. And I think we can have some consensus here on 
how we get ahead, but one area that I think this committee 
should examine is the current State regulatory frameworks. Did 
the Working Group consult with State regulators on their 
existing frameworks?
    Ms. Liang. Yes, the Working Group did consult and talk to 
State regulators, and a number of State regulators have 
increased their expertise in this area. The PWG report believes 
that a more consistent, less fragmented framework is preferred.
    Mr. McHenry. And does that also mean that the President's 
Working Group would think that we shouldn't have State-
chartered credit unions or banks? By that same notion, that 
would be like saying we should only have Federal banks.
    To that point, you consulted with these regulators, but 
there was no mention of the existing State regulatory 
framework. Why was that? Why did the President's Working Group 
make that decision to not mention existing frameworks and 
lessons learned from those existing State frameworks?
    Ms. Liang. The Working Group proposed a consistent 
framework--
    Mr. McHenry. I understand what you proposed.
    Ms. Liang. --built on the State regulators. So, a proposal 
for an insured depository institution (IDI) could be a State-
chartered or a Federal-chartered bank.
    Mr. McHenry. But what I am asking is a separate question.
    Look, this is not an adversarial conversation. I think the 
fact that the Administration has put out this report is a 
welcome thing, and you have given one solution to a really 
complex set of industries. But there was no mention of any 
State regulatory framework.
    We know that New York is the most active, and they have a 
very safe, but very robust set of regulations and disclosures. 
But there is no mention of New York. There are no lessons 
learned from the States included in this report, and I was 
interested in why that was, not the question of what you 
reported. I have read the report.
    So why not understand the lessons learned from the States, 
and why was that not included in the report?
    Ms. Liang. Right. There is no explicit reason for why it 
was not included. It was certainly considered as an 
alternative.
    The principal reason is that the State regulatory system is 
fragmented. There is an issuer, and then there are the 
custodial wallet providers, the other parts of the arrangement 
that are subject to different kinds of regulations. There was 
no plenary oversight of the entire arrangement.
    Mr. McHenry. Thank you. I appreciate your response.
    By that same notion, you would like to have a single 
regulator at the Federal level for all financial institutions. 
That didn't succeed in the Dodd-Frank Act.
    I do want to ask about de-risking, though. In the report, 
you outlined that this is an extremely risky proposition of 
stablecoins. But the conclusion here is that you should put 
them in a federally-insured depository institution. With Dodd-
Frank, we attempted to de-risk those institutions. And what you 
are adding to explicitly with this report is a riskier aspect 
that would have a Federal backstop and a Federal taxpayer 
backstop in the unwinding authority granted under Dodd-Frank 
for these institutions and specifically this product.
    Shouldn't we be in the game of de-risking rather than 
adding to the risk of a Federal bailout or, yes, for these 
products?
    Ms. Liang. I think in the current environment, regulators 
are in a bit of an uncomfortable position. Stablecoins are 
increasing. They have grown rapidly, as you have said. There 
are risks. Its regulation is about where those risks should 
reside and how to protect users and investors.
    If stablecoins are backed by high-quality assets, their 
risk is quite low, and they can form a building block, a 
cornerstone of a payment system. But if they are not supported, 
and there are questions about the quality of the assets in the 
reserve pool backing them, then they create risk.
    Mr. McHenry. Madam Chairwoman, I appreciate the extended 
time we both got to share on this.
    Chairwoman Waters. Yes.
    Mr. McHenry. I do think we can learn a lot from the State 
regulatory framework, what they have done well, and the things 
that we can do better.
    Chairwoman Waters. Thank you, Mr. McHenry.
    Mr. McHenry. I appreciate the engagement, and I yield back 
the balance of my time.
    Chairwoman Waters. Thank you.
    The gentlewoman from New York, Ms. Velazquez, who is also 
the Chair of the House Committee on Small Business, is now 
recognized for 5 minutes.
    Ms. Velazquez. Thank you, Chairwoman Waters, and welcome, 
Under Secretary Liang.
    I would like to ask you about the investigation that was 
conducted by New York Attorney General Letitia James last year, 
which revealed that starting in 2017, the stablecoin, Tether, 
deceived clients and markets by failing to hold reserves to 
back their Tethers in circulation, which was contrary to their 
representations.
    The President's Working Group report highlights the lack of 
standards of reserve assets as a concern and recommends 
legislation which requires stablecoin issuers become insured 
depository institutions. Can you elaborate on this 
recommendation and why it could create standards regarding the 
composition of the reserve assets and information issuers make 
to the public?
    Ms. Liang. Yes. Thank you for your question.
    The issues that you raise are extremely pertinent to the 
first risk that the PWG report identified, which is the risk of 
runs on a stablecoin arrangement because the quality of the 
assets, the composition of the assets backing the coin are not, 
in fact, able to offer stable value perhaps in periods of 
stress. That is, the current market regulators have authorities 
to promote market integrity and to protect investors.
    The proposal for an IDI is to bring the quality and 
composition of assets under a supervisory framework where there 
is a regulator who can attest to the quality of those assets 
backing a stablecoin, and there is a regulator and a supervisor 
who can also oversee the entire arrangement for a stablecoin to 
be used for payment.
    So, that is the core of the approach. We believe it 
provides clarity to stablecoin issuers in terms of a consistent 
framework versus State-level regulations and money transmitter 
licenses in 49 States and allows for beneficial innovation. In 
our outreach, the industry really asked for clarity so they 
could move forward and believed it would facilitate innovation.
    Ms. Velazquez. Thank you, Under Secretary, for that answer.
    Secretary Liang, Puerto Rico has become a favorite location 
for cryptocurrency speculators and investors from the Mainland. 
And the Mainland media--Bloomberg, Rolling Stone, CNN, Data 
Report, Wall Street Journal, and other reports--so at the heart 
of this situation is Puerto Rico's Individual Investors Act, 
which enables wealthy Mainlanders who establish themselves as 
Puerto Rican residents to pay zero tax on capital gains, 
dividends, and interest, making the island particularly 
attractive for cryptocurrency investors.
    Would additional legislative authority from Congress be 
helpful to go after these crypto investors who are attempting 
to use Puerto Rico as a tax shelter and evade IRS reporting?
    Ms. Liang. Congresswoman, I am not familiar with that 
particular Act, the Individual Investors Act. But the Treasury 
Department does believe and works by the principle that 
taxpayers should pay the taxes they owe. I believe maybe 
Treasury officials and the IRS are looking at that issue quite 
closely with respect to crypto transactions, and we would be 
happy to follow up further on this particular situation.
    Ms. Velazquez. Thank you. I yield back.
    Chairwoman Waters. Thank you.
    The gentlewoman from Missouri, Mrs. Wagner, is now 
recognized for 5 minutes.
    Mrs. Wagner. Thank you, Madam Chairwoman.
    Under Secretary Liang, the Financial Stability Board (FSB) 
included high-level recommendations to provide for supervision 
and oversight of global stablecoin arrangements, and I am going 
to highlight all four of them: one, a comprehensive governance 
framework with a clear allocation of accountability for the 
functions and activities; two, effective risk management 
frameworks with regard to reserve management, operational 
resilience, and cybersecurity safeguards; three, transparent 
information necessary to understand the functioning of these 
arrangements; and four, the legal clarity for users on the 
nature and enforceability of any redemption rights and the 
process for redemption, among others.
    These recommendations seek to address one of the critical 
issues, which is the potential for fraud and the mismanagement 
of reserves.
    In December, a number of CEOs discussed their operations 
before this committee, and it seems that based on certain 
issuers' existing regulatory structures at the State level, the 
requirements would meet these high-level recommendations and 
address a number of the risks highlighted in the report.
    Under Secretary Liang, do you share that same view?
    Ms. Liang. Thank you, Congresswoman.
    I think the principles that you laid out under the FSB are 
exactly the principles that the PWG report believes its 
recommendations are trying to meet. I think under the current 
regulatory framework, it does not meet all of those criteria at 
this point in the United States.
    Mrs. Wagner. The CEOs who came before us really, as to 
regulatory structures that they set up and were working with, 
especially at the State level, met these high-level 
recommendations and addressed a number of these risks that were 
highlighted in the report.
    Do you want to--
    Ms. Liang. We have talked to some of the States and have 
talked to supervisors, and I believe that while they believe 
they--under some of the licenses, they have oversight of the 
issuers. And a different look through a different lens at the 
wallet providers and the other kinds of entities that are 
involved in storing, transferring, and allowing stablecoins to 
be used as payment--that is a different set of regulations 
under the money transmitters licenses.
    And there is not plenary oversight of the overall 
arrangement.
    And if stablecoins are going to be used widely as a 
payments mechanism, there is a concern of trying to make sure 
that they can actually perform their function, that there is 
oversight of operations for cyber--
    Mrs. Wagner. Let me just say this. It seems to me that we 
should be examining the best practices under State frameworks 
instead of pretending that they do not exist. Applying a 
uniform regulatory framework to stablecoin issuers will 
discourage innovation and push stablecoin activity and jobs out 
of the United States. We must, I think, ensure that any Federal 
regulatory framework provides clarity and also ensures that the 
regulation fits the activity rather than simply overlaying 
traditional banking regulation over stablecoins.
    Under Secretary Liang, in your opinion, how can stablecoins 
reduce barriers to financial inclusion and lower transaction 
costs?
    Ms. Liang. I think the potential for digital assets and 
stablecoins to improve financial inclusion are high. It can 
reduce the costs of payment, and it can help individuals who 
are unbanked or underbanked if they are more comfortable 
conducting payments on their iPhone than going into a banking 
office.
    So I think there is quite a bit of potential, and there are 
pilot programs to test the use of stablecoins for cross-border 
remittances. And I think that is a very positive, favorable 
development.
    Mrs. Wagner. I would agree with you, and I thank you for 
your testimony.
    I have run out of time, and I yield back, Madam Chairwoman.
    Chairwoman Waters. Thank you.
    The gentleman from California, Mr. Sherman, who is also the 
Chair of our Subcommittee on Investor Protection, 
Entrepreneurship, and Capital Markets, is now recognized for 5 
minutes.
    Mr. Sherman. Thank you, Madam Chairwoman, and thank you for 
having that hearing where we had Mr. Zuckerberg come before us, 
and we pretty much stopped the Libra, which would have been a 
cryptocurrency that had so much money and power behind it with 
Facebook and others that it could have emerged as an everyday 
currency.
    The ranking member talks about State regulation. I will 
just point out that, imagine if we didn't have any Federal 
regulation of State-chartered banks. The FDIC didn't propose 
any capital rules. The FDIC didn't do any audits. It would only 
be a matter of time before there was a race to the bottom, and 
we would have banks operating in my State chartered by some 
other small State, and those banks would be going bankrupt 
because they would have found the jurisdiction that had the 
lowest capital requirements.
    We are told to look at the benefits of these digital 
systems, but it is really just a potential or hoped-for 
benefit. I want a more efficient way to buy a burger. Right 
now, I use a credit card, and the burger company, the seller, 
has to pay a 2- or 3-percent fee, or a debit card might cost 50 
cents.
    But it is unfair to compare the alleged potential of crypto 
to the actuality or current system that we have now. If you are 
going to compare things, you have to compare current with 
current.
    Currently, if I want to buy a burger with a stablecoin or a 
crypto coin, I have to find an Uber, and get them to drive me 
to the one burger stand that is rumored to exist in Cleveland, 
Ohio, where you can use a stablecoin or a crypto coin to buy a 
burger. But I can't find a burger here in Washington, D.C.
    We are told about the risks to investors, and they are 
substantial, and where the stablecoin invests in 
cryptocurrency, you have a joining of two risks. You have all 
of the stablecoin risk with an unstable coin, and then all of 
the risks of the underlying crypto investment.
    But we can't just look at investors. We have to look at the 
risk posed to our payment system, and that is why I am glad, 
Madam Under Secretary, that your report focused on how 
stablecoins and cryptocurrencies are undermining the U.S. Anti-
Money Laundering (AML) and Know Your Customer (KYC) rules. I 
sense sometimes what I call patriotic anarchists, who wave the 
American flag and cheer whenever law enforcement or tax 
enforcement is thwarted.
    Madam Under Secretary, you have a tough job to get a bill 
through Congress, because all of the money and power is on the 
other side. You don't have a political action committee (PAC). 
You don't have gangs of lobbyists. You don't have the arena in 
my city named, ``enforce anti-money laundering dot-com.'' No, 
it's called Crypto.com.
    What you do have is the credibility of knowing that the 
Treasury Department and your affiliated agencies are putting 
the national interests over the pecuniary interests of certain 
investors. But for that credibility to translate into 
legislation, you represent the Working Group, and so I am going 
to ask you to do more work.
    Can you come before us and offer specific statutes that you 
think that we should adopt, rather than just a few sentences of 
explanation? Because if you don't do that, then anything that 
does pass will be considerably weaker than what you are 
recommending.
    Ms. Liang. Thank you.
    We would, of course, be happy to work with the Congress on 
any proposals, and I believe that proposals that include an IDI 
as an option are in the appropriate direction.
    Mr. Sherman. I hope that--and I will make the request 
formal--you will take your recommendations and turn them into 
something very close to or actually statutory language so that 
we know specifically what you are proposing.
    I am told that cryptocurrencies enjoy significant 
investment by those in disenfranchised and minority 
communities. Of course, that was also true of subprime lending. 
Are you concerned that low- and moderate-income people in our 
country, particularly those of color, will be left holding the 
bag if we see a collapse in cryptocurrency or stablecoin?
    Ms. Liang. Of course. Crypto assets broadly, digital assets 
broadly, have the potential for benefits, as you mentioned, but 
there are currently too many incidents of fraud, misleading 
advertising, and the member agencies, as part of the PWG--the 
SEC, the CFTC--are taking actions to try to protect investors 
and consumers.
    Mr. Sherman. Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much.
    The gentleman from Missouri, Mr. Luetkemeyer, is now 
recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman, and thank you 
for being here, Ms. Liang.
    In 2019, the average daily turnover value of the U.S. 
dollar constituted 88 percent of the foreign exchange market 
transactions globally. This dominance by the dollar in the 
global marketplace is a key reason why the dollar remains the 
reserve currency of the world.
    Existence of hundreds of different types of privately-
established cryptocurrency, in my view, presents a threat to 
the dollar's status in global transactions. However, I believe 
that stablecoins backed by the U.S. dollar present a unique 
opportunity to ensure that the U.S. remains the reserve 
currency of the world as the financial services industry adapts 
to new technologies of blockchain cryptocurrencies.
    Despite this critical aspect of stablecoins, the 
President's Working Group on Financial Markets' Report on 
Stablecoins does not mention global competitiveness as a key 
aspect of stablecoin development. I think that is a striking 
oversight.
    I have a couple of questions here. Do you have any concern 
about the number of these cryptocurrencies and how they are 
being established and how they are working? And with respect to 
stablecoins, do you see an opportunity to be able to actually 
help protect the reserve currency status and enhance the U.S. 
dollar? Where would you stand on some of those issues, and can 
you elaborate, please?
    Ms. Liang. Yes. I believe the importance of the U.S. dollar 
and its position in the global financial system is incredibly 
important for the economic well-being of the United States. I 
believe the recommendations to require stablecoin issuers, 
backed by the U.S. dollar, to be put within a regulatory 
framework which ensures that they are, in fact, stable, is the 
best way to promote the U.S. dollar.
    Currently, stablecoins are being issued with limited 
regulatory oversight or outside the regulations backed by the 
U.S. dollar, so they are claiming stable value without any 
assurance that they can provide stable value. I do strongly 
believe the PWG recommendations are highly supportive of 
ensuring the position of the U.S. dollar in the global system.
    Mr. Luetkemeyer. Well, short of regulating and forcing them 
to do this, is there a way to incentivize these stablecoins to 
use dollars as the medium to be matched against, in your view? 
I am not a big fan of regulation. But by the same token, I 
think we have to understand--I think there is a threat here 
with these cryptocurrencies being utilized in a way, 
fortunately, right now everybody will either turn around and go 
back to dollars or the natural currency of their country to 
eventually be able to get their investments back monetized.
    But is there a way we can incentivize the stablecoin folks 
to use dollars, or have you looked into that at all?
    Ms. Liang. I think, currently, they have a natural 
incentive to use the U.S. dollar because it is the global 
currency. I believe the incentives we need to put in place are 
to ensure that it remains the global currency. And I think the 
role of the U.S. dollar is based on the country's respect for 
the rule of law, the strength of its institutions, its economic 
potential, and the depth and breadth of the financial markets, 
not the technology, per se. But it is important, so the 
critical element is the fundamental strength of the dollar, and 
the technology can reinforce it.
    Mr. Luetkemeyer. It is interesting that you make that 
comment, and I appreciate the fact that you believe that in 
order for stablecoins to be successful, we have to have a 
stable economy, and we have to have a stable currency in this 
country. And that is the incentive. So, it makes sense for us 
to continue to work hard to maintain our reserve currency and 
the stability of our money and our country's economy. Thank you 
for that.
    You talked a little bit about, theoretically, a run on 
stablecoins and cryptocurrencies. Has there ever been a run on 
one at this point?
    Ms. Liang. I believe there have been on some smaller 
stablecoins. As you know, this market is evolving very rapidly. 
At times, there could be 50 or 60 different stablecoins pegged 
to the dollar or to another reference asset that might mimic 
the dollar.
    I believe there has been maybe one or two, but these have 
not been large stablecoins at this point.
    Mr. Luetkemeyer. Very good. My time has expired, Madam 
Chairwoman.
    Thank you very much. I yield back.
    Chairwoman Waters. Thank you very much.
    The gentleman from Georgia, Mr. Scott, who is also the 
Chair of the House Agriculture Committee, is now recognized for 
5 minutes.
    Mr. Scott. Thank you.
    First of all, both Chairlady Waters and Ranking Member 
Patrick McHenry raised some of my concerns as well.
    Under Secretary Liang, there is a significant portion of 
our nation's population--Blacks, Hispanics, Asians, and White 
people as well--who are lacking basic access to banking 
services, payment technologies, and financial literacy. So, 
Madam Under Secretary, can you explain how stablecoins connect 
nontraditional banking populations to the broader financial 
system? And what are the guardrails, if there are any that 
exist, to protect these consumers?
    Ms. Liang. Thank you, Representative Scott.
    I believe that stablecoins can promote financial inclusion 
by reducing the cost of payments, by making them faster and 
cheaper. If users are interested, more interested and more 
willing to use technology on, say, their iPhone for payments 
than they would be going to a bank and using a bank. So, I 
believe the costs can be cheaper, and the execution can be 
faster.
    And I think the pilot programs for using stablecoins for 
cross-border remittances is a good example of how stablecoins 
could potentially be used for payments in a significant way and 
in a way that reduces costs and--
    Mr. Scott. But my specific point is, where are the 
guardrails? Do you have any guardrails currently in existence 
to protect these consumers? Because, Under Secretary, wouldn't 
you agree with me that absent a robust legal and regulatory 
framework, one with clear and effective consumer protections, 
there is a very real possibility that without that, the entire 
market could collapse before our very eyes?
    Ms. Liang. The recommendations of the PWG report try to get 
to exactly that risk, that stablecoins as a payment mechanism, 
in fact, offer stable value and can provide a strong 
operational payment structure. And that is the best approach to 
protecting consumers.
    Mr. Scott. Okay. And you sort of opened the door here to 
this President's Working Group report. Tell me, what are their 
recommendations? Where in this report are their recommendations 
to specifically ensure that as stablecoins are adopted into our 
more mainstream market, that there are corresponding increases 
in protections so that ordinary users don't fall through the 
cracks?
    Ms. Liang. In fact, the recommendations are built on the 
idea, on the premise that stablecoins will be growing, continue 
to grow rapidly, and that the guardrails need to be put in 
place to protect users and, in fact--
    Mr. Scott. Okay. In my short time left, what are these 
recommendations?
    Ms. Liang. One is to build on existing securities and 
consumer protection laws. There are complements to those laws 
that exist. But to require stablecoin issuers to be insured 
depository institutions, to require that the custodians--the 
wallet providers, those who manage the reserve assets--to also 
be subject to supervisory oversight to ensure the integrity of 
the payment operations.
    Those are, in my view, and in the President's Working 
Group's view, the best way to protect both consumers and users 
and the payment system.
    Mr. Scott. And do you have that enforcer and target in 
process to enforce these recommendations?
    Ms. Liang. That would be the role of the regulatory and 
supervisory framework.
    Chairwoman Waters. Thank you very much. The gentleman from 
Michigan, Mr. Huizenga, is now recognized for 5 minutes.
    Mr. Huizenga. Thank you, Madam Chairwoman, and I appreciate 
you being here, Under Secretary Liang.
    Under Secretary, I am assuming you may be familiar with 
this, but I just want to make sure. At the end of last year, 
the House Financial Services Republicans released a principles 
position to guide Congress' evaluation of potential proposals 
for a U.S. central bank digital currency, and in that document, 
Committee Republicans noted, ``If Congress contemplates 
authorizing the use of a Fed-issued digital currency, it should 
not impede the development and utilization of stablecoins, both 
those currently in circulation and those yet to be developed.''
    In short, we need to make sure that the private sector is 
leading the way. That is one of the concerns that many of us 
have had. And I will continue to advocate for that because I 
think it is important to remember that issue as we continue 
this discussion on digital currencies.
    I want to move on to my questions here. The SEC is a member 
of the Presidential Working Group on Financial Markets, 
correct?
    Ms. Liang. Correct.
    Mr. Huizenga. Okay. Just about a month or so before the 
release of the report, SEC Chair Gensler stated in an interview 
that stablecoins, ``may have attributes of investment 
contracts, have some attributes like banking products, but the 
banking authorities right now don't have the full gamut of what 
they need and how we work with Congress to sort through that.''
    While that may not be the most clear statement of intent, 
it does suggest that the Chair believes that Congress needs to 
act in order for most or all stablecoins to fall under the 
SEC's regulatory authority. Yet during his testimony to the 
Senate, Chair Gensler stated, in a somewhat contradictory way, 
that, ``some of these tokens have been deemed to be commodities 
and many of them are securities.''
    So, I am curious, will you be able to explain why the 
report did not include any analysis of policy issues under the 
securities laws as they pertain to stablecoins, and was it 
discussed? And again, given that the SEC is a member of the 
Working Group, if it wasn't discussed, why not?
    Ms. Liang. Yes, of course. The President's Working Group 
was convened to review stablecoins as a possible way to improve 
the payment system, and the mandate was to identify whether 
this new possible payment instrument, based on a new 
technology, would have the appropriate regulatory framework, 
and the goal was to identify gaps in regulation.
    As I mentioned in my testimony, this proposal builds on 
existing laws and regulations that apply, including SEC 
regulations that apply to stablecoins as an investment asset or 
a security.
    Mr. Huizenga. Did I miss something? It doesn't look like 
there was any analysis that was actually done on that.
    Ms. Liang. We did not include what the existing securities 
were, but--
    Mr. Huizenga. Hold on. I'm sorry. It is unclear already, so 
why would you not do that analysis? If we don't have a clear 
picture, why would you not have done that analysis?
    Ms. Liang. I think I would need to defer to the SEC for its 
strategies about how to address stablecoins. But its 
authorities are for market integrity and investor protection 
related to the redemption and creation of stablecoins, not for 
their use as a payment instrument.
    Mr. Huizenga. I have 1 minute left, and while I want to 
revisit that, I need to move on to this quickly, because I need 
to have your opinion. In your written testimony this morning, 
you indicated that, ``Some have suggested that stablecoins 
could be regulated either as securities or as money market 
mutual funds.'' Assuming that stablecoins satisfy the 
definition of securities or MMFs, there is a further question 
as to whether these regimes would effectively address the 
prudential risks of stablecoins. And in your view, what are the 
parallels between MMFs and stablecoins and what considerations 
would be helpful for us to consider?
    Ms. Liang. Yes. Thank you for this question. Let me start 
with money market funds that invest in government securities, 
high-quality securities, as if that was the pool of assets 
backing a stablecoin. Investors purchase those with the 
expectation of earning the yield on the underlying assets. It 
is an investment asset.
    A stablecoin can be purchased and used for payments, not 
necessarily investment, and that is what makes stablecoins 
unique. They are that bank-like product that the SEC Chair 
referred to as well as an investment-like product. And that is 
why we believe there was a regulatory gap for which a new 
framework should be considered.
    Chairwoman Waters. The gentleman's time has expired.
    The gentleman from Texas, Mr. Green, who is also the Chair 
of our Subcommittee on Oversight and Investigations, is now 
recognized for 5 minutes.
    Mr. Green. Thank you. Madam Chairwoman, I greatly 
appreciate you having this hearing, as well as the ranking 
member, and to the witness, I have always appreciated you, and 
I thank you so much for what you have shared with us over the 
years.
    Let's talk for just a moment about a particular coin. As 
you have explained, I understand that this is not one of the 
stablecoins, but let's talk about Doge, D-o-g-e, if I am 
pronouncing it correctly. Would you agree that is not a 
stablecoin?
    Ms. Liang. That is not a stablecoin.
    Mr. Green. And one of the things that I have noticed is how 
it has fluctuated. At one time, it had a high, in terms of its 
capitalization, of over $80 billion, and now it is down to 
around $20 billion. And it seems that this was initiated as a 
point of amusement for some persons and it became an investment 
tool for some other persons.
    What do you see as the foundation for this cryptocurrency? 
What is the foundation for it? What is it resting on?
    Ms. Liang. I believe first, I would say that the digital 
asset marketplace is evolving very rapidly. It is changing. It 
is ongoing change for a while. But it is built around a new 
technology that has the potential to radically change how 
different financial services will be provided.
    There are a lot of products being offered, and services 
being provided that investors can evaluate. They should, in my 
view, have the information needed and evaluate the risks they 
take if they choose to invest in them. And they also should 
have the protections that current laws would apply to 
investors. But I think it is difficult for us--for regulators 
and policymakers--to anticipate what this digital asset 
landscape will look like many years from now.
    Mr. Green. Let me ask this question: What are you investing 
in when you invest in this particular piece of cryptocurrency? 
What are you investing in?
    Ms. Liang. Not speaking about any particular product, but I 
believe that people may be investing in the adaptation of this 
new digital technology, this distributed ledger technology, to 
all kinds of services, and its application. And I think there 
is a view in the industry that the more people invest in these 
kinds of assets and get comfortable with them, the potential 
for them to develop new applications continues to grow.
    So I think it is a very open question, which of the 
products currently being provided will be lasting and durable, 
but it is in the position right now that regulators and 
policymakers think it is very difficult to prejudge who the 
winners and losers will be.
    Mr. Green. I concur with your notion that it is difficult 
to prejudge, but I would add this commentary: If you invest in 
nothing, there is a good likelihood that at some point you will 
get what you pay for. And that causes me a good deal of 
concern, because a good many people have assumptions that are 
not necessarily going to be comparable to the facts. And people 
who are investing in coins that have no fiat currency 
associated with them--I know of very little associated with 
some of them--those investments are at a higher risk than some 
others, and that causes me a lot of concern.
    I do believe that at some point we are going to have to 
look at certain coins literally as being without the law. They 
will be without the law, because we cannot allow certain things 
to happen. We just can't allow people to invest in nothing. 
Investing in nothing does not end well, it seems to me. There 
may be some rare occasion where you will get some great 
benefit, but usually you will get what you pay for. And I am so 
grateful to you. Thank you so much.
    Chairwoman Waters. Thank you so very much.
    The gentleman from Oklahoma, Mr. Lucas, is now recognized 
for 5 minutes.
    Mr. Lucas. Thank you, Madam Chairwoman. Under Secretary 
Liang, could you discuss the differences between the types of 
reserve assets that stablecoins hold?
    Ms. Liang. As I mentioned, there are many stablecoins that 
are being offered that are tied to the value of, say, the U.S. 
dollar predominantly. Some of them are backed by Treasury 
securities, and bank deposits. Some of them are backed by 
short-term liabilities such as commercial paper, corporate 
debt, or others. These are self-reported assets, which I 
believe are subject to audit by a private firm. They are not 
confirmed by any regulators. But there is a mix of the reserve 
assets backing stablecoins, and not all of them, we believe, 
would be able to deliver a dollar in stress conditions.
    Mr. Lucas. Which takes me to my next question, if there is 
such a thing, what would a typical assortment of reserve assets 
be? You mentioned every one of these is unique in itself, but 
is there such a thing as a typical assortment of assets in 
these pools?
    Ms. Liang. I think the desired asset pool would be high-
quality assets that could deliver a dollar even under stress 
conditions. But I think the current mix varies across the 
different stablecoin issuers. As I mentioned, there may well be 
50 or 60 different stablecoin issuers out there right now. The 
largest, however, has some corporate, short-term liabilities 
that has not proven to be able to deliver a dollar in the past, 
under stress conditions.
    Mr. Lucas. Exactly, and that takes me to my last question 
in this line of logic, thinking about my predecessor from 
Texas's comments. That mixture of reserve assets, of course, 
would impact a user's ability to redeem stablecoins at some 
future point, correct?
    Ms. Liang. Absolutely.
    Mr. Lucas. So, one would need to be thoughtful.
    Ms. Liang. Absolutely.
    Mr. Lucas. Second question, Under Secretary. The CFTC has 
shown through enforcement action that it has some authority 
over stablecoins. Is it the Working Group's view that the 
Commodity Exchange Act gives the CFTC the full authority to 
audit stablecoins to ensure that the assets backing stablecoins 
are fully accounted for?
    Ms. Liang. I would definitely need to refer you to the CFTC 
on that. The PWG did not try to come to a conclusion about the 
applicability of the securities and the commodities laws. That 
is something their agencies are working on. And as I understand 
it, there are enforcement cases in the courts that are 
addressing this issue. The PWG was looking for gaps in existing 
regulations related to stablecoins as a payment instrument.
    Mr. Lucas. The report touches on how many stablecoins 
aspire one day to be widely used by retail users to pay for 
goods and services and other uses. Can you discuss the current 
barriers stablecoins might face in becoming widely adopted, and 
in your view, would the wide adoption of stablecoins be a 
positive development for the consumer?
    Ms. Liang. I think the potential for stablecoins to be 
widely used is that there are potential benefits, again, in 
faster and cheaper payments.
    The current barriers would--in our outreach, when we were 
doing this study, we spoke to 40 to 50 market participants. And 
one thing that was a common theme was that greater clarity 
about the regulatory structure would be helpful to developers 
and innovators on stablecoins. I also think it is at the 
beginning of adoption. I think adoption of technology can scale 
up very quickly. There are quite a few companies now 
considering whether to issue stablecoins and how to do so. I 
think the potential is there to really improve the payment 
system.
    Mr. Lucas. With that, Madam Chairwoman, I yield back the 
balance of my time.
    Chairwoman Waters. Thank you very much.
    The gentleman from Missouri, Mr. Cleaver, who is also the 
Chair of our Subcommittee on Housing, Community Development, 
and Insurance, is now recognized for 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman, and Under 
Secretary Liang, thank you for being here today and for being 
so candid with us.
    I am following along the same lines that many of my 
colleagues have raised during this discussion. Madam Under 
Secretary, I am suffering from, ``Ponzi paranoia.'' I know you 
probably haven't heard of that disease, but when I start 
thinking about and discussing this whole issue, I think of 
Bernie Madoff and how easy it would be for us to have some kind 
of devastating economic problem as it relates to this whole new 
digital currency, digital dollars.
    And let me just find out if there is any kind of 
antipsychotic regime that is put in place by you or other 
doctors. You are a Ph.D., right, so you are a doctor. I need a 
doctor on this anyway.
    What protects the American public right now, at this very 
moment, from being taken in?
    Ms. Liang. I think that the issues that you raise are of 
serious concern, that consumers and investors need to be 
protected. The digital asset space, while built on a new 
technology and while offering the potential for innovation that 
is beneficial to the economy and consumers also carries some 
risks to consumers and users and investors.
    The market regulators, the CFPB and the bank agencies, to 
the extent that their entities are involved, are taking actions 
to try to protect consumers and investors, and I expect these 
actions will continue. And they address fraud, misleading 
advertising, and manipulation.
    So, I think those are the protections in place. From a 
broader financial stability perspective, there is ongoing 
monitoring, following developments and whether leverage might 
be used in some trading of digital assets that could increase 
the potential for a much more serious fall in asset prices. So, 
I think the regulators are very much focused on protecting 
investors and consumers.
    The PWG report focused on stablecoin, which has a much more 
stable value because that is its offer, so it doesn't have 
quite that level of concern about the volatile asset prices 
that come along with the other assets. But I believe the 
regulatory community is very much focused on these issues you 
are raising.
    Mr. Cleaver. Yes, I am sure they are, but the private 
sector is setting up whole divisions right now, crypto 
divisions and corporations. They are ahead of us. And the 
reason I mentioned Bernie Madoff and Ponzi scams, which is 
investment fraud, is that all you need is a constant flow of 
new money to thrive. And when you face the reality that there 
are probably unlicensed sellers out there, and they are not 
registered with the Securities and Exchange Commission, it 
frightens me. Do you have any such concerns?
    Ms. Liang. Absolutely. I think new developing technologies, 
rapidly growing markets with an unclear, inconsistent 
regulatory framework is not appropriate. And the PWG report 
tried to start the conversation of what the regulatory 
framework should be for stablecoins, which is a subset of the 
digital asset space. And as I mentioned in my testimony, the 
Administration has an ongoing effort to take a more 
comprehensive strategy across all kinds of digital assets, 
including concerns about user protection and financial 
stability.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Chairwoman Waters. You are welcome.
    The gentleman from Florida, Mr. Posey, is now recognized 
for 5 minutes.
    Mr. Posey. Thank you, Madam Chairwoman.
    Under Secretary Liang, one of the reasons for prudential 
supervision of banks and deposit insurance is to ensure that 
our payment system can redeem its deposit liabilities at par, 
or dollar for dollar. This is essential for bank deposits 
functioning as money that can be redeemed even in periods of 
stress.
    In this regard, a number of questions have arisen in the 
stablecoin realm about asset quality. Let me use Tether as an 
example. Can you tell us if Tether is backed by a dollar or 
cash equivalent?
    Ms. Liang. My understanding from their public documents 
that they post is that their reserve assets include assets that 
are not credit risk free.
    Mr. Posey. Okay. Does Tether have investments in Chinese 
commercial paper or any other illiquid assets that might 
threaten the redeemability of stablecoins?
    Ms. Liang. I understand they hold commercial paper of 
private firms, which is not a credit-free asset.
    Mr. Posey. Okay. Has a Tether been issued that is not fully 
collateralized?
    Ms. Liang. I'm sorry. Could you repeat that question?
    Mr. Posey. Has a Tether been issued that is not totally or 
fully collateralized?
    Ms. Liang. I expect that is the case. They are not 
regulated. They publish data, but based on what I understand, 
they may not be able to deliver a dollar. They are not fully 
collateralized under all conditions.
    Mr. Posey. Okay. Thank you. Do you have concerns about 
Tether's opaqueness and its impact on consumers?
    Ms. Liang. I do have concerns about the opacity of the 
reserve assets of stablecoin issues. That is, in fact, one of 
the reasons for our first risk that we identified, the run 
risk, and the potential that could have for other short-term 
funding markets if investors were to become concerned about the 
quality of the assets underlying a stablecoin.
    Mr. Posey. As we move forward, I hope we can find a path 
that provides for protection of consumers and investors in the 
stablecoin realm, but which also permits our economy to realize 
the benefits of the newer innovations. The President's Working 
Group explored regulatory alternatives to doing this. The 
conclusion that the group reached seemed to be that stablecoins 
ought to look more like banks and deposits, including deposit 
insurance.
    Can you share with us the alternative regulatory regimes 
for providing adequate disclosure that would make sure the 
consumers of stablecoins are not perfect substitutes for cash 
or bank deposits, as they are currently structured, to anybody?
    Ms. Liang. As I mentioned in my testimony, the IDI 
proposal, that issuers be IDIs, really did rely on the 
flexibility of supervision and regulation under that proposal, 
that a stablecoin issuer that only issued stablecoins for 
payments and did not make commercial loans like a commercial 
bank, a traditional commercial bank, would be subject to a very 
different supervisory regime. So, I think there is a degree of 
flexibility within the proposal that we put forward.
    The PWG report also did not make a statement about deposit 
insurance. Depending on the quality of the assets and the 
capital and liquidity standards that could be applied to a 
stablecoin issuer, they may not need deposit insurance. So I 
think there is also a possibility that within that one 
framework of IDI, there is a range of ways that could be 
applied.
    Mr. Posey. Okay. And you have covered part already, but I 
am wondering what the current Administration policy proposal 
for addressing stablecoins is in our financial system?
    Ms. Liang. Currently, the PWG report recognize that there 
are gaps in the current system, that there are securities laws, 
and there are consumer protection laws, and there are illicit 
finance laws to address stablecoins and other virtual assets. 
But there is not a regulatory framework at the Federal level 
that builds on State-level regulations that would apply to 
stablecoins as a use of payment by households and businesses 
and financial firms and governments, if it became widely used.
    Mr. Posey. I thank you for your forthright answers, and I 
see my time has expired. I yield back, Madam Chairwoman.
    Chairwoman Waters. Thank you.
    The gentleman from Colorado, Mr. Perlmutter, who is also 
the Chair of our Subcommittee on Consumer Protection and 
Financial Institutions, is now recognized for 5 minutes.
    Mr. Perlmutter. Thanks, Madam Chairwoman, and thank you, 
Under Secretary Liang, for joining us today. This is a very 
interesting conversation because it is almost like we are 
trying to talk about the nature of money or the nature of an 
investment or the nature of commodities. So even though there 
is a glossary of new terms dealing with digital assets, we are 
dealing with some things that are very basic to an economic 
system.
    For me, I just see there is a spectrum here, and you are 
trying to figure out where on the spectrum these stablecoins 
fall. The first part of the spectrum would be, you go buy 
something, it is a stupid purchase, you should never have 
bought it, but we have caveat emptor, buyer beware. Why did you 
buy that dumb thing?
    But then, say, 10,000 people buy it, and you say, okay, and 
it falls apart, well, you guys got defrauded. Maybe, let's take 
a look at it. You move further ahead and a million people 
invest in something. Now, all of a sudden, you have other 
questions you have to ask. Is it a currency? Is it a medium of 
exchange that so many people are using? And I want to thank Mr. 
Davidson, who convened a group a couple of days ago on 
cryptocurrency. It was a very interesting conversation.
    Here, it reminds me of money markets. It also reminds me of 
silver certificates. It is not like we have not had in history 
something backed by what was thought to be a stable reserve, 
silver, but then there was a crash of the silver market and 
those silver certificates were absolutely worthless.
    In this instance, in this spectrum, these stablecoins, what 
do you consider, based on the review of the group--what would 
you consider the most secure of the stablecoins that have been 
developed? And not to the point where they are a currency, a 
medium of exchange that a million people are using back and 
forth, but more like an investment. Can you see this sort of 
spectrum that I am talking about?
    Ms. Liang. Yes, of course, and I think you highlighted the 
particular uniqueness of stablecoins, that it can be both the 
investment and it can serve as a payment mechanism. And the PWG 
report was focused on the future of stablecoins, the near 
future of stablecoins as a payment mechanism.
    But as an investment contract there are, I believe, 
stablecoins that are backed by high-quality assets, and if they 
were not used as payments and there were not issues of concerns 
about operational risks of storage, transfer, and the actual 
use as payments, then the PWG recommendations are not 
applicable. The PWG recommendations are focused on those that 
could be used for payments and how to convert convertibility 
and operational risks as well.
    Mr. Perlmutter. Let's talk about that. This is where it 
gets to money markets.
    Ms. Liang. Yes.
    Mr. Perlmutter. And we broke the buck, the reserve, 
whenever it was, we broke the buck. And Mrs. Wagner and Mr. 
McHenry were sort of saying, well, why are we trying to make 
this a Federal issue? Let's just go State by State. We saw with 
money markets that even though we didn't back them because so 
many people used them as currency or as a payment medium, we 
ended up backing them.
    Ms. Liang. Right.
    Mr. Perlmutter. The question is, do we want to do this 
before something goes to heck or after it goes to heck? That 
seems to me to be the question.
    Ms. Liang. Right. The PWG report would suggest before.
    Mr. Perlmutter. Okay. I think this is a great education on 
sort of an economic system and the payment system, and I wish 
you very good luck in trying to come up with a good answer. 
Thank you.
    Ms. Liang. Thank you very much.
    Chairwoman Waters. Thank you very much.
    The gentleman from Kentucky, Mr. Barr, is now recognized 
for 5 minutes.
    Mr. Barr. Thank you, Madam Chairwoman, and thank you, Under 
Secretary Liang, for your testimony.
    I want to follow up on the questions from Mr. Luetkemeyer a 
little bit about protecting the dollar as the world's reserve 
currency. As innovations in digital assets advance, it is 
vitally important that we maintain the dollar's position as the 
world's reserve currency. Given that major stablecoins are 
denominated in dollars, the adoption would likely not 
compromise the dollar as the world's reserve currency.
    Under Secretary, first, do you agree with that, and second, 
do you agree that as dollar-backed stablecoins such as USDC are 
adopted, the threat to the dollar from cryptocurrencies and 
other central bank digital currencies is diminished?
    Ms. Liang. I agree with your statement that it is important 
to preserve the value of the dollar. I believe stablecoins that 
are stable and can deliver a stable value tied to the dollar 
would benefit the U.S. dollar.
    Mr. Barr. Great. The Fed is exploring a digital dollar and 
recently released its long-awaited CBDC report. We don't want 
the development of a Fed CBDC to quash private sector 
innovation, including in the stablecoin space. Do you believe 
that stablecoins issued within a clear regulatory framework may 
be able to coexist with a Fed-issued CBDC?
    Ms. Liang. Yes. In my view, regulating stablecoins tied to 
the dollar does not in any way preclude anything with respect 
to the introduction of a CBDC. It is hard to know what the 
future will look like, but one could imagine they could 
coexist. One could imagine a CBDC that supplants private 
stablecoins. But I don't see any reason that creating a 
regulatory framework for U.S. stablecoins would foreclose any 
avenues on the digital dollar.
    Mr. Barr. One editorial comment--and I am still developing 
my opinions on this--but it does seem to me that the dollar-
backed stablecoin concept solves the problem of protecting the 
dollar as the world reserve currency and perhaps diminishes the 
case for a Fed central bank digital currency.
    Let me ask another question. I want the United States to be 
competitive and the leader in stablecoins, and one of the key 
recommendations of the PWG is that Congress pass a law 
requiring stablecoins to be issued only by insured depository 
institutions, bringing stablecoins within the banking 
regulatory regime. I do worry that this could push crypto 
talent innovation and stablecoin issuers overseas to other 
jurisdictions, and I also worry that it is inconsistent to take 
the position that only banks should be allowed to issue 
stablecoins, but then fail to grant bank charters to the 
largest issuers of stablecoins.
    As you think about American competitiveness and making sure 
that we are on the cutting edge and the leaders in this space, 
can you address these concerns in the context of the PWG's 
recommendation that we bring stablecoin issuance into the bank 
regulatory regime?
    Ms. Liang. The proposal for issuers to be insured 
depository institutions is designed to make them stable, and I 
think stability is probably the key attribute of a good 
stablecoin. So, I think stability and leadership in this space 
are not in conflict.
    Mr. Barr. Under Secretary, that is a fair point, and if I 
may interject with limited time, if you have an audit, if you 
have oversights of the integrity of audits to ensure that 
stablecoins truly are stable, that diminishes the likelihood of 
runs, run risk for example, that, to me, solves the problem 
without requiring stablecoin issuance to be done through 
insured depository institutions. Why is that wrong?
    Ms. Liang. The first risk that we identified in the report 
was run risk. The second risk was risk to the payment system, 
and that I do not think the disclosure or the money market fund 
type regulations are designed to address.
    Mr. Barr. Thank you for your work on this. I look forward 
to continuing to be an advocate for innovation and American 
leadership in this space, and I yield back.
    Ms. Liang. Absolutely.
    Chairwoman Waters. Thank you.
    The gentleman from Connecticut, Mr. Himes, who is also the 
Chair of our Subcommittee on National Security, International 
Development and Monetary Policy, is now recognized for 5 
minutes.
    Mr. Himes. Thank you, Madam Chairwoman, and thank you, 
Madam Under Secretary, for being with us.
    Like Mr. Perlmutter, I think this is an interesting 
conversation. I want to just start by level-setting, because I 
think it is important that we move on beyond what we have been 
doing, in a constructive way, and understanding these 
implements, to realizing that like every other innovation that 
the Congress has faced, probably for centuries, there is a 
potential upside, and a potential downside. My guess is that 
110 years ago, when we were presented with the concept of the 
automobile, we never imagined that 35,000 Americans would die 
every single year on the roads because of the automobile. But 
nobody is proposing that we do away with the automobile. I 
suspect that is true for air travel, for the internet, and for 
all of the innovations that we see every single year.
    So the question really is not, should we allow it or not, 
because it is already here. And the question is, just as it was 
with the automobile and with the internet and with everything 
else, how do we regulate it in a way that allows for innovation 
and the benefit but protects the consumers, et cetera?
    And, by the way, I will just remind my colleagues that we 
famously did a number of hearings on GameStop back in February. 
Had Grandma bought GameStop in February, at $350 a share, 
Grandma would be out two-thirds of her money today. And we 
don't say we should stop trading in GameStop. We say it should 
be transparent, it should be disclosed, all of the risks, and 
when that happens, we trust American consumers to take informed 
risks.
    That leads me, Madam Under Secretary, to my question, which 
is, I think you would agree with me that there is a radical 
difference between a stablecoin which is fully-backed, dollar 
for dollar, with reserves that are not leverageable, where 
there is redemption at par, where there is no maturity 
transformation--there is a radical difference between that and 
what Mr. Green so memorably called investing in nothing. 
Correct?
    Ms. Liang. Agreed.
    Mr. Himes. Dogecoin. And I think we have an opportunity 
here to recognize that by saying that if a stablecoin is 
dollar-for-dollar backed with currency, it is redeemable at 
par, there is good transparency, we can regulate it in a way 
that is different than a much more risky instrument. And we 
have talked about this, but I wonder whether you would agree 
that full IDI regulation, bank charter may not be necessary in 
that former case?
    Ms. Liang. I agree there are important distinctions between 
stablecoin and the unbacked digital assets. I also agree the 
full set of bank regulations do not need to be applied to a 
stablecoin issuer that does only stablecoin issuance. There is 
flexibility within the IDI framework to not focus on credit 
risk in making loans, because the stablecoin issuers do not 
make loans. They do not engage in fractional reserve banking. 
But they do have payments, and there are operational and 
convertibility risks that are associated with that, over which 
you would like some oversight to ensure that the payment system 
continues to operate well, which is a public service to the 
financial system. And that is the core of the PWG 
recommendation.
    Mr. Himes. I appreciate that, and I appreciate the way--and 
we have had a couple of conversations about this--you are 
thinking flexibly, because I really do think our sole job right 
now is to figure out how to adequately regulate instruments 
which can be very, very safe or potentially very, very risky, 
and that is actually an exciting endeavor, I think.
    Let me use my last minute, Under Secretary Liang, on 
something I have not thought too much about, but I would love 
to hear you on for a minute, which is systemic risk. It doesn't 
feel to me like you have quite the market cap yet, or 
leverage--and I really highlight the word, ``leverage''--to 
create the kind of systemic risk. And I am a refugee of 2009, 
2010. But give us a minute on what we need to watch for, vis-a-
vis the development of systemic risk in this space?
    Ms. Liang. I think you have identified one of the key 
things you would watch for systemic risk. It is an asset which 
the value becomes increasingly based on more leveraged 
positions. The regulators, including the Financial Stability 
Oversight Council (FSOC), have been monitoring developments in 
digital assets, looking for leverage. Leverage is a fundamental 
vulnerability that increases risk to financial stability. 
Others are, whether they become much more interconnected with 
the traditional financial system.
    Currently, crypto assets, digital assets have pretty 
tenuous links to the traditional financial system. The banking 
regulators have raised capital requirements on any crypto asset 
holdings. They are cautiously issuing guidance for how banks 
can get involved in this category. That is another thing that, 
if you were monitoring for emerging systemic risks you would 
look for greater connections with the traditional system and 
you would look for leverage, increasing leverage.
    Chairwoman Waters. Thank you very much. The gentleman's 
time has expired.
    The gentleman from Texas, Mr. Williams, is now recognized 
for 5 minutes.
    Mr. Williams of Texas. Thank you, Madam Chairwoman. 
Cryptocurrencies have shown great promise to fill many 
shortcomings with the traditional financial services 
marketplace. They are offering new ways to reach unbanked 
communities and are making it easier to send payments anywhere 
in the world, and are making oracles that transfer real-time 
data to blockchain networks.
    Stablecoins play an integral part in making this entire 
ecosystem function by allowing people to remove the volatility 
that is often associated with crypto, so you can preserve value 
without the need to transfer digital coins back into fiat 
currencies.
    Your report suggests that we should treat all stablecoin 
users as banks. This would give a massive advantage to all of 
the institutions who are most skeptical about cryptocurrencies 
in the first place, and leave behind the entrepreneurs who have 
worked to make cryptocurrencies more mainstream. It would 
guarantee that the largest banks in the country have a built-in 
advantage over another market participant who may not have the 
resources to comply with the minimum regulations that are 
coming.
    So, this would give the largest banks an even greater 
advantage in this developing space over every other 
entrepreneur who may have been doing this for much longer.
    So, Ms. Liang, how did the Working Group balance the effect 
on innovation as they came up with these recommendations?
    Ms. Liang. Thank you for the question. Of course, the group 
was very focused on balancing the benefits for financial 
innovation with reducing the risks to users and the broader 
financial stability of stablecoins.
    I believe that stablecoins, because they offer stability, 
should be held accountable to actually be able to provide that 
stability when demanded, and that requires more regulation than 
they currently are under.
    While the proposal was for stablecoins to be issued by 
insured depository institutions, the proposal also relied on 
the fact that regulation and supervision of IDIs can be quite 
flexible, and that stablecoin issuers that have those simple 
business models of holding high-quality reserve assets and 
issuing liability such as stablecoins, would be subject to a 
very much less stringent type of supervision and regulation 
than would a traditional commercial bank.
    So I think that we, the PWG, came out balancing the risks 
that could be reduced by that framework while providing clarity 
and consistency and safety that would be beneficial for 
innovation.
    Mr. Williams of Texas. As you developed this report, you 
have sought the input of regulators, academics, and private 
sector participants, and as a business owner myself, I value 
the input of the private sector. I think it is the most 
important. And since most people who took risks to build these 
new products and provide service are in the private sector, 
they are the ones who took risks and have the most to lose if 
the government gets this regulation wrong.
    So in closing, can you describe your work in consulting the 
private sector as you developed this report, and do you think 
their voices were adequately accounted for?
    Ms. Liang. We did reach out to many stakeholders, including 
academics, regulators, and the private sector. We talked to 
many in the industry to hear their concerns, to learn more 
about the actual business and the problems that they face. I 
think many of them are comfortable with the idea of an IDI bank 
charter. Some are pursuing it. Some are already within the 
regulatory parameter, even on their own.
    So I think, again, we are balancing innovation with safety, 
trying to find the right balance. I think this recommendation 
is one path forward. Of course, Congress will determine how it 
wants to write legislation. We believe this element could be 
very beneficial to the system.
    Mr. Williams of Texas. I yield back. Thank you.
    Chairwoman Waters. Thank you very much.
    The gentleman from New York, Mr. Meeks, who is also the 
Chair of the House Committee on Foreign Affairs, is now 
recognized for 5 minutes.
    Mr. Meeks. Thank you, Madam Chairwoman. Madam Under 
Secretary, as mentioned, a core recommendation of the 
President's Working Group is to require stablecoin issuers to 
be insured depository institutions. So my question is, to what 
extent was this recommendation analyzed through the context of 
the President's Executive Order on promoting competition, as 
well as his Executive Order on racial equity? It occurs to me 
that limiting stablecoin issuers to insured depository 
institutions, which have a high barrier to entry, could limit 
competition. Furthermore, given the disproportionate number of 
people of color who gravitate to nonbank financial 
institutions, such recommendations could have a racial equity 
impact.
    So what I want to know is, did the Working Group consider 
this recommendation's impact on both competition and racial 
equity, and if so, please explain?
    Ms. Liang. Thank you. The group did consider the impact on 
competition. I think the view is that the current regulatory 
framework is inconsistent and fragmented, and that a more 
consistent, comprehensive framework would benefit competition. 
It also believes that financial innovation is important and 
tried to provide clarity, which is something that the industry 
has asked for, and also that competitive advantages should not 
arise from differences in how standards are implemented across 
different regulators. So, my view is that it balanced 
competition by providing more clarity, and more consistency.
    In terms of meeting equity goals and meeting the needs of 
the unbanked or underbanked, I think stablecoins have the 
potential to help by lowering costs, and if those who choose 
not to go to banks are more comfortable using the technology of 
the stablecoin. And so, I think that is the potential to 
improve financial inclusion and address some of the equity 
goals of this Administration.
    Mr. Meeks. Thank you for your answer, and there are 
certainly areas of regulatory gap when it comes to this new 
type of payment system and technology. And there are also 
tremendous ways we can use stablecoins to help underbanked 
communities. And as Chairwoman Waters said, I am the Chair of 
the House Committee on Foreign Affairs, so it also could help 
communities abroad who may be facing turmoil in their home 
countries.
    Ms. Liang. Yes.
    Mr. Meeks. And we are hearing about NGOs who can assist 
refugees with assessing their cash in their new country through 
the use of stablecoin, where the population of a country in 
distress can access a mobile crypto wallet and the government 
cannot get to it, making it a great use case for humanitarian 
aid and relief.
    So, how can the Treasury assist some of those NGOs in 
partnership with stablecoin issuers to help get humanitarian 
aid out to these populations safely and efficiently? And is 
there anything that Congress can do to assist in this area?
    Ms. Liang. The examples you cite of being able to provide 
aid to other countries is exactly some of the benefits that 
could come from this new technology. The President's Working 
Group recommendations are to make that service more stable, so 
that it functions as needed without raising other risks to 
financial stability. And that is exactly an example of the 
beneficial effects of a new technology in allowing innovation.
    Mr. Meeks. Thank you for that. And I am pretty pleased to 
see that the industry is interested in using stablecoins to 
help citizens of some foreign countries, and a lot of them are 
going through the necessary steps to ensure that there is 
proper Anti-Money Laundering (AML) and Know Your Customer (KYC) 
procedures in place. But in peer-to-peer transactions, that 
doesn't have a formal broker.
    The Financial Crimes Enforcement Network's (FinCEN's) 
jurisdictional reach is limited, and many crypto users value 
the autonomy aspect, and therefore a great number of 
transactions don't require the same level of KYC procedures 
that others may do.
    And I know I am out of time, but my question would be, what 
role can the Financial Action Task Force (FATF) and FinCEN play 
when it comes to combatting these bad actors while also 
ensuring that good use cases like humanitarian aid and simple 
cross-border payments are not stifled or made more complicated?
    Ms. Liang. Treasury is leading the Financial Action Task 
Force (FATF), and trying to improve the implementation of 
standards in countries that may be lagging in their 
implementation. This is a high priority for them.
    Chairwoman Waters. Thank you very much.
    The gentleman from Arkansas, Mr. Hill, is now recognized 
for 5 minutes.
    Mr. Hill. Thank you, Madam Chairwoman. Thanks for convening 
this hearing. I appreciate the comments of the ranking member 
as well. And Madam Under Secretary, thanks for sitting there 
patiently with all of these Members asking questions.
    My sense, listening today to Chairwoman Waters, is that 
there is a fair amount of agreement between Democrats and 
Republicans on stablecoins, starting with the belief in their 
potential to improve the efficiency, speed, and cost of 
payments, especially cross-border payments, as just noted by 
Chairman Meeks, expand financial access, and facilitate the use 
and adoption of digital assets due to the role of the 
stablecoin as being sort of an onramp to the greater crypto 
developing ecosystem. I would say a very fledgling, but 
developing ecosystem.
    And, as noted by Mr. Himes and Mr. Barr, maintaining the 
U.S. as a preferred currency, is obviously important to all of 
us--Mr. Himes and I have our U.S. dollar legislation pending 
about working on that--but also, the U.S. is a preferred place 
for innovation and a host country for financial technology.
    So as Congress considers legislating, I think we ought to 
focus on permissible reserve assets, their credit quality, and 
the collateral requirements, liquidity and redemption 
requirements, risk management and other governance issues, 
including audit and transparency controls and privacy, 
irrespective of what the use case is. And this is something, 
Madam Under Secretary, this issue of whether it acts as a money 
market mutual fund or a payment system, I think we ought to be 
neutral on that. I don't think we should preempt that. I think 
we ought to have narrowly crafted legislation that simply 
determines, as I have just outlined, what is a good stablecoin, 
from a consumer or business point of view.
    Do you agree that we should focus on that definition above 
all, after working on the output of the Working Group?
    Ms. Liang. Representative Hill, thank you for that 
question. It is a thoughtful question. I think regulations 
should follow the function of the product or the service.
    Mr. Hill. Yes, I agree with that. It is just that my time 
is short.
    I am an activities-based person as opposed to jamming 
everything through entity regulation, particularly in an 
innovation, and the jury is out for me on whether these have to 
be issued by a depository institution, for example. I don't 
think you are wrong to suggest that, but would you support a 
Federal money transmission license, or a national payment 
provider license that would be a national license similar to 
what we see in the EU? Is that an alternative that you would 
accept?
    Ms. Liang. I think that is a possibility definitely worth 
exploring. The U.S. does not have a Federal money transmitter 
license, so we did not build on that framework.
    Mr. Hill. Yes. And that gets into this issue, as Ranking 
Member McHenry asked, about State regulation. Are you 
supportive of States going ahead and defining some of these 
quality standards around stablecoins, as we have seen in the 
case of New York?
    Ms. Liang. I think in the current environment with 
stablecoins already in play and growing rapidly, the current 
regulators need to take actions to meet their mandates. As I 
understand it, some State money transmitter licenses don't even 
apply to digital assets, so it feels like there is probably 
room for different States to be revisiting their rules.
    Mr. Hill. Yes. Thanks. And on the subject of deposit 
insurance, I agreed with a lot of the comments, and I don't 
really think that's the right road to go down for these assets. 
I think defining them is a much better approach, whether they 
are used as a payment activity or as an investment holding 
activity, and that we just use activity-based regulation, based 
on the definition.
    As to whether or not they are systemically important, that 
seems a stretch for me at $150 billion or $170 billion, when 
you think about how we have $5 trillion in credit card 
transactions a year, and we have almost $5 trillion in money 
market funds. So to me, I thought that was a stretch. I 
encourage my colleagues to work together on a narrowly-crafted 
definitions bill for what is a good stablecoin.
    Thank you for your time, and I yield back.
    Chairwoman Waters. Thank you very much, Mr. Hill, and I 
just want to remind you that while you talk about how it 
appears that there is growing consensus between both sides of 
the aisle, do not minimize permissible reserves. That is very 
important. Thank you.
    The gentleman from Illinois, Mr. Foster, who is also the 
Chair of our Task Force on Artificial Intelligence, is now 
recognized for 5 minutes.
    Mr. Foster. Thank you. Under Secretary Liang, I would like 
to follow up regarding any specific recommendations that you 
might have for providing a secure and legally-traceable digital 
identity for participants. It seems to me that it is clear that 
if stablecoins, or even central bank digital currencies or 
other crypto assets, become generally available for consumer 
transactions, and we want to prevent them from being used for 
ransomware, money laundering, human trafficking, you name it, 
we must have a legally-traceable identity to the beneficial 
owners behind the transaction, that can be executed in a court, 
in a trusted jurisdiction, in a country with which we have 
extradition treaties.
    And I thought it was quite remarkable that when we had 
crypto billionaires in front of our committee a while ago, they 
pretty much agreed that was a necessary condition for 
preventing this kind of crime. And we can't simply just use KYC 
requirements as they exist today, because the fact that someone 
or some shell company has a bank account in Cyprus just will 
not cut it.
    What are your thoughts on how to proceed with traceable 
digital identity for crypto assets generally, both nationally 
and internationally, and do you need more specific guidance 
from Congress on how to proceed?
    Ms. Liang. Thank you for that question. I think in the 
context of digital assets, the principles of security and 
privacy can, at times, be in conflict. But privacy is very 
important, as is security.
    I think this is an area for legislation. The PWG report did 
not make any recommendations around this issue. But I would say 
that they were very aware of this potential, and I think with 
the role of a CBDC, these are issues as well.
    One area that the PWG report did touch on this topic is the 
potential for a stablecoin to scale rapidly, perhaps because of 
network effects, and there are benefits to that. But that also 
gives them quite a bit of information and control over a lot of 
customer financial transaction data. So an issue that we raised 
was that Congress should consider whether they would want to 
put some authorities around how to manage the security of that 
data. And I think that is an important issue to address if 
digital assets, as a currency, become widely used by the 
population, and you have a big system where everything is 
digital. As you know, consumer privacy is important, as well as 
security, and those are a balance, and I think that is an area 
for Congress to be doing more in, as they are, I should say.
    Mr. Foster. Yes. I just would, as I have done before in 
this committee, draw people's attention to the National 
Institute of Standards and Technology (NIST) standards for 
using a modern cellphone and a REAL ID-compliant mobile ID or 
driver's license as a way for consumers to prove who they are, 
who they say they are.
    Ms. Liang. Yes. I understand there are proposals to build 
on the real ID system that is being implemented and tying it to 
the iPhone or their phones as a way to ensure the identity of 
an individual. That would help to prevent fraud, and it would 
also increase security for an individual.
    Mr. Foster. And is this something that FinCEN would have 
specific recommendations on, on how to proceed?
    Ms. Liang. I would be happy to ask. I am sure my colleagues 
at FinCEN would be happy to follow up on this.
    Mr. Foster. Thank you. I think this is one of the really 
positive ways that this committee can get involved in crypto 
asset regulation generally.
    Thank you, and I yield back.
    Chairwoman Waters. Thank you very much.
    The gentleman from Minnesota, Mr. Emmer, is now recognized 
for 5 minutes.
    Mr. Emmer. Thank you, Chairwoman Waters, and thank you, Ms. 
Liang, for your testimony and your time today. I am going to 
try to be efficient with my time, so I would appreciate as 
concise responses as you can provide to my questions.
    Currently, stablecoins represent just 5 percent of the 
digital asset industry's total value. It is a relatively small 
fraction. But they, stablecoins, are facilitating more than 75 
percent of trading in the entire digital asset ecosystem. 
That's quite significant.
    Clearly, stablecoins offer economic benefits that cannot be 
ignored. Stablecoin transfers have nearly instant settlement, 
and settlement can be confirmed by both parties on a public 
blockchain. These characteristics lead many to view stablecoins 
as less risky than the heavily-regulated payment rails of our 
current banking system.
    Yet, the President's Working Group report on Stablecoins 
focused almost solely on their perceived risks. The report 
doesn't even provide a definition for stablecoin. But it 
doesn't hesitate to assert that the risks of stablecoins are so 
broad and across cross-jurisdictional lines that only insured 
depository institutions or banks should be allowed to issue 
them.
    As you mentioned to my colleague, Mr. Huizenga, you believe 
stablecoins could be both a bank-like product as well as an 
investment-like product, which is why you believe they should 
only be issued by banks. I firmly contend that the stablecoin 
is a payment instrument and is a fundamentally different asset 
than an investment product. If we base the evaluation of the 
report in this hearing today on a narrowly-tailored definition 
of stablecoin, I think we might come to see that a bank-like 
regulatory framework would improperly regulate the asset class 
and inadvertently capture potential future financial products 
that are vastly different than what you and I think of as 
stablecoin.
    For instance, under this report a tokenized money market 
fund, which clearly would be a security, could fall under the 
same stablecoin umbrella as a fiat-backed payment token that is 
fully redeemable for cash. How is it that such vastly different 
financial products could be both defined as stablecoins, and 
the only institutional players that would be able to offer 
these vastly different products are banks?
    The reason I elevate this concern is because legislating 
and regulating in this space should not be done under such 
broad definitional scope, and doing so would severely limit 
future market growth. It is not unlikely that tokenized money 
market funds backed by government debt or commercial paper 
might seek to come to market in the future. These potential 
future financial products could ostensibly lower the costs of 
participation in the asset class while offering conservative 
returns to investors.
    Ms. Liang, do you think the same run risks and prudential 
risks when attached to stablecoins backed purely by U.S. 
Government debt or highly rated commercial paper?
    Ms. Liang. I believe you're raising some important issues 
about how quickly the technology is evolving and what the 
future of digital assets will be, that--
    Mr. Emmer. No. That was a very specific question. How about 
this. Do you think U.S. Government debt that underpins U.S. 
Government money market funds is risky?
    Ms. Liang. There is no credit risk. There can be 
convertibility risks if--
    Mr. Emmer. They are risky or they aren't?
    Ms. Liang. There is no credit risk.
    Mr. Emmer. Okay, so--
    Ms. Liang. There can be liquidity risk, just in being able 
to execute the transactions.
    Mr. Emmer. In the time I have left, Under Secretary Liang, 
I want to thank you. Tokenized money market funds backed by 
government debt or highly rated commercial paper clearly would 
not impose prudential risks significant enough to reserve the 
issuance of all tokenized money market funds to banks. This is 
important to highlight because there is a void in the market 
between stablecoins and security tokens, and a tokenized money 
market fund could provide an attractive, low-cost financial 
product with conservative returns. For this reason, I am 
working on a nonpartisan legislation that would allow tokenized 
money market funds to come to market.
    Here is the bottom line. Banks should not be the only 
institutions in the ecosystem with dibs to issue the potential 
array of financial products that the President's Working Group 
report simply lumps together and ties as a stablecoin.
    Thank you. I yield back the remainder of my time.
    Chairwoman Waters. Thank you very much.
    The gentlewoman from Ohio, Mrs. Beatty, who is also the 
Chair of our Subcommittee on Diversity and Inclusion, is now 
recognized for 5 minutes.
    Mrs. Beatty. Thank you, Madam Chairwoman, and thank you for 
holding this hearing. And Under Secretary Liang, thank you for 
being our witness today.
    As I have listened to both sides of the aisle today, this 
has been very eye-opening and interesting to me. In full 
disclosure, at one time I probably thought this was more like 
the Wild Wild West of what we are doing, and now I realize that 
it is the future frontier. And while I don't want to 
overregulate to the point that it chokes off innovation, I do 
believe that some well-thought-out regulation would provide 
some legitimacy to this space and allow it to further flourish.
    Earlier in your testimony, Madam Under Secretary, you 
talked about the largest stablecoin. Were you making reference 
to Tether?
    Ms. Liang. That is the largest stablecoin.
    Mrs. Beatty. Okay. Recently, they settled lawsuits with, I 
believe it was the State of New York and the CFTC for lying 
about the state of reserves that back this currency. And 
further, they claimed that about $30 billion of its holdings 
are invested in commercial paper, making them the seventh-
largest holder of such debt. And this is coming from an article 
in Bloomberg.
    So I guess what I want to ask you, Ms. Liang, is how 
important is it that stablecoin issuers are transparent--
everybody knows, whether we are talking about this or diversity 
and inclusion, that I am a big believer that transparency is 
important--so that issuers are transparent with their reserves 
and these reserves are audited by United States accredited 
firms, not Cayman Islands firms?
    Ms. Liang. Right. I believe transparency is important, but 
it alone is not sufficient to prevent runs. For example, on 
money market funds, the holdings are transparent, but we had 
runs on two money market funds when the assets backing those 
funds are other than government securities. So when the 
holdings are Treasury securities and corporate high quality, in 
stress investors may still run. And we saw that in 2008, and we 
saw that in 2020.
    So, transparency itself is extremely helpful, but it is not 
sufficient to address the issue of investor runs.
    Mrs. Beatty. Okay. Because of time, we will come back to 
that later, and maybe I can talk to some of your team.
    Let me ask you this: What do you believe are the 
consequences for financial stability when so few hold such a 
large percentage of these different types of tokens?
    Ms. Liang. I think currently the risks to financial 
stability, the systemic risks, are not high. They are growing. 
They are emerging. One issue in the broader digital asset space 
is the high price volatility, and as mentioned earlier if that 
were fueled, in part, by leverage or when prices fell it would 
have impacts on the traditional--
    Mrs. Beatty. I am only rushing because of the time.
    Ms. Liang. --systemic risk.
    Mrs. Beatty. Congressman Meeks talked about minority 
communities and different communities. In full disclosure, I 
thought this only applied to the top 1 or 2 percent. But now, I 
am hearing that Black and Brown communities who are underbanked 
and unbanked are also playing in this space. What are the risks 
for them, or how, if I am underbanked or unbanked, can I put 
myself in something that we don't really have regulations for 
now? Quickly, because the clock is ticking.
    Ms. Liang. Yes. Here, I would like to distinguish again 
between digital assets and stablecoins. Stablecoins have the 
potential to improve payments--make them cheaper, make them 
faster--and we are seeing potential benefits for cross-border.
    Digital assets, those that are not backed by, say, a pool 
of reserve assets, and whose volatility, the prices are highly 
volatile, investors really need to understand the risks when 
they make those investments. There are potential losses. High-
volatility stocks are not for all investors.
    Mrs. Beatty. So, should we be advising people to wait? That 
is a yes-or-no question.
    Ms. Liang. I think we should advise investors and consumers 
that they should be aware of the risks of any assets that they 
are purchasing for investment purposes.
    Mrs. Beatty. Okay. Thank you. My time is up. Thank you so 
much.
    Chairwoman Waters. Thank you very much.
    The gentleman from Georgia, Mr. Loudermilk, is now 
recognized for 5 minutes.
    Mr. Loudermilk. Thank you, Madam Chairwoman. Thank you for 
having this hearing today.
    One thing I have seen over my years on this earth and the 
time I have spent in government is the hesitancy of some people 
to adopt new technologies, especially when it comes to 
government. And I am not one to run out and just haphazardly 
accept anything that is new technology just because it is new, 
but I think it is very important for us to weigh the benefits 
and the other issues with any type of technology.
    My mind goes back to the early 1900s, when the Washington 
Post ran an article when the word came out that these two 
bicycle mechanics, the Wright brothers, were testing a 
controlled flight device called an airplane. And the article 
said men will not be able to fly and should never be able to 
fly, just because of the hesitancy to adopt new technology.
    However, when it comes to people in our positions, it is 
important that we have an honest weighing of the costs and the 
risks and the benefits of new technologies. And like Mr. Emmer 
had expressed, I am a little concerned and disappointed about 
how one-sided this report really seems to be, for us to make a 
good decision. Most of it focuses on the risk of stablecoins, 
which obviously there are some, but there is little discussion 
of the benefits. In fact, the report mentions risk 131 times, 
but only mentions benefits 2 times.
    So, I wish the report was more balanced, and I hope this 
Administration will be more ready to embrace some innovation, 
not just accept everything, but actually give an honest look at 
innovation and technology and not try to stifle it.
    The report also doesn't address the regulatory frameworks 
that many States have already established for digital assets. 
Banking regulators in a number of States supervise stablecoin 
issuers under money transmittal laws.
    Ms. Liang, the report calls for Congress to establish a 
Federal regulatory structure for stablecoins. As part of that, 
does the Administration intend to account for the regulatory 
frameworks that many States have already established for 
digital assets to avoid creating redundant requirements?
    Ms. Liang. The PWG report recommends a framework that 
reduces inconsistency and reduces the fragmentation of current 
regulations, and builds on the current State framework. It can 
build on the State money transmitter laws. Insured depository 
institutions can be Federally-chartered or State-chartered.
    The goal of the framework was to provide some consistency, 
which we believe actually is beneficial to innovation, that 
having State laws apply, which vary, and increase the 
complexity of addressing lots of different regulations is a 
hindrance to innovation.
    Mr. Loudermilk. So what you are looking at doing, to make 
sure I understand this, is considering State laws, but you want 
to avoid having contradictory State laws? Is that where one 
State may have one regulation, and another State, another 
regulation? What I am understanding you are saying is you are 
considering existing State regulations.
    Ms. Liang. Yes. It would build on existing State 
frameworks, as I mentioned. Insured depository institutions can 
be State-chartered or Federally-chartered. State money 
transmitter laws, as was mentioned, are at the State level. 
There is no Federal money transmitter license.
    This was an approach to try to reduce some of the 
fragmentation in the system, with an approach that we believe 
can be flexible and does not use the entire set of rules that 
apply to traditional banks, and they could be adapted to 
stablecoin issuers.
    Mr. Loudermilk. I think that it is important not to have 
fragmentation or conflicting regulations, but I also think it 
is important to avoid one-size-fits-all regulations 
specifically. We should not be broadly applying banking 
regulations to stablecoins.
    Does the Administration intend to account for the 
significant differences between depository institutions and 
stablecoin issuers in its regulatory approach? Am I 
understanding that?
    Ms. Liang. Yes, that is our understanding, that the banking 
regulators have flexibility to address the supervision and 
regulation that would account for differences between 
stablecoin issuers and banks that also make loans. So, it would 
be a different approach.
    Mr. Loudermilk. Thank you, and Madam Chairwoman, I yield 
back the balance of my time.
    Chairwoman Waters. Thank you very much.
    The gentleman from California, Mr. Vargas, is now 
recognized for 5 minutes.
    Mr. Vargas. Thank you very much, Madam Chairwoman. I want 
to thank you for holding this hearing, and also the ranking 
member. It has been very fascinating. And Madam Under 
Secretary, I appreciate the time you have spent with us.
    I do think that stablecoin and cryptocurrency has some 
potential advantages. Certainly, when we take a look at 
remittances, remittances are very important in my district, and 
frankly, I think a benefit to Latin America and our hemisphere, 
and I think that this is a real possibility.
    But I also think that there is real potential risk here. 
Just listening to the previous speaker here, he said that this 
Administration should be more balanced when it comes to 
cryptocurrency and digital assets.
    Are you familiar with what President Trump said about 
Bitcoin?
    Ms. Liang. I am not.
    Mr. Vargas. Let me tell you what he said, since you are not 
familiar with it. ``Bitcoin, it just seems like a scam. I don't 
like it because it's another currency competing with the 
dollar.'' Hardly seems balanced there.
    But anyway, I just throw that out there because certainly 
the last Administration had a particular point of view, and 
certainly the President. So when you get accused of not being 
balanced, I don't think that is correct. But anyway, I 
appreciate all of the work that you have done on this.
    But I do have concerns. I also heard that this is a new 
technology and it is new stuff that we have never seen before. 
The reality is that before the Civil War, banks used to issue 
their own paper, and they were redeemable for either silver or 
gold. And what you would see is that many of these banks, 
unfortunately, would issue more paper that was not redeemable, 
and then you would have a run, and you would have all sorts of 
chaos. That is why we had the National Bank Act of 1863, to 
make sure that we had the dollar, and that the dollar was 
backed by the full credit, and also rolls at the time of the 
United States of America.
    So it is not the notion that we have never had this before, 
that you haven't had people issuing coins. The reality is we 
have had that, and it didn't work out very well. Now, we have 
new technology, and that is why we have to be open-minded; I 
certainly am.
    But I do have concerns about the--and I will read here from 
page 2 of the report, which says, ``While stablecoins have the 
potential to address shortcomings, the existing payment systems 
such as the potential for lower-cost or real-time payments, 
they pose legal regulatory and oversight challenges and may 
present risk to monetary policy.'' I do think risk is 
associated there.
    We have been saying how small stablecoin is. I remember 
when we were saying how small cryptocurrency was. We used to 
talk about it in the billions. Now, we talk about it in the 
trillions. Could you talk a little bit about that risk?
    Ms. Liang. Yes. Sure. One of the risks that we focused on 
was something we would call concentration of economic power, 
and that is because stablecoins, as a payment mechanism, could 
scale up very quickly. One could imagine that you would create 
a closed loop, almost a private system of money, similar to 
what you were referring to in the late 1800s. That kind of risk 
is something that we think Congress should consider. The 
proposal in the PWG report, one possible path on that is to 
have supervisors require interoperability so that there would 
be greater competition among stablecoins and less potential for 
one system. That also would reduce interference with 
implementation of monetary policy, as you mentioned, that you 
have an alternative form of money system. So, that is the third 
prudential risk that we identified in the report.
    Mr. Vargas. Would some of these things be corrected if you 
did have the central bank digital coin? It seems to me that you 
would then have a possible solution there with the CBDC.
    Ms. Liang. Yes. CBDC, that possibility I think, as I 
mentioned, will depend quite a bit on the kind of features the 
CBDC would offer. It could be very different. The current 
situation, however, is that a CBDC is still being investigated 
by many central banks, including the United States. It could be 
years before it were introduced, if they made the decision to 
introduce it. And stablecoins are here today, and they are 
growing quickly. And it leaves regulators in an uncomfortable 
position to say, we should wait until there are decisions about 
a CBDC.
    Mr. Vargas. Thank you.
    Chairwoman Waters. Thank you.
    The gentleman from West Virginia, Mr. Mooney, is now 
recognized for 5 minutes.
    Mr. Mooney. Thank you, Madam Chairwoman.
    The growing popularity of stablecoins introduces some 
regulatory challenges but it also presents some opportunities. 
At a time when some regimes, for example, Communist China, are 
using top-down restrictions on their digital yuan to maintain 
totalitarian control of their populace, stablecoins have 
emerged as an innovative, entrepreneurial way to provide wider 
access to the U.S. dollar around the world. Stablecoins pegged 
to the U.S. dollar can help ease cross-border transactions and 
help maintain the dollar's status as the world's reserve 
currency.
    Ms. Liang, in your testimony you mentioned furthering the 
United States' continued leadership of the global financial 
system as a goal of the President's Working Group framework. 
Can you explain how the President's Working Group's 
recommendations aim to further America's global leadership on 
the world stage?
    Ms. Liang. I think first, the role of the dollar and the 
role of the U.S. in the global financial system depends 
primarily on the country's governing structure, its respect for 
the rule of law, the strength of its institutions, the strength 
of its economy, and the liquidity of its financial markets.
    Technology can play a role, but it is not the primary role. 
And I believe that stablecoins that are tied to the value of 
the U.S. dollar can help to promote the role of the U.S. 
dollar, but it needs to be on a stable footing. It needs to 
actually be stable. Stablecoins that are not stable could 
undermine some of the confidence in the dollar.
    Mr. Mooney. Thank you. I want to ensure that any regulation 
we provide of stablecoins does not get in the way of one of our 
country's greatest strengths here in America, which is 
innovation. With global adversaries like China, which have 
banned cryptocurrencies and the freedom they represent, our 
country can embrace them.
    Next, I would like to pivot to the role of Congress in this 
progress. The report calls for congressional action on 
stablecoins, but also says that FSOC should act on its own to 
regulate stablecoins in the absence of legislation. So Ms. 
Liang, do you have any specific timeline in mind for 
congressional action before the FSOC would step in on its own?
    Ms. Liang. As you mentioned, the recommendation is for 
legislation. The Financial Stability Oversight Council has a 
responsibility to be monitoring for risk to financial stability 
and to consider actions to reduce those risks. So, it is an 
ongoing monitoring of the issues. They have some tools, but 
they are not a substitute for legislation. They cannot make 
structural changes to what stablecoin issuers would be.
    Any action they would take is a little premature, given how 
quickly the system changes. I am sure that their processes are 
defined by what is laid out in the Dodd-Frank Act, and it would 
be very data-driven and very deliberate and would invite public 
input and be transparent.
    Mr. Mooney. Okay. To follow up and make a final point on 
it, let's say, for example, that stablecoin legislation makes 
it through Congress by the end of this year. How do you think 
Treasury would respond to that?
    Ms. Liang. I think, again, FSOC would be monitoring risks 
to financial stability. To the extent that any risks to 
financial stability were increasing, it would be their 
responsibility to consider what tools it has to address those 
risks. But it is not a substitute for legislation.
    Mr. Mooney. In my last 30 seconds, let me just say thank 
you, and I do fear that hasty action on the part of regulators 
could do more harm than good. Sometimes, people have the best 
of intentions but it has an opposite effect. The last thing we 
need is a rushed regulatory process. Congress, where we are 
elected to serve, is a deliberative body, and the legislative 
process does take time. I say, let Congress do its work. Let 
this committee do its work. This is a complex issue. It is more 
important to get it right than to rush and get something done 
quickly.
    Thank you, Madam Chairwoman. I yield back.
    Chairwoman Waters. You are welcome.
    The gentleman from New Jersey, Mr. Gottheimer, who is also 
the Vice Chair of our Subcommittee on National Security, 
International Development and Monetary Policy, is now 
recognized for 5 minutes.
    Mr. Gottheimer. Thank you, Madam Chairwoman, for holding 
this important hearing and discussion on new innovations in the 
stablecoin space.
    Given the explosive growth in the stablecoin and 
cryptocurrency space, including, as I said, stablecoins, which 
continue to be front and center as an issue, it is critical, I 
believe, that Congress examine how best to establish 
appropriate guardrails around stablecoins to ensure these 
assets continue to mature here within the United States instead 
of fleeing overseas.
    I am continuing to work on draft legislation examining how 
best to establish guidelines on stablecoins, including coins 
issued by insured depository institutions, but also through 
properly-constituted nonbank stablecoin issuers. Establishing 
appropriate guardrails to mitigate the risk of a run and 
potential collapse of a stablecoin issuer should be a primary 
goal of any stablecoin legislation, and I look forward to 
working with my colleagues on both sides of the aisle on this 
issue.
    Ms. Liang, it is great to see you again, and thank you for 
coming today to testify. If Congress looks at stablecoins 
through a partisan lens and, in turn, fails to pass meaningful 
reform in short order, do you believe we could see the collapse 
of improperly-backed issuers, and would the effect be on the 
broader cryptocurrency market as well, as ordinary people 
invest in this market?
    Ms. Liang. I do believe that if stablecoins continue to 
increase rapidly and there are large stablecoins without 
appropriate reserve assets backing the ability for investors to 
redeem, that is a potential run risk and could have 
implications for other short-term funding markets and systemic 
risks for the financial system.
    Mr. Gottheimer. I agree. I am very concerned that if we sit 
here and let partisan games get in the way of getting a bill 
done it would be a huge mistake, and obviously, we will 
continue to lose companies overseas and they will flee our 
markets and consumers will be hurt.
    As part of the PWG report, you outline how stablecoins can 
pose substantial illicit finance risks without appropriate 
oversight. The report specifically cites the need to counter 
terrorist financing as a major objective of stablecoin 
oversight. Additionally, crypto scams resulted in $14 billion 
in losses in 2021, and I have heard from some of my own 
constituents who have seen funds stolen. The hard-earned 
dollars of ordinary citizens could have literally been stolen 
to help finance terrorist attacks.
    Do you think the only appropriate oversight method for 
stablecoins would be to ensure all issuers are subject to bank-
like AML/KYC requirements to counter terrorist financing and 
scams?
    Ms. Liang. Currently, stablecoin issuers are subject to the 
AML/CFT regulations, the anti-money laundering, under the State 
money transmitter licenses. So, they have an anti-money 
laundering framework. It triggers various reporting 
requirements of large transactions or suspicious activities.
    The banking charter could increase some of those compliance 
regulations, but I do think that FinCEN has a framework in 
place that, as I understand it, some of the bigger issues with 
illicit finance now is inadequate enforcement of existing 
regulations in other countries. And Treasury is leading an 
effort at FATF to try to improve compliance and enforcement of 
these actions in other countries and the exchanges in those 
countries.
    Mr. Gottheimer. There are some potential holes right now. 
We need to make sure we close them, right?
    Ms. Liang. Yes. That is correct.
    Mr. Gottheimer. When examining privately-issued 
stablecoins, I think a major concern is ensuring we do not 
allow these coins to undermine the supremacy of the U.S. 
dollar. The PWG report advocates for an approach where 
stablecoins could be issued by insured depository institutions. 
Actually, the report says, ``If well-designed and appropriately 
regulated, stablecoins could support faster, more efficient and 
more inclusive payment options.'' Would you mind elaborating a 
little bit on that, please?
    Ms. Liang. As I mentioned, the potential for stablecoins to 
improve the speed and efficiency of payments is large. We are 
seeing payments being offered 24/7, instantaneous, on public 
blockchain ledgers, on public blockchains. So, that has a 
benefit to help all consumers by reducing the cost of payments 
and increasing their speed. We are seeing that being tested in 
cross-border remittances. We are seeing consumers respond to 
surveys to say they would benefit, and they would like to use 
stablecoins. So, I think when that becomes used to conduct 
transactions in the system that we all share, a payment system, 
it is important that that payment system be operationally 
resilient to all kinds of stresses, and that is the basis for 
the recommendations of the PWG.
    Mr. Gottheimer. Thank you so much. I yield back.
    Chairwoman Waters. Thank you.
    The committee will take a break for 5 minutes.
    [brief recess]
    Chairwoman Waters. The committee will come to order.
    The gentleman from Ohio, Mr. Davidson, is now recognized 
for 5 minutes.
    Mr. Davidson. Thank you, Madam Chairwoman.
    And thank you, Ms. Liang, for the testimony today and the 
work that you have been doing on this topic.
    I would like to step back and discuss the concept of a 
stablecoin more broadly. I think it is easy to get caught up in 
discussing this topic solely in the context of digital assets 
that are pegged to currency or to a commodity. The President's 
Working Group Report acknowledges that some stablecoin 
arrangements could fall under U.S. securities laws, which is 
the SEC's jurisdiction. This risked a siloed approach to 
addressing specific types of stablecoins; in fact, footnote 2 
of the report explicitly states that the report, ``does not 
provide recommendations regarding issues or risks under Federal 
securities laws under the Commodity Exchange Act.''
    This gap, to me, is concerning. So, my question is this, if 
you think about stablecoins, you have referred to them as 
risky, as potentially systemically risky, but you haven't 
really talked about specific things. I guess we did briefly 
allude to Tether, which I have called a time bomb. It is not 
regulated. It is not getting a lot of scrutiny, and I think the 
Securities and Exchange Commission should focus some attention 
on Tether.
    But if you look at the next-largest stablecoin, the U.S. 
Dollar Coin, it is a highly-regulated asset. Do you believe 
that the New York financial services regulatory framework is a 
deficient means of providing regulatory clarity for things 
regulated as New York Trusts?
    In fact, we are talking about stablecoins as this new or 
emerging idea, but there have been stablecoins approved under 
New York Trust laws since 2015. We are 7 years late.
    Could you address the regulatory framework of New York, 
specifically, and those coins that are audited, have audited 
financials, and transparency requirements under New York law, 
as just one example, to be specific?
    Ms. Liang. Yes. Thank you for that question, Congressman 
Davidson.
    I think the issue of stablecoin that the PWG report focused 
on is that it can serve as an investment, and SEC and CFTC laws 
and regulations would apply. But it also serves as a payment 
instrument, which distinguishes it from, say, a money market 
fund.
    The New York State laws apply to stablecoins as an 
investment, and look to audit the assets or provide some 
transparency around the assets, but do not have the authority 
to look into the other functions of a stablecoin that are 
necessary for it to function as a payment.
    Mr. Davidson. Okay. Thank you for that.
    If you look at it, it is okay as a payment system, Visa and 
MasterCard aren't legal tender, but, frankly, they are about 
the only thing that is accepted in America. It is almost 
impossible to pay in cash, and that is actually the legal 
tendered currency in the United States. We have made it almost 
impossible to transact that way, which has made it so that 
there is an emerging technology for better payment systems.
    And, frankly, digital assets aren't subject to the Durbin 
Amendment, so the market is working; there are more affordable, 
lower-cost transaction processes. And as an investment, 
stablecoins aren't really, generally, good investments. They 
are worth a dollar, so why would you own them?
    And so, the question is, if we think about dollars, like 
the U.S. Dollar Coin is U.S. dollars and Treasuries. Another 
one would be gold. We have talked about the silver notes. One 
of the first ones approved was a New York Trust-regulated 
stablecoin for gold.
    But there are also stablecoins that are pegged to other 
very liquid assets like, say, shares of Apple. So, if somebody 
has custody of shares of Apple, some would say, and make this 
choice clearly every day in our financial markets, the best in 
the world, and say, I would rather hold shares of Apple than 
cash, because I don't think my cash is going to keep up with 
inflation and I do believe that Apple is going to become more 
valuable over time; that is an investment. They could tokenize 
that and the share, and the token would be represented by 
someone who truly had custody of shares of Apple, as an 
example.
    Right now, that is not possible for American citizens, but 
it is for others around the world. Wouldn't that also be a 
stablecoin?
    Ms. Liang. I think the value of the stablecoin is distinct, 
because the value is designed to be stable and close to a 
dollar. The value of Apple stock, you could use it to transact, 
but it is volatile, and so both the purchaser and the 
consumer--
    Mr. Davidson. It is volatile in terms of U.S. dollars, but 
less volatile than--it has done better to keep up with 
inflation than U.S. dollars. It has outperformed inflation, as 
an example. So, the U.S. dollar isn't a good metric; frankly, 
the stablecoin should be relative to what it holds.
    And I don't think that this Working Group does anything 
except protect the big banks. It may as well be called a big-
bank protection concept.
    Chairwoman Waters. The gentleman's time has expired.
    Mr. Davidson. My time has expired, and I wish we could go a 
lot longer on the topic. Thank you.
    Chairwoman Waters. The gentleman from Florida, Mr. Lawson, 
is now recognized for 5 minutes.
    Mr. Lawson. Thank you, Madam Chairwoman, for having this 
hearing, and I thank Ranking Member McHenry as well. It is a 
great opportunity for us to learn more about what is going on 
in the economy.
    Under Secretary Liang, according to the recent NASDAQ 
article, data shows that Black and Latino communities are 
driving national, mainstream adoption. The article highlights 
that in a Harvard and Harris Poll, only 11 percent of White 
Americans, 23 percent of Black Americans, and 17 percent of 
Hispanic Americans own such assets. This is a positive trend, 
but it also signals a greater need for financial literacy and 
skill training. The rising interest in new technology is 
instrumental, and an opportunity to prepare key demographics 
for a next-gen workforce.
    How do you suggest the Federal Government be more proactive 
when it comes to future work strategies to position the 
historically-disadvantaged groups to compete in a global 
innovation of the economy and force digital equity?
    Ms. Liang. Thank you for that question. That actually gives 
me an opportunity to highlight a new initiative at Treasury.
    Through the Financial Literacy and Education Council, we 
announced a new initiative on digital assets just within the 
last month or two. We think there is a need and an opportunity 
to introduce digital assets, highlight the risks and the 
opportunities, and highlight the distinctions between types of 
digital assets. This is a cross-government council, and has 
been around for many years, and digital assets is a new 
initiative.
    In addition to that, which is just, which is just the 
education component, the Consumer Financial Protection Bureau 
(CFPB) is clearly following and tracking and taking actions 
against misleading advertising, and the market regulators will, 
of course, be looking to take actions to reduce fraud, and to 
take other actions to protect investors.
    Mr. Lawson. Okay. Thank you.
    A financial regulator stated that an effective payment 
settlement system requires four things: lower fees; 
predictability; exchangeability for goods and services; and 
consistent high speed. Present day, there is a consensus among 
most experts that stablecoins do not meet all of these 
objectives.
    Compared to our traditional financial system, would you 
still consider stablecoins to be an effective way to settle 
payments?
    Ms. Liang. The stablecoins have developed very quickly. 
They are continuing to develop. There is an incentive for 
developers to make them very efficient, to manage all of these, 
to meet all of these requirements to be an efficient payment 
method.
    Are they there yet? That is hard to tell. They haven't been 
tested in periods of stress. I think there still needs to be 
more oversight of their operational risks, and their 
convertibility risks to function as payments. But I think the 
potential for them to be beneficial to the payment system, to 
cut costs, to make it faster, to offer 24/7, is absolutely 
there.
    Mr. Lawson. Okay. Madam Chairwoman, I am going to try to 
get this in.
    Do you think it is necessary for stablecoin issuers to meet 
the same capital requirements as traditional IDIs if the 
majority of the reserved assets are backed by cash?
    Ms. Liang. I believe in terms of capital requirements, 
risk-based capital requirements would clearly be lower, if 
stablecoin issuers held only high-quality, liquid assets.
    Mr. Lawson. With that, Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you.
    The gentleman from North Carolina, Mr. Budd, is now 
recognized for 5 minutes.
    Mr. Budd. Thank you, Madam Chairwoman.
    And thank you, Ms. Liang, for being here.
    The President's Working Group Report states that absent 
urgently-needed legislation, the respective agencies in the 
FSOC can apply their existing authorities.
    So, do you see a scenario where they get tired of waiting 
for Congress to act and, in turn, they would place centralized 
finance (CeFi) designations on particular stablecoins?
    Ms. Liang. I think the scenario for the FSOC to take such 
actions is premature to understand how it could apply its 
tools. FSOC has a responsibility to monitor risks to financial 
stability. It has been following and monitoring digital assets.
    But FSOC's tools are limited. Designation is limited. It is 
not a substitution for a requirement that stablecoin issuers be 
insured depository institutions.
    Mr. Budd. But if I am hearing you correctly, that is--
    Ms. Liang. Proper authorities in the future would have to 
be very factored in and deliberate.
    Mr. Budd. So, if I hear you correctly, you don't see a 
scenario where FSOC would front-run Congress and then place 
heavy limitations on stablecoins?
    Ms. Liang. In the current environment, I don't see that 
FSOC would take such actions.
    Mr. Budd. Okay. So, second question: In his confirmation 
hearing last month before the Senate Banking Committee, Fed 
Chairman Powell agreed that well-regulated, privately-issued 
stablecoins can coexist along a Fed-issued CBDC.
    Do you and the Treasury Department share the same opinion 
with Chairman Powell or do you differ from that?
    Ms. Liang. No, I absolutely agree with that assessment. I 
think regulation of stablecoins will make them more stable, but 
does not preclude, at all, the introduction of a CBDC, nor does 
it determine, the future of the CBDC will probably be the ones 
that determine how stablecoins exist or coexist.
    Mr. Budd. Okay. Thank you.
    So, there seems to be some disagreement among regulators 
about whether or not stablecoins are securities, which would 
determine if they fall under the SEC's regulatory regime. My 
view is that stablecoins that are backed by quality assets do 
not meet the Howey Test.
    Do you believe that stablecoins should be treated as 
securities?
    Ms. Liang. I would really need to defer to the SEC or the 
CFTC for their views on the applicability of their laws and 
regulations. I think that this is a product that has futures of 
a number of different financial products and services, and as 
such, that is why the regulatory approach to it should meet 
those differences.
    Mr. Budd. Very good. I thank you for your time.
    And, Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you very much.
    The gentleman from New York, Mr. Torres, is now recognized 
for 5 minutes.
    Mr. Torres. Thank you, Madam Chairwoman.
    Under Secretary, do you believe, as I do, that 100 percent 
of stablecoin reserves should consist of cash and cash 
equivalents?
    In the interests of time, a simple yes or no will suffice.
    Ms. Liang. Yes.
    Mr. Torres. And I share the PWG's concern that stablecoin, 
if left unregulated or poorly reserved, could impose a systemic 
risk as it becomes more widely adopted as a means of payment.
    But here is where we disagree. The risk of stablecoin, to 
me, is best managed not by the blunt instrument of banking 
regulation, but by common-sense rules, requiring transparency 
and accountability, reporting, auditing, liquidity standards, 
and redemption rights; rules that can be passed on a bipartisan 
basis.
    The benefits of stablecoins, simply, safely, and soundly-
regulated, will ultimately outweigh the risks. And for me, the 
tokenization of the dollar or the ability of the dollar to move 
at the speed of a blockchain, has the potential to lead to a 
better, cheaper, and faster payment system.
    Now, the leading stablecoin issuers in the world have 
chosen to peg their stablecoins to the U.S. dollar, which, to 
me, represents a re-invigoration of the dollar as the world's 
reserve currency.
    Under Secretary, do you believe, as I do, that dollar 
stablecoins have a role to play in preserving the primacy of 
the U.S. dollar?
    Ms. Liang. I do believe that, yes.
    Mr. Torres. During a House Financial Services hearing in 
December of 2021, Brian Brooks testified that Circle, the 
stablecoin issuers of USD Coin, had applied for a bank charter 
with the Office of the Comptroller of the Currency (OCC), but 
was unlikely to receive one.
    Under Secretary, should the OCC grant a banking charter to 
Circle?
    Ms. Liang. I am not in a position to understand a 
particular application. The PWG recommendation is for an issuer 
to become an insured depository institution with the 
appropriate regulation that matches the activities. So, that 
would be the recommendation, but I cannot comment on a 
particular application.
    Mr. Torres. I will just note that the PWG, as you noted, 
has taken the position that stablecoin issuers should operate 
within the regulated banking system. If that is, indeed, the 
policy preference of the PWG, it seems contradictory to deny a 
stablecoin issuer the ability to operate within the regulated 
banking system.
    I have a question about the notion of regulating stablecoin 
issuers as banks. Suppose for a moment there is a stablecoin 
issuer whose reserves are verifiably backed by the dollar on a 
1:1 basis, and whose reserves can be immediately redeemed for a 
dollar on a 1:1 basis.
    If the stablecoin issuer has no fractionalization of 
reserves and has no lending, it would seem to me that the 
stablecoin issuer is operating differently from a bank and, 
therefore, should be regulated differently from a bank.
    Under Secretary, even though the PWG proposes regulating 
stablecoin issuers as banks, do you acknowledge that at some 
level, the absence of fractionalization and the absence of 
lending are relevant factors that differentiate stablecoin 
issuers from banking and, therefore, should differentiate 
stablecoin regulations from banking regulations?
    Ms. Liang. I absolutely acknowledge that there are 
differences, and the lack of lending makes a stablecoin issuer 
different from a traditional, commercial bank.
    The proposal recognizes or relies on the flexibility of 
current banking regulation to distinguish between those kinds 
of activities that a stablecoin issuer that does not make loans 
would not be subject to regulations that would apply to 
institutions that make loans.
    The distinction about the stablecoin issuer is that it is 
more than just a redemption and creation of stablecoins, which 
the transparency and disclosure rules could apply to, but it is 
also about storing, transferring, using the stablecoin for 
payments and that is why--
    Mr. Torres. In the interests of time, I just want to 
interject.
    The reserves of Tether, the largest stablecoin issuer, 
consist heavily of commercial paper, and is shrouded in 
secrecy. The public has a right to know the names of the 
companies buying the commercial paper and the countries in 
which those companies are located in order to fully assess the 
true safety of Tether's reserve assets.
    Suppose for a moment we were to adopt the rule of requiring 
reserves that were 100 percent cash or cash equivalent. Since 
Tether has become one of the largest holders of commercial 
paper in the world, what unintended effects could a 100 percent 
cash or cash-equivalent rule have on the commercial paperwork?
    Ms. Liang. I believe this is similar to the issues that 
arise in the money market fund regulation. There are government 
money market funds and there are prime money market funds. The 
prime money market funds, under new regulations, have reduced 
their holdings of commercial paper and commercial paper issuers 
have sought other investors.
    I think over time, the choice, the markets and the issuers 
find the right investors and reduce risk to the system overall.
    Mr. Torres. My time has expired. Thank you.
    Chairwoman Waters. Thank you very much.
    The gentleman from Tennessee, Mr. Kustoff, is now 
recognized for 5 minutes.
    Mr. Kustoff. Thank you, Madam Chairwoman. I thank you and 
the ranking member for calling today's hearing.
    And Under Secretary Liang, thank you very much for sitting 
here for almost 3 hours. Frankly, I appreciate your 
straightforwardness in talking about issues that are complex to 
a lot of people.
    And to that point, if we could, the President's Working 
Group report that talked about the uses and the benefits of 
stablecoins, I think you have touched on this and we have 
gotten in the weeds during today's hearing, if you were talking 
to any one of our Rotary Clubs or Kiwanis Clubs anywhere in the 
country, could you talk to that degree or if you were talking 
to one of those groups, about the uses and the benefits of 
stablecoins?
    Ms. Liang. I think stablecoins reflect a new technology and 
the technology, itself, can be complicated. But what it does 
offer is the ability to transact payments instantaneously, 24/
7, on a public chain so that the transactions are viewable. So, 
I think it offers efficiency, makes the payments cheaper, and 
faster to meet consumers' needs. And the technology is sort of 
behind that, but I think that is what the benefits are.
    How that technology can evolve and introduce other 
innovations is sort of open at this point. This is just every 
adoption and further adaptation, I am sure, will come. So, I 
think that is what the explanation of stablecoin is; it is an 
alternative form of cash, an alternative way to make a payment.
    Mr. Kustoff. You mentioned the technology, which I 
appreciate. I know we are talking in theory, but it would be a 
true statement that if we were too heavy-handed from a 
regulatory standpoint, as it relates to the technology, and it 
doesn't catch up. Is that fair?
    Ms. Liang. I agree. I think it is a balance that needs to 
be--there are benefits and there are costs, yes.
    Mr. Kustoff. Right. It is not easy to find that balance 
and, obviously, you have been questioned today by Members who 
have different thoughts about the degree of regulation, which 
is fair, and that is why we are here and that is why we 
appreciate you participating in today's hearing.
    If I could, and I know there have been some questions to 
you related to the Chinese Communist Party (CCP), we have 
recently seen the CCP go after some digital assets, an outright 
ban on some of those assets in China. Can you talk about the 
consequences, if you will, of China's crackdown on digital 
assets and maybe what lesson we can learn in the United States 
from those crackdowns?
    Ms. Liang. I believe, as I understand it, China is trying--
introducing the eCNY, the digital law, is in some parts, a way 
to take back some control that they have lost to private firms 
that offer digital assets. And they are offering their own 
digital currency as a CBDC, which will offer a lot of lessons 
for other countries.
    In terms of adoption, they are offering incentives. As we 
understand it, people are still evaluating whether to use the 
eCNY or the other two products that they have become accustomed 
to. I think it is reflecting that there is a change in 
technology for how payments will work and consumers will make 
the choices, and they are moving into this market.
    China doesn't value privacy as much as, say, the U.S. does, 
so I think the lessons from how they introduce theirs versus 
how the U.S. could introduce one here, in that space are a 
little less direct, but I think the use, the provision of a 
CBDC, the introduction of custodial wallets by the Central Bank 
of China will have a lot of lessons for other countries as they 
consider how to introduce a CBDC, if they choose to do so.
    Mr. Kustoff. Thank you, Under Secretary Liang.
    And thank you, Madam Chairwoman.
    Chairwoman Waters. The Chair now recognizes the gentleman 
from Massachusetts, Mr. Lynch, who is also the Chair of our 
Task Force on Financial Technology, for 5 minutes.
    Mr. Lynch. Thank you, Madam Chairwoman.
    And Under Secretary Liang, thank you for your willingness 
to come before the committee to help us with our work. This has 
been a very good hearing.
    We are currently in a period of elevated inflation and the 
Fed has made announcements that over the coming months and 
perhaps into next year, they will introduce a series of 
interest rate increases in order to try to get control of that 
inflation by increasing the cost of money. And my concern is 
that that monetary policy, that ability to control the cost of 
money, would be undermined by, let's say, if Meta, formerly 
known as Facebook, had an idea about a digital currency, and 
they have that network effect where they have 2 billion daily 
users or something like that.
    Wouldn't the introduction of stablecoins on a wider basis 
undermine the Federal Reserve's ability to control inflation, 
for example?
    Ms. Liang. I think you are raising an important issue about 
private money increasing quickly in scale that could produce 
its own internal system, which is then outside what the central 
bank would set interest rates and control. I think that is 
exactly one of the concerns about large technology firms or 
large firms with networks that could create a closed loop. I 
think the implementation of monetary policy does come into 
play. The questions around how will you do that, I think is an 
important issue. That was a potential risk we raised.
    Mr. Lynch. Okay. Have you thought through how, in periods 
of high inflation, for example, the Fed could retain the 
ability to restrict, say, an issuance of a stablecoin during 
that high-inflation period? Is that something that might be a 
tool that would mitigate that danger, or am I getting into 
someone else's jurisdiction, as opposed to Treasury?
    Ms. Liang. Yes, I think that probably starts to cross the 
line of independence of monetary policy from the regulatory 
structure of the financial institutions. But it is something 
that I am sure the central bank, the Fed, would be thinking 
about in terms of introducing a central bank digital currency 
and how it would coexist with private stablecoin issuers and 
that they would be considering that seriously when they are in 
those, in that, in their efforts.
    Mr. Lynch. Okay. Let me ask you this. I know a couple of 
Members have raised this in the past, but it would seem to me 
that the issuance of a central bank digital currency by the 
Fed--and I know that the Boston Fed is working with MIT in 
Boston to come up with the technology around that--would 
diminish the value of many of these stablecoins, especially 
with respect to the payment system; in other words, 
instantaneous transactions with near-instantaneous 
reconciliation and settlement.
    Ms. Liang. Yes. I think there are a lot of really important 
questions in terms of designing a CBDC, all of which would have 
implications for how they either coexist or compete with 
private stablecoins. There would be issues of who they held the 
accounts with, whether there would be caps on the accounts, and 
whether they would be interoperable with private stablecoins.
    As you know, the Fed is looking at this, and in their paper 
they raised 20-something questions about it, which just 
suggests the complexity of the issues. And I think that it is a 
critically-important issue for the Fed and for Congress to 
consider what the future of the money and payment system should 
look like in this country.
    Mr. Lynch. Thank you, Madam Chairwoman.
    And I yield back.
    Chairwoman Waters. Thank you very much.
    The gentleman from Indiana, Mr. Hollingsworth, is now 
recognized for 5 minutes.
    Mr. Hollingsworth. Good afternoon, everybody. I am really 
excited about this hearing. I have been looking forward to it 
for quite a while.
    Under Secretary Liang, I have been on an emotional roller 
coaster over the last couple of weeks and through this hearing. 
I started off dismayed because I saw in the report put out that 
only banks should issue stablecoins and that they should be 
subject to prudential regulation. But then, surprisingly, and 
happily, by the way, I have heard you a couple of times in 
response to some of my colleagues' questions, maybe draw a 
little nuance to that particular issue, and I want to go back 
to a few things that you said earlier.
    First, ``The full set of bank regulations do not need to be 
applied to a stablecoin issuer that does only stablecoin 
issuance. There is flexibility in the insurer depository 
institution framework.''
    Next quote: ``stablecoin issuers that have a simple 
business model, holding high-quality assets, would be subject 
to less-stringent supervision and regulation.''
    I think these are really important points to make, that 
there is the opportunity for good stablecoin issuers, and I 
have met many stablecoin issuers that are very interested in 
being good operators, good stewards, and good issuers, for them 
to have a lower-regulatory model, provided that they are wholly 
reserving for the issued assets.
    Can you talk a little bit about the type of assets that 
should qualify as high-quality assets, according to you?
    Ms. Liang. Thank you for that. And I stand behind those 
statements I made.
    The high-quality assets that can meet the abilities for 
investors and consumers to redeem their stablecoins should be 
cash, or reasury securities. It could be, if it were in the 
banking system, reserves at the central bank, which are the 
highest quality, and then would also not have any 
convertibility issues upon redemption. I am not trying to 
specify or limit what could be in that category, but just high-
quality, credit risk-free assets.
    Mr. Hollingsworth. And I think we would also want to make 
sure, not just high-quality--30-year Treasuries are high-
quality--but we also want to make sure they are of a limited 
maturity, right? You talked about run-risks several times.
    Ms. Liang. Yes.
    Mr. Hollingsworth. Making sure near-term maturity at par is 
important, as well; is that right?
    Ms. Liang. I think that is an important consideration that 
short-term Treasury bills convert much more quickly to cash 
than longer-term Treasury securities, we found, at least in 
March 2020.
    Mr. Hollingsworth. And several times previous to that, and, 
obviously, you are taking less interest rate risks, with a 
shorter duration.
    Ms. Liang. Yes.
    Mr. Hollingsworth. So, I guess my point here today, and I 
think you have elucidated it very well, is that we do have the 
ability to say if you are going to be, I will use your word, a 
simple stablecoin issuer that, and you are going to fully 
reserve and your assets are going to meet a certain quality and 
are going to be no longer than a certain duration, we should 
accept that even without prudential regulation layered over and 
above that, right?
    Ms. Liang. I think there are regulations related to the 
operational risks of stablecoin for storing and transferring 
the stablecoins as payments and that are more than just the 
consumer-protection kinds of the rules that the State money 
transmitter laws usually focus on.
    Mr. Hollingsworth. There are a lot of businesses that 
aren't subject to full prudential regulation that do those very 
things. We have figured out custody of assets, outside of 
banking the loan and other issues related to, I will call it 
the back-end operations that we could sufficiently ensure they 
operate without the full weight of prudential banking 
regulations. There are businesses that we allow to do business 
today.
    Ms. Liang. Yes. The other service providers in the 
recommendation were not required to be--the recommendation was 
not to require them to be an insured depository institution.
    Mr. Hollingsworth. Right.
    Ms. Liang. It only applied to the issuer of the stablecoin.
    Mr. Hollingsworth. Right.
    Ms. Liang. As you know, it is part of a broader arrangement 
for--
    Mr. Hollingsworth. In my 20 last seconds, I just want to 
make sure I hit this nail on the head. I think there is room 
for non-bank stablecoin issuers, provided that their assets are 
backed wholly and that they are of sufficient quality and they 
don't exceed a certain maturity. I think that we should find 
another avenue for this technology to develop outside of giving 
the exclusive power to banks themselves.
    Chairwoman Waters. Thank you very much. The gentleman's 
time has expired.
    The gentleman from Illinois, Mr. Casten, who is also the 
Vice Chair of our Subcommittee on Investor Protection, 
Entrepreneurship, and Capital Markets, is now recognized for 5 
minutes.
    Mr. Casten. Thank you, Madam Chairwoman.
    And thank you, Under Secretary Liang.
    I want to follow up on the conversation you had with Mr. 
Huizenga. I think there are all these really, really cool 
things around digital money and all of these things we are 
developing. I also think sometimes we wrap things in acronyms 
and techno-speak. We make the old sound new and some of these 
things are simple, and I want to just focus on sort of the 
simplicity of currency.
    Because if I understood your answer to Mr. Huizenga, and I 
hope you will correct me if I get this wrong, when he asked you 
why shouldn't we regulate this like money market mutual funds, 
you said, because that can't be used as a currency and this 
can. I see you are nodding, so hopefully, I got that right.
    It seems to me that it can be used as a currency is one 
question, is a separate one--cowrie shells can be used as a 
currency, and as Mr. Sherman noted, there are an awful lot of 
people who are not taking them, stablecoins or any digital 
currency, as money right now.
    And to my simple way of thinking, that is not really that 
surprising. If you want a dollar-denominated currency, we have 
one: It is the dollar. And we have created a world where the 
dollar is valuable as a currency: one, because we pay our taxes 
with it, which is 20 percent of the economy, roughly; and two, 
because it is backed by the full faith and credit of the 
government.
    Since, presumably, I didn't see anything in the PWG report 
that said when we will allow people to pay taxes in stablecoin 
or Dogecoin or Ethereum or whatever else, then the full faith 
and credit piece of any dollar-backed stablecoin really comes 
down to making sure that we have the management and reserve 
rules, such as we already have for money market and mutual 
funds.
    Regardless of whether or not this actually becomes a 
currency that converts from, ``can be used'' to, ``is being 
used,'' is there any reason why we should not be saying, let's 
put all of those same fiscal protections that we have in money 
market mutual funds, in these stablecoin markets?
    Ms. Liang. I believe that the protections of the money 
market fund industry that apply to money market funds would 
apply to stablecoins, to the extent that they offer a stable, a 
redemption into a dollar. I guess I would think that 
stablecoins, because they can be used as payments by households 
and businesses and are currently being adapted to do so, raises 
a separate set of issues, and that is what the PWG report--
    Mr. Casten. And if I may, and I understand that you have to 
be a little bit careful about not recommending policy, but I 
understand that people are trying to do that. I think that is 
the separate question of, until they do, how does this behave 
in the market, because we do still need to have all of those 
consumer protections that I think Mr. Himes so eloquently 
outlined.
    So, to the extent that this is being used as a currency 
today, where there is a push, if I understand your testimony, 
and I understand the markets right, these three big values: 
number one, in remittances; number two, in clearing time; and 
number three, in lower fees, and all of the benefits that 
creates.
    Did I understand your answer to Mr. Gottheimer correctly, 
that you think that those issues are not creating, essentially, 
an arbitrage issue with anti-money laundering and know-your-
customer rules, that the rules around this are robust enough 
that we are just arbitraging away existing market and 
efficiency, not dodging regulations. Is that the gist of your 
answer to Mr. Gottheimer?
    Ms. Liang. Yes, in terms of the illicit finance risks of 
stablecoins, yes, absolutely.
    Mr. Casten. Okay. So, then I get back to saying, okay, if 
we think that eventually this thing is going to have 
appropriate regulation as it sits right now to make sure that 
there is the fiscal protections and the don't break the bucket 
of a money market fund, and if we agree that the existing 
rules, and I don't know that I am convinced on this, but if I 
am just, do I take your testimony, do we agree that if the 
existing rules provide all of the AML/KYC protections, why go 
through all the complexity of creating a stablecoin that 
exposes us to those risks that we have to regulate around to 
protect? Aren't we just really creating a central bank digital 
currency that would solve those issues just as well and not 
have all of these other exposures?
    What is a well-regulated stablecoin providing that a CBDC 
doesn't?
    Ms. Liang. I think, one, a central bank digital currency 
would be the backed by the central bank. This is by high-
quality assets, which are not central bank reserves. So, there 
is that distinction.
    The other distinction that I think we were trying to 
grapple with is that there are private stablecoins now and they 
are growing and growing quickly and may grow faster if network 
effects allow them to scale up. And there is not a central bank 
digital currency being issued right now, so this could be the 
substitute. It could be a complement.
    They could go away once a central bank digital currency 
were to be introduced, if it were.
    But the current situation is they are currently being used 
and--
    Mr. Casten. The Chair is telling me we are out of time. I 
know. So, thank you.
    I am all for private sector innovation. I just want to make 
sure that if that requires us to build a big regulatory 
framework, let's have eyes wide open about what that means.
    Ms. Liang. Yes.
    Chairwoman Waters. Thank you very much, Mr. Casten.
    Mr. Casten. Thank you, Madam Chairwoman.
    Chairwoman Waters. The gentleman from Ohio, Mr. Gonzalez, 
is now recognized for 5 minutes.
    Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. Thank 
you for holding this hearing.
    And thank you, Under Secretary Liang, for your 
participation.
    I will start with the question that I think Mr. Casten just 
left off with, which is, what do we get with a well-regulated 
stablecoin that we do not get with a central bank digital 
currency?
    I think privacy, for one, right? There is a design question 
with the CBDC. But me, personally, I have massive privacy 
concerns that I don't see a CBDC being able to address.
    And, two, the innovation that we get on the private sector, 
the history on this is pretty clean. I think that private 
sector innovation tends to be more efficient, more economical, 
and better. And so, I think those two things are worth 
considering.
    Ms. Liang, I want to start with a question with respect to 
where the primary, prudential oversight of stablecoin should 
exist. There are some proposals that have been put out that 
would put that under the Treasury. My view is, that is an 
option. I would like you to opine on that, and maybe if you are 
willing, where do you think primary prudential regulation 
should be housed other than the Federal Government?
    Ms. Liang. Thank you. I agree with you on the central bank 
digital currency, that privacy and innovation are advantages of 
the private versus the central bank digital currency. I 
appreciate that.
    The U.S. Treasury is not set up to regulate financial 
institutions, and has not been, historically.
    The OCC, of course, is a regulator. The Federal Reserve is 
a regulator. The FDIC is a regulator.
    I think a proposal for a stablecoin issuer to be an IDI 
would, depending on the charter as an IDI, go into the 
regulator as under current practices. That could be a choice--
    Mr. Gonzalez of Ohio. I would like to interject here if I 
could, and pick up where Mr. Hollingsworth and Mr. Torres left 
off. I would like to associate myself with much of what they 
said.
    I want to ask a pretty direct question. The IDI 
recommendation, as you have said, is more or less to ensure 
safety and soundness and to guarantee a consumer protection 
mechanism so that if you have a stablecoin, it can be redeemed 
for a dollar. I think you have said in various instances that 
if the reserve quality is high enough and there are redemption 
rights in place, maybe that is not necessarily required.
    Did I hear that correctly, that there could be a world that 
you would agree with, which is to say, hey, there are some who 
probably need to be IDIs, but if we define what a stablecoin is 
in a particular way, that is not necessary.
    Is that fair?
    Ms. Liang. I think a stablecoin issuer, and these are all 
issues for further discussion, but a stablecoin issuer within 
an IDI framework that held capital and was subject to liquidity 
standards, could have reserve assets that were not 100 percent 
cash because of the capital and liquidity standards and the 
other standards.
    If it didn't have the capital or liquidity, one would want, 
basically, cash--
    Mr. Gonzalez of Ohio. So, there is a world where we could 
have stablecoins regulated as such that they do not need to be 
IDIs. I think that is really important for a whole host of 
reasons, one of which is the diversity and inclusion aspect of 
crypto. As has been pointed out, crypto has been 
disproportionately adopted by diverse communities, which is in 
contrast to other financial innovations, which typically 
benefit non-diverse communities disproportionately.
    I would argue that part of this is because the barriers to 
entry for diverse communities are much lower in crypto and 
also, it gets around to two things that when the FDIC surveys 
the underbanked and unbanked, why do they remain unbanked? One, 
minimum-balance requirements, and two, they don't trust banks; 
they are unbanked.
    And so, I think a fear I have with the IDI requirement is 
that we push our diverse communities and those who are unbanked 
into a banking relationship that they either, don't trust or 
have natural reasons why it doesn't make sense. So, I think to 
preserve the innovation for all Americans, doing so outside of 
the IDI framework is something of which we absolutely should be 
cognizant.
    And with that, I yield back.
    Chairwoman Waters. Thank you very much.
    The gentlewoman from North Carolina, Ms. Adams, is now 
recognized for 5 minutes.
    Ms. Adams. Thank you, Chairwoman Waters, and Ranking Member 
McHenry, for hosting the hearing today.
    And Madam Under Secretary, thank you for your expert 
testimony and for answering our questions here today.
    You know as well as I do that industry, academia, and 
everyone in between has their own opinion on who should 
regulate cryptocurrencies and stablecoins. The report that we 
are discussing today suggests that our prudential regulators 
should be the primary Federal overseer of stablecoins,
    So, Madam Under Secretary, are you concerned that there 
could be confusion if stablecoins are brought into the 
prudential regulatory framework, but other cryptocurrencies are 
not?
    Ms. Liang. I believe that there is a distinction in 
consumers' minds and investors' minds between what are unbacked 
crypto assets and stablecoins. And I think we, as regulators 
and policymakers, can actually try to reinforce that 
distinction with regulation, that stablecoins offer stable 
value, actually can provide stable value.
    I think that is an important distinction to make and I 
think regulation can help that. I am not concerned that it 
introduces confusion.
    Ms. Adams. Okay. Thank you.
    You have heard today that there is bipartisan desire to 
provide this industry the tools that it needs to grow in a 
strong and safe manner. In your view, how can both Democrats 
and Republicans in Congress work together with the 
Administration, industry, and other stakeholders to best 
provide those tools?
    Ms. Liang. I think that Members of Congress have been 
proposing pieces of, parts of legislation to consider how to 
make stablecoins more stable. I think there is a general 
acceptance of what are the sensible risks of stablecoins for 
payments. And there is a discussion about what is the best 
regulatory approach for it, but there does seem to be some 
common acceptance of a need for regulation, and I think that 
there is agreement that more consistent is value to promote 
innovation and competition.
    So, I think these are issues for Congress to consider and 
balance the benefits of innovation with the costs, and the 
risks to users and the payment system on the financial system 
broadly. We are very happy to continue to engage in that 
process.
    Ms. Adams. Thank you very much.
    Madam Chairwoman, I am going to yield the rest of my time 
back. Thank you.
    Chairwoman Waters. Thank you very much.
    The gentleman from Tennessee, Mr. Rose, is now recognized 
for 5 minutes.
    Mr. Rose. Thank you very much, Chairwoman Waters, and 
Ranking Member McHenry, for holding the hearing.
    And I also want to thank our witness for being here today.
    As my time is limited, I am going to go ahead and dive 
right in. Under Secretary Liang, I wanted to follow up on a 
line of questioning on the importance of the dollar on the 
global stage. If Congress banned stablecoins, do you think that 
stablecoins would be developed in other countries?
    Ms. Liang. Yes, I think stablecoins would continue to 
develop.
    Mr. Rose. And do you think that stablecoins would be pegged 
to other currencies, rather than the dollar?
    Ms. Liang. I think the use cases would determine what it 
would want to peg to. But if the U.S. dollar is supported by 
not stablecoins or technology, but by the country's respect for 
the rule of law, it is the infrastructure or the economic 
potential of the country, but no doubt if you created currency 
or payment systems that are separate and independent, it would 
take away from what could have been additional contributions to 
the role of the dollar.
    Mr. Rose. Sure. The U.S. dollar, of course, is the world's 
dominant reserve currency, and as I think has already been 
mentioned, approximately 59 percent of all foreign exchange 
reserves are held in U.S. dollars. Currently, the five-dollar 
pegged stablecoins represent 94 percent of the market.
    Under Secretary Liang, what are the benefits of having 
stablecoins pegged to the U.S. dollar, as opposed to other 
currencies?
    Ms. Liang. I think the reflection that many of the major 
stablecoins being pegged to the dollar reflects that the dollar 
is the primary reserve currency. And I think for policy 
purposes, policies to promote the strength of the dollar are 
critical, and stablecoins will continue to peg to the dollar as 
long as the dollar remains strong and reflects--
    Mr. Rose. Okay. So, is the inverse true, that having a 
majority of stablecoins pegged to the dollar might help to 
preserve the dollar's status as the world's reserve currency?
    Ms. Liang. Yes. I think it is a positive contribution.
    Mr. Rose. And are there stablecoins that reference other 
currencies, such as the Yuan or the Euro today?
    Ms. Liang. The Central Bank of China has issued additional 
currency, yes, but--
    Mr. Rose. According to a recent staff working paper 
released by the Federal Reserve, entitled, ``Stablecoins Growth 
Potential and Impact on Banking'', quote, ``stablecoins served 
as a digital safe asset, while more speculative crypto assets 
were temporarily in free fall during the crypto market crashes 
in March of 2020 and May of 2021.'' The paper adds that these 
episodes demonstrate the potential for stablecoins to serve as 
a digital safe haven during market distress.
    You testified that stablecoins may pose systemic risk. Do 
you know what the size of the market for stablecoins is today?
    Ms. Liang. Currently, stablecoins are roughly $170 billion, 
but they are used in many transactions. Their value does not 
represent their importance in the crypto asset market, because 
they are used in many transactions and that doesn't [Audio 
malfunction.] in share of transactions, it is much higher.
    Mr. Rose. To give some contrast, what is the size of the 
money market funds today?
    Ms. Liang. The money market fund industry, I would guess, 
is in the $4 trillion range at this point.
    Mr. Rose. And then, similarly, what is the market for U.S. 
Treasuries today?
    Ms. Liang. The market for U.S. Treasuries is much larger 
than stablecoins.
    Mr. Rose. Right. So, is the stablecoin market really big 
enough to pose systemic risk, and do these incidents in March 
of 2020 and May of 2021, those market events, do they tend to 
show that adequately-capitalized stablecoins with appropriate 
safeguards in place, can, as the Fed's working paper states, 
``serve as a digital safe haven during market distress and 
provide a level of stability that is on par with traditional 
forms of safe value''?
    Ms. Liang. Yes. The PWG report does not suggest that 
stablecoins currently are a threat to financial stability and 
pose systemic risk. It is the ability for stablecoins to scale 
up rapidly because of network effects, once they become 
adopted, then it could pose a systemic risk.
    Mr. Rose. Thank you, Under Secretary Liang.
    I see my time has expired. I appreciate your responses.
    And Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you.
    The gentlewoman from Texas, Ms. Garcia, who is also the 
Vice Chair of our Subcommittee on Diversity and Inclusion, is 
now recognized for 5 minutes.
    Ms. Garcia of Texas. Thank you, Madam Chairwoman, and thank 
you for this very important hearing.
    And Under Secretary Liang, thank you so much for your 
patience and your endurance. The end is in sight. We are coming 
down to the last few Nembers, and votes are taking place, so I 
will have to rush through my questions.
    But I just want to quickly follow up on Mr. Rose's 
question. The $170 billion market share that stablecoins 
represent, how many consumers would that be? How many people 
are actually using this?
    Ms. Liang. That is a great question. I would have to get 
back to you on that.
    Ms. Garcia of Texas. How many investors does it represent?
    Ms. Liang. I do not know.
    Ms. Garcia of Texas. So, we just know the growth in value, 
but we really don't know if we are talking about 1,000 
consumers or 2,000 investors. And I just wanted to say, to keep 
things in perspective, that we are saying it is growing, and we 
need to do something. But is it really? Who is really using it?
    And I ask that because the report states that legislation 
should require stablecoin issuers to be registered as insured 
depository institutions in order to participate in issuing 
currency. Well, I understand the reason behind this, and I 
think I do support it. I want to explore the possibility of 
this requirement preventing smaller issuers from participating 
in market activity.
    We always have challenges, and I think other Members have 
asked you about barriers for unbanked and smaller providers, 
smaller issuers. I don't want us to create a system that is 
just going to repeat what the banks have been doing, which is 
leaving us out.
    And if we don't know who is using it now or who is 
investing now, I am afraid that we are just going to repeat 
ourselves. So my question is, what can we do to make sure that 
the little guys or the little gals are not left out while 
allowing only the big banks coin issuers to participate?
    Ms. Liang. Right. The proposal for an IDI does, of course, 
raise some costs of entry for this business. But I believe that 
there is a lot of flexibility in a new charter. So, it is not 
trying to reduce--
    Ms. Garcia of Texas. I understand that. I don't mean to 
interrupt, but I just want to be clear. My question is, how are 
we going to make sure that there is true equity--I think Mr. 
Meeks also asked this question--and that it will be accessible 
and that we are not just putting together another system that 
is going to leave the same people out who have always been left 
out?
    Because you have mentioned remittances, and while that is a 
laudable goal, I think there's a lot of work to do before we 
could get there. Because you have mentioned in terms of things 
that are good about stablecoins and creating a new payment 
system would be lower costs, but I am worried about conversion 
fees. I am worried about accessibility to be able to get those 
funds.
    If I am in Mexico, and I am a poor person waiting for my 
relative here in Texas to send money, how do I convert this 
stablecoin into money that I can then take to the market to buy 
a jug of milk? Shouldn't we think this through?
    Ms. Liang. That is exactly the pilot programs that 
stablecoin issuers and wallets are testing. Can you improve the 
speed and reduce the cost of these remittances between, say, 
Texas and Mexico?
    Ms. Garcia of Texas. But you understand that a lot of 
people don't use wallets. A lot of folks don't have cell 
phones. That has been my pet peeve of the entire vaccine 
rollout. It is so tech-dependent.
    Ms. Liang. Yes.
    Ms. Garcia of Texas. Because there are people in my 
district--I have a 77-percent Latino district--who don't have 
Wi-Fi and don't have the tech capacity to do that. So, once 
again, we are creating this system that is just going to help 
those who already have and leave the have-nots out of the 
picture.
    I just want us to be mindful that $170 billion does not 
mean it is 170 billion people who are using it.
    Ms. Liang. No, absolutely. And I share your concern that 
not all households can access this. But I believe greater 
competition is probably the best way to improve the payment 
system, and that stablecoins are a competitor to the existing 
payment system.
    I would say we won't know what our payment system will look 
like many years from now. But competition is probably the 
strongest force for improving a payment system over time and 
meeting the needs of all consumers.
    Ms. Garcia of Texas. Thank you. I see my time has run out.
    Madam Chairwoman, I yield back, and I am running to the 
Floor to vote. Thank you.
    Chairwoman Waters. Thank you very much.
    The gentlewoman from Michigan, Ms. Tlaib, is now recognized 
for 5 minutes. Is Ms. Tlaib on the platform?
    [No response.]
    Chairwoman Waters. The gentleman from Wisconsin, Mr. Steil, 
is recognized for 5 minutes.
    Mr. Steil. Thank you very much, Madam Chairwoman. I 
appreciate you holding today's hearing on a really important 
topic.
    As we have seen, digital assets are already transforming 
our financial system, and I think we really have an amazing 
opportunity right now to put in place the legal foundations 
that are going to support continued innovation and long-term 
growth, in particular, in the United States. And I am concerned 
that if we continue down a path of ill-fitted regulatory 
constructs, we may be moving this innovation offshore, rather 
than coming up with the approach of, how can we help bring 
innovation into the United States?
    And so, with that background, Under Secretary Liang, we 
have had a great conversation today about digital asset coins, 
how they are currently and particularly State-regulated. And 
besides the money transmitter regimes, as we have noted today, 
several States have developed pretty sophisticated approaches 
to digital assets regulation.
    As we noted, in New York, the BitLicense allows firms to 
apply for limited purpose trust charters under State laws. But 
I notice in many ways, your report didn't really address the 
regulatory framework in States. Earlier, I think you mentioned 
that you talked to State regulators and analyzed State 
frameworks. Is that correct?
    Ms. Liang. We did consider State frameworks. Yes, we 
considered State frameworks.
    Mr. Steil. But there is not really an actual analysis of 
State frameworks included in your report. Is that correct?
    Ms. Liang. No, we did not include a discussion of State 
framework analysis.
    Mr. Steil. So, do State-chartered depository institutions 
have a primary Federal regulator, and are they subject to 
Federal banking regulations?
    Ms. Liang. I think Federal banking regulations can apply to 
banks that are State-chartered.
    Mr. Steil. Okay.
    Ms. Liang. Some of the BitLicenses are, as you said, 
limited purpose banks or charter banks, as I understand them, 
or trust banks. Yes.
    Mr. Steil. I appreciate that. I would like to go back a 
little bit in time here to earlier in the hearing, back to a 
response you gave to my colleague, Mr. Loudermilk's, question 
on the PWG approach. I think you referenced, if I recall 
correctly--you said it builds upon existing State laws.
    But as we just noted, the report doesn't really analyze 
State laws. There is definitely a Federal primary approach. 
What do you mean by, ``builds upon State laws?''
    Ms. Liang. Yes. One is partly all stablecoin issuers and 
custodial wallet providers are money services businesses, and 
money transmitter laws apply to them. That is at least 49 State 
regimes.
    The proposal does not replace the State money transmitter 
with the Federal money transmitter proposal, which I understand 
maybe some legislators are considering. But it could build on 
that and require a set of risk management standards that could 
apply to custodial wallet providers. In that sense, it builds 
on the State frameworks.
    Also, insured depository institutions can be State-
chartered or Federal-chartered. That is in the current system. 
But even a State-chartered bank has always had some Federal 
layer on it for deposit insurance or some of the other features 
of a traditional bank.
    Mr. Steil. I just think it is a really interesting topic 
here. So, I am just trying to flesh it out a little bit.
    Ms. Liang. Yes.
    Mr. Steil. We are looking at kind of a construct that would 
privilege federally-insured depository institutions. How would 
you account for the existing State-based regimes that already 
apply to incumbent firms? It is a little bit what you are 
talking to. Could you hit that point for us?
    Ms. Liang. Yes. I think that would be something that needs 
further discussion. The current existing State charters, at 
least some of them, do not provide the supervisors of those 
institutions sufficient visibility into the broader payment 
arrangement. Therefore, we are looking to fill that gap.
    Mr. Steil. Yes, understood. Under Secretary Liang, I 
appreciate your time. I think it is really important that we 
get this right. I think we are digging into the right topics.
    I think the key here is to make sure that we don't 
overregulate, that we encourage innovation in the United States 
of America. I think we are at a moment in time where there is 
great opportunity. We don't want to overregulate this and throw 
the baby out with the bath water on what is clearly a really 
interesting space of development.
    And so, conscious of the time, Madam Chairwoman, I will 
yield back.
    Chairwoman Waters. Thank you.
    The gentlewoman from Pennsylvania, Ms. Dean, is now 
recognized for 5 minutes.
    Ms. Dean. Thank you, Madam Chairwoman.
    And thank you, Under Secretary Liang, for testifying today 
and for all of this valuable information.
    When we had a hearing on digital assets in December with 
witnesses from the crypto industry, I talked about my concerns 
over the extreme volatility that we see in the market, and I 
asked the panel if we are at risk of a bubble akin to that 
which was triggered in the 2008 financial crisis. I will note 
that the volatility that we have seen in the 2 months since the 
hearing has certainly not reassured me.
    But at the hearing, in response to my question, Mr. Brian 
Brooks likened this volatility to what we saw in the first 100 
years of the stock market. While it may be turbulent in the 
early days, the long chart is up and to the right, he said, 
just like the U.S. equity markets. Well, that may be true, but 
I am worried, and that doesn't quite tell the whole story.
    Under Secretary Liang, what are your thoughts? Are we at 
risk of another bubble?
    Ms. Liang. I think with many of the digital assets, 
especially those that are unbacked, the price volatility is 
very high, and investors absolutely need to understand whether 
those investments are appropriate for them.
    The costs of a bubble are high when the prices are 
supported by financial leverage in the system, or they are 
connected to traditional highly-levered banking institutions 
that could magnify the impact of any price decline in crypto 
assets.
    Currently, investors in crypto assets and digital assets--
this is separate from stable value, but in terms of the digital 
assets with highly-volatile assets--are bearing the losses and 
the gains largely on their own. But we definitely are concerned 
that those do not cause problems for the broader financial 
system or the economy where consumers who are least financially 
and economically resilient would bear the cost of a decline in 
prices of a bubble bursting.
    But to the extent that these prices are within the sort of 
digital asset space, the implications of the price decline are 
less severe for the broader economy and less severe for the 
consumers who really are most vulnerable to these kinds of 
outcomes.
    Ms. Dean. Thank you. That is really helpful.
    And I wanted to build on that issue of leverage. You have 
talked today about your concerns with the systemic risk posed 
by the buildup of leverage against digital assets.
    In your written testimony, you stated, ``As we saw in 2007-
2008, financial risk--and most that preceded it--leverage can 
play a key role in catalyzing and accelerating financial 
instability.'' And you note that the Administration is still 
working to understand the role that leverage plays in digital 
asset markets.
    Can you give us any further clarity along those lines of 
leverage and what the Administration is recognizing?
    Ms. Liang. I think it is early to say very much, except to 
highlight that it is a topic of high importance because high 
leverage in a volatile asset can cause problems for the 
financial system and the economy. The Financial Stability 
Oversight Council is following this, and looking at it. But I 
think it is too early to say that we have conclusions.
    Ms. Dean. And in terms of the investor base, I think some 
of the reports that I have read, it is quite diverse, which 
makes me worry about those that would be potentially at risk. 
Can you talk about the investor base? What do we know about the 
demographics?
    Ms. Liang. I think there are concerns about the 
demographics if they--some surveys suggest more minorities, 
more lower-income investing in these assets. To the extent 
those surveys are accurate, that is of great concern, because 
as we mentioned, these prices are highly volatile.
    But this is a space that is not regulated, and I think the 
information about who the investors are and the transactions is 
actually quite limited, and we are relying on various surveys.
    Ms. Dean. That's very helpful.
    My time has expired. I yield back. Thank you, Madam 
Chairwoman.
    Chairwoman Waters. Thank you.
    The gentleman from South Carolina, Mr. Timmons, is now 
recognized for 5 minutes.
    Mr. Timmons. Thank you, Madam Chairwoman.
    And first, I want to thank the Under Secretary for her work 
on the President's Working Group and for being here with us 
today.
    I want to first touch on a subject many of my colleagues 
have brought up with you today, whether stablecoins should be 
regulated and housed solely within the banking system or not. I 
know that your report speaks to this, and you have discussed it 
at length in today's hearing. But I wanted to ask you myself, 
do you and the PWG see stablecoins existing exclusively within 
the traditional banking system?
    Ms. Liang. I think the recommendation is to require the 
issuer to be an insured depository institution with a flexible 
regulatory framework that is lower cost for simpler business 
models.
    Mr. Timmons. Were there other options discussed in the PWG?
    Ms. Liang. Yes, of course, other options were considered in 
developing a recommendation. I think the principles of 
providing clarity, consistency, and a comprehensive framework 
is what led to this particular recommendation, recognizing that 
there is some flexibility in the IDI framework.
    And no one was recommending that a stablecoin issuer be 
regulated like a traditional commercial bank. But the IDI 
charter has the flexibility to provide some supervision and 
regulation that is adjusted for the risks of the activities of 
the stablecoin issuer.
    Mr. Timmons. I think it seems obvious to me that regulating 
a product under a regime designed for something completely 
different, while it may solve some problems, it is likely to 
create many more problems and stifle innovation and investment 
in an emerging industry that shows great promise.
    I guess my question is, what do you think the obstacles are 
that stablecoin issuers are likely to face if PWG's 
recommendation to regulate them like banks comes to fruition?
    Ms. Liang. I think it would be on the regulators to try to 
reduce the costs for an issuer that is not a traditional bank. 
And they can have some flexibility to keep those costs down, 
and I think that is the function, the stablecoin function of 
providing payments is a bank-like function. And that is why the 
recommendation was to use the bank framework.
    But recognizing that a stablecoin issuer is not likely to 
make loans and extend credit and engage in fractional reserve 
banking, the regulatory system can be adjusted to not apply all 
the kinds of rules and regulations that would apply if you were 
to make laws.
    Mr. Timmons. You are making a lot of assumptions on their 
ability to thread the needle. I personally think it would be 
better for Congress to do their job and to craft policy 
specifically for this new emerging industry. What are your 
thoughts on that?
    Ms. Liang. Yes, I think that is clearly an issue for 
Congress to certainly discuss. Again, we were trying to promote 
a more consistent framework, less fragmented, not--we were just 
less compelled to introduce yet another regulatory scheme. And 
to the extent an existing tested framework is available and 
could be applied, that seemed to be the preference of the 
group.
    Mr. Timmons. Sure. Well, I would like to think that 
Congress might be able to do better. Disruption is a natural 
part of a free market economy. New products and technology 
emerge and shake things up.
    It can sometimes lead to short-term pain for entrenched 
industries, but it forces adaption and almost always leads to 
better products for consumers and more prosperity for our 
communities. I urge my colleagues to really find a better path 
forward.
    And with that, Madam Chairwoman, I will yield back. Thank 
you.
    Chairwoman Waters. Thank you very much.
    The gentlewoman from Michigan, Ms. Tlaib, is now recognized 
for 5 minutes.
    Ms. Tlaib. Thank you so much, Chairwoman Waters, for 
holding this important hearing, and I thank the Under Secretary 
for being so patient with all of us, and for presenting the 
Working Group's report. I thank you so much for the important 
work.
    As fintech becomes an entry point for the underbanked and 
unbanked to access financial services, we must ensure that we 
are putting in place adequate protections on behalf of our 
constituents.
    [Audio malfunction.]
    Ms. Liang. I believe we lost her connection.
    Chairwoman Waters. Okay. We are going to hope that she gets 
back in, and we are going to go on to our next Member at this 
point.
    The gentleman from Illinois, Mr. Garcia, is now recognized 
for 5 minutes. I don't see Mr. Garcia on the platform anymore.
    The gentleman from Massachusetts, Mr. Auchincloss, who is 
also the Vice Chair of the committee, is now recognized for 5 
minutes.
    Mr. Auchincloss. Thank you, Madam Chairwoman.
    And Under Secretary Liang, I appreciate your stamina in a 
long hearing and your thoughtful answers, and I have learned a 
great deal from your memo and the PWG and my colleagues' good 
questions from both sides of the aisle. I want to talk about 
three different domains of risk that I think we can bucket this 
conversation into.
    The first near-term bucket is prudential risk, is run risk 
and payment risk of stablecoins, which you have articulated and 
have answered a lot of questions about. It seems like from your 
previous answers--I believe specifically to Mr. Himes--you feel 
like run risk could be mitigated with a simple registration 
process by stablecoin issuers which where they were audited and 
disclosed not as IDIs, but just in a transparent auditing 
process. But that you feel like payment risk really is what 
requires the IDI.
    And I want to press on that a little bit because it is not 
really clicking to me. I understand that stablecoin is used as 
a medium of exchange, but only really within the crypto 
economy. So, why do we feel like there needs to be a federally-
insured regulation around a medium of exchange that is really 
quite constrained to the crypto economy, when other fintech 
innovations, like the PayPals or Venmos of the world, weren't 
subject to the same type of regulation?
    Ms. Liang. Thank you for that clarifying question.
    The premise of the PWG report is that stablecoins will 
continue to work, try to be converted just via currency, be 
work outside the crypto economy, that it will not only be used 
to facilitate crypto trading.
    An example is cross-border remittances, which are 
translated into currency in some successful sense, right? And 
it then becomes part of the payment system the way that money 
is transacted--
    Mr. Auchincloss. I would encourage us then to investigate 
that premise further and try to find a way to mitigate payment 
risk that is in keeping with that premise and more narrowly 
tailor it. I am not convinced that we need to have it fully an 
IDI, partly because we risk regulatory capture by the banks.
    Part of the promise of Web3 is that it is disruptive in a 
good way to the financial services system, and I worry that 
layering on these requirements that may be unnecessary, given 
the actual payment risk, could actually just be a boon to 
established incumbents.
    But this leads us, your answer, to our second kind of big 
bucket of risk here, which is systemic risk, and my colleague, 
Mr. Hill, asked about this. And you answered that you really 
did not see this stablecoin economy as being a systemic risk at 
this point.
    It seems that FSOC should really be doing persistent 
monitoring of that, and reporting back to Congress about 
whether it is becoming so. You also suggested that 
interoperability between stablecoins could help mitigate some 
of that systemic risk.
    Are there measures that you would recommend beyond FSOC 
monitoring and interoperability standards that could mitigate 
systemic risk, or is there a firewall that could be set up, or 
at least monitored to forewarn of it?
    Ms. Liang. Ideally, I think this is always about trying to 
identify the next potential source of systemic risk, and the 
way that regulators approach that is to look at the common sort 
of vulnerabilities like leverage. So, if there were a way to 
measure and quantify leverage in this system, that would be an 
early warning indicator.
    Mr. Auchincloss. So, again, for--
    Ms. Liang. I think in the current environment, that is not 
easily done.
    Mr. Auchincloss. Another reason why registration, auditing, 
and disclosure would be helpful, but not necessarily--you 
wouldn't need to have IDI status to be able to track leverage. 
You could do just basic registration to accomplish that?
    Ms. Liang. Yes. The stablecoin itself, as registered, that 
itself is not leverage. It is the use of the stablecoin as 
collateral to lender stablecoins so that someone can use it to 
purchase on margin. Because it is a stable value, it provides a 
stable collateral.
    Mr. Auchincloss. So, that might be more the custody wallets 
then that have to be--
    Ms. Liang. Exactly.
    Mr. Auchincloss. So, custody wallets and stablecoin issuers 
are registering and disclosing and auditing. All of that seems 
to sort of make sense to me. Again, it is just the IDI.
    Finally, Under Secretary, in my last couple of seconds, do 
we need a CBDC in order to address this third bucket of risk, 
which is the United States losing its preeminence on the global 
stage as the world's reserve currency? I loved your answer 
about how it is more about the liquidity of our markets, it is 
more about the rule of law; this is not a tech fix.
    The CBDC paper--and I appreciate the work that the Fed 
did--struck me as a solution in search of a problem. Can't we 
just accomplish a lot of these aims with better stablecoin 
regulation and with compounding the existing strengths of our 
nation?
    Ms. Liang. Yes. I guess I would--as you say, I would repeat 
my previous answer that the strength of the U.S. dollar is 
based on its country's laws and governance and its markets and 
its economic potential. Technology can play a constructive 
role, but it is not the primary indicator.
    Mr. Auchincloss. Under Secretary Liang, thank you again for 
your testimony today.
    Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you very much.
    I just want to make sure that Mr. Garcia and Ms. Tlaib left 
the platform and that somehow they were not frozen out of here.
    It is about time for us to close down, and I would like to 
thank our witness for her testimony today.
    Thank you so much for the time that you have spent with us. 
Thank you so much for your patience. And thank you so much for 
the way that you were able to address all of the questions that 
were asked of you.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to this witness and to place her responses in the record. Also, 
without objection, Members will have 5 legislative days to 
submit extraneous materials to the Chair for inclusion in the 
record.
    This hearing is adjourned.
    Ms. Liang. Thank you.
    [Whereupon, at 2:12 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           February 8, 2022
                           
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