[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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