[Senate Hearing 117-588]
[From the U.S. Government Publishing Office]
S. Hrg. 117-588
STABLECOINS: HOW DO THEY WORK, HOW ARE
THEY USED, AND WHAT ARE THEIR RISKS?
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HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE PURPOSES AND RISKS OF STABLECOINS
__________
DECEMBER 14, 2021
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Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
51-128 PDF WASHINGTON : 2023
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Corey Frayer, Professional Staff Member
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
(ii)
C O N T E N T S
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TUESDAY, DECEMBER 14, 2021
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 35
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 4
Prepared statement....................................... 36
WITNESSES
Alexis Goldstein, Director of Financial Policy, Open Markets
Institute...................................................... 6
Prepared statement........................................... 39
Responses to written questions of:
Chairman Brown........................................... 86
Senator Toomey........................................... 91
Senator Menendez......................................... 95
Jai Massari, Partner, Davis Polk & Wardwell, L.L.P............... 8
Prepared statement........................................... 61
Responses to written questions of:
Senator Toomey........................................... 100
Senator Sinema........................................... 102
Dante Disparte, Chief Strategy Officer and Head of Global Policy,
Circle......................................................... 9
Prepared statement........................................... 64
Responses to written questions of:
Chairman Brown........................................... 102
Senator Toomey........................................... 105
Senator Sinema........................................... 107
Hilary J. Allen, Professor, American University Washington
College of Law................................................. 11
Prepared statement........................................... 68
Responses to written questions of:
Chairman Brown........................................... 111
Senator Menendez......................................... 117
Additional Material Supplied for the Record
Blockchain Transaction Fees (Gas) on FTX......................... 120
(iii)
STABLECOINS: HOW DO THEY WORK, HOW ARE THEY USED, AND WHAT ARE THEIR
RISKS?
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TUESDAY, DECEMBER 14, 2021
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:15 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order.
I welcome our witnesses. Today's hearing is in a hybrid
format. Our witnesses, one is virtual; three are in person.
Members have the option to appear either in person or
virtually.
For those joining remotely, a few reminders: Members
already know how to do this after many times. For our remote
witness, just please try to minimize background noise, click
the mute button until it is your turn to speak. You will have
one box on your screen labeled ``clock'' that will show how
much time of your 5 minutes is remaining, or the questioner's 5
minutes. You will hear a bell ring when you have 30 seconds
remaining. If there is a technology problem, we will move on to
the next witness or Senator.
The speaking order is as usual, determined by seniority of
the Members who have checked in before the gavel, either in
person or remote. And then we go back and forth, Republican,
Democrat, Republican, Democrat.
A few years ago, most people had never heard of
cryptocurrency. Most people still did not know what all these
terms mean, from stablecoins to nonfungible tokens. But they
have become a hot topic in Washington, on Wall Street, online,
among millions of Americans who, understandably, just do not
trust big banks and are looking always for an opportunity to
make money.
Over the last several years, the number of cryptocurrencies
has exploded from the hundreds to the thousands. The supposed
value of these digital assets in circulation recently passed $3
trillion, which is about the size of JPMorgan Chase's balance
sheet, our Nation's largest bank. With that much money tied up,
that is pretty much the definition of a systemic issue in our
economy.
Those big numbers have come with big promises. We have been
told that blockchain, the technology these coins are built
upon, will democratize money or build a more inclusive economy,
but none of these promises has materialized, likely never will.
Instead, we have gotten wild financial speculation. As we have
heard before in this Committee, the wild price swings and high
transaction fees from any cryptocurrencies make them useless
for payments, the one thing they claim to be designed for.
Stablecoins were supposed to solve this problem. Unlike
other cryptocurrencies, their value is not just based on market
enthusiasm; a stablecoin's value is supposed to be backed by
real assets held by the company that issues the stablecoin. In
other words, stablecoins are a particular type of
cryptocurrency whose value is managed by a single company.
These include, as you know, Tether, Circle, and Abracadabra, a
fast growing scheme that makes ``Magic Internet Money''. That
is their words, not mine. What could possibly go wrong with
something that claims to make ``magic'' money?
Cryptocurrency advocates argue that crypto assets are
superior to real dollars because they are decentralized and
transparent, but stablecoins are neither of those. Most of
them, certainly the largest ones, rely on a single, centralized
company to manage the reserve assets and their supply of coins.
That sounds a lot like what traditional financial institutions
do. It is not decentralized when one company controls when
people can access their own money. It is certainly not
transparent when critical information about stablecoins and the
companies that issue them are not available to people who have
their money tied up in those assets.
Last month I wrote to some of the biggest stablecoin
issuers to get more information on how they manage their funds
that back their coins and to ask what rights that their users
have. Their responses were not particularly enlightening. They
should lead us to--and should lead us to assume most ordinary
customers do not have much in the way of rights at all.
So let us be clear about one thing. If you put your money
in stablecoins, there is no guarantee you are going to get it
back. They call it a currency, implying it is the same as
having dollars in the bank and you can draw the money at any
time. But many of these companies hide their terms and
conditions, allowing them--in the fine print, allowing them to
trap customers' money. There is no guarantee you will get your
money back. That is not a currency with a fixed value; it is
gambling.
And with this money tied up, it sure looks to me like a
potential asset bubble. Stablecoins make it easier than ever to
risk real dollars on cryptocurrencies that are, at best,
volatile, at worst, outright fraudulent. Just a few weeks ago,
we saw how quickly these tokens can crash with cryptomarkets
diving by almost 30 percent in 1 day.
History tells us we should be concerned when any investment
becomes so untethered from reality. Look at the 1929 stock
market crash. Securities started out as a way for regular
Americans to invest in new companies that wanted to bring new
products to market to expand their operations. By the end of
the decade, companies were invented out of thin air to create
more stocks to satisfy wild demand. Banks allowed customers to
borrow against one stock to buy another until the whole market
collapsed.
And of course, many of us are old enough to remember, most
of us are, the 2008 crash. Subprime mortgages were supposed to
create--to give more families access to the American dream
while derivatives were created to help financial companies
reduce their risks. In reality, predatory mortgages were used
to strip homeowners of their equity they had in their homes in
order to create complex mortgage-backed securities and
derivatives that ended up increasing risks at banks and
financial companies. We know how that turned out for our
country.
We cannot deny that betting on cryptocurrency has made a
few people rich. That kind of action always does, just like
some people became fabulously wealthy trading stocks in the
1920s or buying and selling derivatives 20 years ago. And we
heard the stories about mortgage brokers and house flippers
becoming millionaires more recently. But for most people, this
kind of wild speculation ends in disaster. The only ones who
tend to walk away unscathed are the big guys--it is always the
big guys--the ones who call it innovation and then line their
own pockets.
So far, what happens in the cryptomarkets has stayed in the
cryptomarkets, so far, but stablecoins create a very real link
between the real economy and this new fantasy economy. We saw
this with Dogecoins, a satirical cryptocurrency that was all of
a sudden worth billions when a tech billionaire tweeted about
it. Think about that.
It is understandable a lot of people are looking for an
alternative to our current financial system. Wall Street banks
dominate this economy. They make record profits no matter what
happens to workers and small businesses in Nevada, in South
Dakota, in Ohio and Rhode Island. To a whole lot of people,
that seems like a fantasy economy, too. But a big tech scheme
that makes it easy for hardworking Americans to put their money
at risk is not the answer. Stablecoins, cryptomarkets are not
actually an alternative to our banking system; they are a
mirror of the same broken system with even less accountability
and no rules at all.
We will hear the same arguments today from this industry
against regulation, the same arguments we hear from the
financial industry, lobbyists so many times before: It harms
innovation. The free market will solve all our problems.
America needs to be globally competitive.
Of course, we do. What makes America, though, the strongest
economy in the world is not wild betting in the financial
sector. It is our workers. It is the dignity of work. It is
their talent. It is their ingenuity, their dedication. That is
what our economy is built on. You cannot fake that, but as we
have seen so many times before you can put it all at risk. The
rest of the world trusts the U.S. dollar when we have orderly,
sane markets.
The real threat to our global competitiveness is regulators
who ignore clear warning signs. We have reason to be encouraged
this time around, though. The Biden administration is putting
strong watchdogs in place, quite a change, strong watchdogs in
place at the banking and market regulators. We are empowering
workers. Wages are rising. Infrastructure investment is about
to spur more job growth. We are fighting to bring down costs
for families, for seniors, with prescription drugs, for the
middle class with the Build Back Better plan.
We cannot put that potential at risk. I will continue to
work with the financial watchdogs to ensure they have the tools
they need to protect people's hard-earned money and our
economic recovery from another bubble and another crash.
Senator Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman. Stablecoins are a
central component of the cryptocurrency ecosystem, which is
itself at the vanguard of the tokenization of assets.
Stablecoins can speed up payments, especially cross-border
transfers. They can reduce costs, including remittances. And,
they can help combat money laundering and terrorist financing
through an immutable and transparent transaction record.
Stablecoins can also be programmed and made interoperable with
other currencies, creating efficiencies to improve access to
financial services for more Americans.
But unlike volatile cryptocurrencies like Bitcoin,
stablecoins do not fluctuate in their dollar price. In today's
hearing, we will focus on stablecoins designed to maintain a
one-to-one value relative to the U.S. dollar, meaning one
stablecoin is meant to always equal one dollar.
Over the past year, the stablecoin market has exploded. As
one of our witnesses, Dante Disparte, will explain, stablecoins
are beginning to be used for small business payments and
international remittances. While traditional payment systems
can be expensive and take several days to settle, transferring
funds via stablecoins is low cost and nearly instantaneous.
Given that stablecoins disrupt the status quo, they have
naturally drawn skepticism from incumbent industries and
regulators. Last month the President's Working Group on
Financial Markets, or PWG, issued a report recommending that
Congress pass legislation to establish a Federal regulatory
framework for stablecoins. In their report, the Treasury
Department and others expressed their worries about consumer
protection and financial stability with stablecoins.
Although the report did little to highlight the potential
benefits of stablecoins, I was encouraged that the report
acknowledged that responsibility for clarifying whether, and to
what extent, Federal agencies have jurisdictions over
stablecoins is a question that rests with Congress. I am open
to working with the Administration and my Democratic colleagues
on this front. But whatever Congress does, let us be sure that
we do not stifle innovation in an evolving digital economy or
undermine our own country's competitiveness. Let us have the
humility to recognize that many of our views about how
financial services are delivered and how investments work are
quickly becoming outdated.
This morning I am releasing a set of guiding principles
that I think should influence our work on a stablecoin
legislative framework. These principles recognize that
stablecoins are a very important innovation and they introduce
new capabilities into money that did not previously exist. In
addition to their ease of use and reduced fees associated with
their transfer, stablecoins can improve the privacy and the
security of our transactions. They also introduce the concept
of money programmability or smart contracts, which allow
automated transactions based on a sequence of verifiable
events. In recognition of the potential of these new
capabilities, any regulation should be narrowly tailored and
designed to do no harm. At the same time, sensible regulatory
standards may help to protect against key risks such as
redemption or run risk.
These principles take a different approach than the PWG
report. For example, the PWG report recommends that all
stablecoin issuers must be insured depository institutions.
Well, there are three reasons that I disagree with that
recommendation.
First, stablecoin issuers have different business models
than banks. They do not provide the same services as banks and
do not present the same risks. As one of today's witnesses, Ms.
Massari, has observed, stablecoin providers do not engage in
taking deposits and making loans in the manner that banks do.
Because of these and other important differences, subjecting
all stablecoin providers to the full suite of bank regulations
and rules meant to address maturity transformation is not
appropriately tailored to the potential risks.
Second, requiring all stablecoin issuers to become banks
would stifle innovation. We know that a tremendous amount of
innovation occurs outside of the banking system, including by
technology companies. It is unlikely that much of this
development could happen within the banking system because of
the onerous regulations which create a difficult environment
for innovation. Allowing entrepreneurs to innovate with digital
assets like stablecoins will promote greater competition and
deliver better results for consumers.
Finally, the regulation of payments activity should create
an equal playing field. Great innovators like PayPal, Venmo,
and Apple Pay are already subject to a State-by-State licensing
regime as well as registration with a Federal regulator.
Recognizing the range of different business models, there
should be at least three options available for a stablecoin
provider. One would be to operate under a conventional bank
charter if they chose. But, two, they could comply with, or
acquire, a special purpose banking charter designed for
stablecoin providers, which would be designed in accordance
with legislation. Or, they could register as a money
transmitter under the existing State regime and as a money
service business with FinCEN at the Federal level. This
optionality would match each stablecoin provider with the
regulatory framework most appropriate to the business model.
Regardless of the charter or license they pursue, all
stablecoin providers should meet certain minimum requirements.
For example, they should clearly disclose what assets back the
stablecoin as well as give clear redemption policies and
subject themselves to periodic audits. These requirements would
ensure that consumers have sufficient information about which
stablecoins they use. It might also be appropriate to set
minimum reserve requirements and attestations as well.
In addition, legislation should stipulate that non-interest
bearing stablecoins are not necessarily securities and
therefore should not automatically be regulated as such. This
framework should protect the privacy, security, and
confidentiality of individuals using stablecoins, allowing
customers to opt out of sharing personal information with third
parties.
Finally, anti- money laundering and other requirements
regarding financial surveillance under the Bank Secrecy Act
should really be modernized for all financial institutions
subject to them, given the emergence of stablecoins,
cryptocurrencies, and other new technologies, including
artificial intelligence.
The emergence of stablecoins represents, to me, the latest
development in the ongoing evolution of money. I stand ready to
work on this issue and do so in a manner that does not
discourage innovation or competition moving forward.
I look forward to hearing from our witnesses, and I yield
back my time.
Chairman Brown. Thank you, Senator Toomey.
I will now introduce the four witnesses today. First, we
will hear from Alexis Goldstein, Director of Financial Policy
at the Open Markets Institute; welcome. Jai Massari, a partner
at Davis Polk & Wardwell, welcome. And, Chief Strategy Officer
and Head of Global Policy at Circle and Professor Hilary Allen
from the American--I am sorry. Dante Disparte I left out, I am
sorry, Chief Strategy Officer and Head of Global Policy at
Circle. And, Professor Hilary Allen, who is joining us from her
home or office, from the American University Washington College
of Law.
Ms. Goldstein, you begin. Five minutes, please. Thank you.
STATEMENT OF ALEXIS GOLDSTEIN, DIRECTOR OF FINANCIAL POLICY,
OPEN MARKETS INSTITUTE
Ms. Goldstein. Chairman Brown, Ranking Member Toomey, and
Members of the Committee, thank you for inviting me to testify
today. I am the Director of Financial Policy at the Open
Markets Institute, where my work focuses on financial
regulation and consumer and investor protection. My degree is
in computer science, and I previously worked as a programmer
for Morgan Stanley, building electronic trading systems, and as
a business analyst at Merrill Lynch and Deutsche Bank, working
with the over-the-counter equity derivatives trading desks.
I am a researcher, but I am also an investor. I invest in
the equity markets, and I invest in the crypto asset markets. I
have used large crypto exchanges. I have used DeFi to lend, to
borrow, and to trade crypto. And I have bridged from one
blockchain to another. In doing so, I have seen how stablecoins
are used across the crypto ecosystem, and I agree with the
Presidential working group's assessment that stablecoins are
used today for speculation. Stablecoins essentially act as a
waystation in between other speculative trades and as a way to
avoid losses.
Stablecoins are often heralded for their potential. Maybe
they are not used widely today to pay for goods and services,
but they could be in the future. But the reality is that today
U.S. retail investors across--sorry. Retail investors access
stablecoins by trading them, not by using them to buy groceries
at the corner store.
U.S. retail investors can neither purchase nor redeem the
top two stablecoins directly from the issuer. Instead, they are
reliant on exchanges to trade a stablecoin for a dollar. It is
an awkward scenario and sort of a second step that we are not
used to seeing with other kinds of digital payments. You do not
need to also set up a stock brokerage account in order to send
somebody money electronically.
There are a number of ways to earn interest and rewards on
stablecoins. Many cryptolending platforms pay far higher rates
for locking stablecoins into their platforms than they do for
locking in non-stablecoins, and Coinbase pays its users a 1
percent reward for buying and holding the U.S. dollar coin by
default without any action from the user other than purchasing
USDC. Coinbase does not offer any rate of return for other
stablecoins likely because the more USDC that Coinbase holds
for its customers' accounts the more money they will make in a
revenue sharing agreement that they have with Circle.
There are claims in the cryptocurrency industry and among
some stablecoin issuers that they are fighting Wall Street or
disrupting Wall Street, but they use the same forced
arbitration agreements and class actions bans that Wall Street
does, preventing their users from suing in a court of law
should things go wrong.
There are also claims that regulations and Government
oversight are not needed because the code is up there publicly
available for anybody to read. But the moment a platform is
hacked because an attacker has read the smart contract, found a
bug, and exploited the bug, platforms tend to call for law
enforcement to help chase down the stolen funds.
There are also promises that stablecoins could help drive
financial inclusion outcomes, an admirable goal I think we can
all agree is critical. A recent report from the World Economic
Forum found that stablecoins have no benefit for financial
inclusion as they are subject to the same or higher barriers as
preexisting financial options, including the need for internet
and for smartphones. I have also found this to be true as I
have used stablecoins as fees begin to add up fast, especially
when you want to send your stablecoin to your friend or to a
different wallet off of the exchange.
The slice of the cryptocurrency markets with the least
compliance with regulations, including checks for illicit
finance, is what is called DeFi or decentralized finance. Put
simply, DeFi does not work without stablecoins. Stablecoins
help to facilitate trading on decentralized exchanges and
access collateral in lending and borrowing protocols. The
largest decentralized exchange is Uniswap, and as of yesterday
eight out of nine of the top liquidity pools in Uniswap had at
least one leg in a stablecoin. With only a few exceptions, the
platforms on DeFi are not in compliance with Know Your
Customer, anti- money laundering, and countering the financing
of terrorism, nor does it seem that many of them are conducting
a simple check to ensure that the cryptocurrency address making
calls to the protocol are not on the sanctions list.
Today, the cryptocurrency market is not that entangled with
the mainstream financial system, but if Wall Street and the
cryptocurrency industry have their way it will be. I think the
Committee is right to pay attention to stablecoins and crypto
asset markets more broadly because absent your attention I do
think that there is potential for crises, especially in the
least regulated pieces of the ecosystem.
Thank you very much, and I look forward to your questions.
Chairman Brown. Thank you, Ms. Goldstein.
Ms. Massari.
STATEMENT OF JAI MASSARI, PARTNER, DAVIS POLK & WARDWELL,
L.L.P.
Ms. Massari. Chairman Brown, Ranking Member Toomey, and
Members of the Committee, thank you for inviting me here today
to talk about this complex and interesting topic. I am Jai
Massari, a partner in the Financial Institutions Group at Davis
Polk. For the past several years, I have been advising
stablecoin issuers, digital wallet providers, and financial
institutions on the regulatory--the financial regulatory
considerations for stablecoin activities. Today, I am
presenting my own views, not those of any client or my firm. My
remarks will focus on three key points.
First, stablecoins are an innovation in our understanding
of money. This is particularly the case for true or payment
stablecoins. These are non-interest bearing financial
instruments designed to maintain a stable value against a
reference fiat currency, say, one dollar. Today's stablecoins
are used primarily for payments in connection with
cryptocurrency transactions and decentralized finance, that is,
DeFi applications. Stablecoin payments, though, could have
broader uses, complementing existing payments such as cash,
checks, credit and debit cards, and wire transfers, each of
which has benefits and drawbacks.
Second, as stablecoins begin to find use in retail
payments, we must seek to understand the risks they present
along with the benefits. Like the innovations in money that
preceded them, stablecoins squarely present the core regulatory
concerns of consumer protection, systemic stability, safety and
soundness, and combating illicit finance. And as described in
the President's working group report, stablecoins give rise to
more specific kinds of risks such as those related to the
operation of blockchain platforms and risks arising from
regulatory gaps.
And third, the regulation of stablecoins should address
these risks while supporting their potential benefits.
My written statement goes into these points in more detail,
but for now I will summarize my view of what regulation of
stablecoins should look like. Stablecoins issuers should have
restrictions on permissible types of reserve assets to ensure
short-term liquid backing of those reserves. They should have
auditing and transparency standards so regulators and the
public can evaluate reserve composition. There should be
restrictions that preclude maturity and liquidity
transformation to shield reserve assets. They should have
obligations to address illicit finance and sanctions
considerations. And, there should be requirements to address
operational risks from conducting transfers on blockchain
networks.
But, requiring stablecoin issuers to be insured depository
institutions, that is, insured banks, as suggested in the PWG
report, is not necessary and, unless certain adjustments are
made, is not workable. First, FDIC insurance is not necessary
to address run risk where a stablecoin issuer, properly
regulated, holds reserves of short-term liquid assets of at
least 100 percent of the par value of outstanding stablecoins.
Second, banks are subject to leverage ratios and risk-based
capital ratios that assume relatively illiquid and riskier
assets than cash and genuine cash equivalents. Unless Congress
recalibrates these ratios, the stablecoin business model would
be uneconomic.
Congress should instead consider an optional Federal
charter for stablecoin issuers. At this time, U.S. stablecoin
issuers and digital wallet providers are largely regulated by
the States under money transmission regulators and State trust
company authorities, but an expanded Federal law may well be
appropriate and useful.
I would like to close by thanking the Committee for its
focus on these important issues. While I do not believe that
stablecoin issuers should be required to be insured banks, I
strongly support commonsense regulation for stablecoins in a
way that takes into account their risks and benefits. And I am
optimistic that there is much common ground that can pave the
way for a regulatory approach that safeguards consumers, the
banking system, and the broader economy while continuing to
promote innovation. I will be happy to answer any questions.
Chairman Brown. Thank you, Ms. Massari.
Mr. Disparte, welcome.
STATEMENT OF DANTE DISPARTE, CHIEF STRATEGY OFFICER AND HEAD OF
GLOBAL POLICY, CIRCLE
Mr. Disparte. Chairman Brown, Ranking Member Toomey,
Members of the Senate Committee on Banking, Housing, and Urban
Affairs, thank you for the opportunity to share my testimony
with you today. My name is Dante Disparte, and I am the Chief
Strategy Officer and Head of Global Policy for Circle, a
leading digital financial services firm and the sole issuer of
the U.S.D. Coin or USDC, a dollar digital currency supporting
the extensibility of the U.S. dollar in a competitive, always-
on global economy.
Having recently completed my 3-year term on the Federal
Emergency Management Agency's National Advisory Council and
being no stranger to disaster displacement and hardship, I want
to acknowledge the communities affected by last week's
devastating storms. Indeed, as this disaster and others have
shown, with the movement of financial aid and disaster relief
when speed matters most, friction stands in the way.
As a country, we have faced a Great Depression, a Great
Deleveraging, and in 2020 with the onset of the COVID-19
pandemic, we faced nothing short of a Great Correction. In this
correction, the centrality of technology for any semblance of
political, business, economic, and household continuity was
laid bare. What was also clear is that access to the internet
and other digital public goods was unequal. How we engage with
money and payments in digital form was clearly an area of
prepandemic vulnerability in the U.S. and around the world.
The advent of stablecoins, or what we like to refer to as
dollar digital currencies, like USDC, are an important
innovation, enabling greater control over how we send, spend,
save, and secure our money. To define a stablecoin, noting that
like money itself not all of these innovations are created
equal, is tantamount to the moment we converted our compact
discs into MP3s. The CD and music is still yours but now enjoys
the powers of programmability, user control, and a digitally
native form factor that works anywhere, on any device, across
the planet.
Stablecoins, in effect, are designed to reference and
import the economic properties of an underlying asset, by
circulation, the most successful of which all reference the
dollar, with the economic aim of combating the buyer's and
spender's remorse that plagued early cryptocurrencies. USDC is
a now 3-year-old dollar digital currency standing at more than
40 billion in circulation and cumulatively supporting more than
$1.4 trillion in on-chain transactions in a manner that
enhances financial inclusion, responsible innovation, and
integrity. Critically, the dollar-denominated assets backing
USDC, which are strictly cash and short-duration treasuries of
90 days or less, are all held in the care, custody, and control
of U.S. regulated financial institutions.
Indeed, as this internet native financial infrastructure
continues to grow, we aim to do our part ensuring the future of
payments and money is more inclusive than the past. Our
recently announced Circle Impact Initiative has four core
components, each of which are close to home for me, having
growing up in poverty and being the first-generation high
school and college graduate. These include:
Allocating a share of USDC dollar reserves to minority
depository institutions and community banks across the country.
We hope this will accrue to billions of dollars over time,
strengthening the balance sheets of these banks and thereby
strengthening their communities.
Embarking on digital financial literacy initiatives
together with Historically Black Colleges and Universities and
other partners supporting the development of essential learning
and hands-on approaches to entrepreneurialism.
Leveraging our SeedInvest platform, which is one of the
Nation's leading equity crowdfunding businesses, to catalyze
targeted campaigns for women and minority entrepreneurs across
the country.
And finally, assisting humanitarian interventions and
coordinating public-private partnerships to mobilize blockchain
based payments and USDC to deliver corruption resistant, real-
time aid and relief.
Because nothing worth doing is worth doing alone, our hope
is to catalyze uncommon coalitions on these initiatives, which
are deeply connected to our mission of raising global economic
prosperity through the frictionless exchange of financial
value.
While some argue that the U.S. may lose the digital
currency space race if it fails to issue a central bank digital
currency, I argue that we are winning this race because of the
sum of free market activity taking place inside the U.S.
regulatory perimeter with digital currencies and blockchain
based financial services. The sum of these activities are
advancing broad U.S. economic competitiveness and national
security interest.
Thank you, Chairman Brown and Ranking Member Toomey, for
the opportunity to speak with you today. I look forward to
addressing the Committee's questions.
Chairman Brown. Thank you very much, Mr. Disparte.
We will now hear from Professor Hilary J. Allen from
American University Washington College of Law, and she is
joining us from a remote location.
Professor Allen, welcome.
STATEMENT OF HILARY J. ALLEN, PROFESSOR, AMERICAN UNIVERSITY
WASHINGTON COLLEGE OF LAW
Ms. Allen. Thank you, Chairman Brown, Ranking Member
Toomey, and the Members of the Committee. Thank you for
inviting me to testify at today's hearing. My name is Hilary
Allen, and I am a professor of law at the American University
Washington College of Law and the author of the book,
Driverless Finance: Fintech's Impact on Financial Stability.
My area of expertise is financial stability regulation, and
so I will focus my remarks today on risks relating to crypto,
particularly stablecoins, and financial crises. I would also
like to point out that, while not the primary focus of my
testimony, stablecoins pose a threat to monetary policy as
well, and I would be happy to take questions on that point.
Proponents of crypto often claim that it creates jobs and
that it improves financial inclusion. But financial crises
destroy jobs, and they disproportionately affect the most
vulnerable members of our community, and so we should be
extremely wary of the fragilities that crypto could create for
our financial system.
Cryptotechnology introduces a number of new fragilities,
including the ability for anyone with programming ability to
create financial assets out of thin air, and more assets mean
bigger bubbles and bigger busts. The distributed ledgers that
crypto run on often have very complicated governance
mechanisms, which make fixing problems caused by glitches and
hacks extremely challenging. Fragilities also arise because the
computer programs that operate on distributed ledgers, known as
smart contracts, execute automatically even when the parties
agree that forbearance is in their best interest and the
interest of financial stability. Other fragilities include the
possibility of runs on stablecoins if holders lose confidence
in their ability to exchange stablecoins for fiat currency at
the expected rate.
An important point to note about stablecoins, though, is
that although it is hard to obtain concrete data on the
cryptomarkets my understanding is that stablecoins are almost
exclusively being used in DeFi apps rather than for everyday
payments. DeFi stands for ``decentralized finance,'' but DeFi
is not particularly decentralized. Centralized governance and
concentrated ownership proliferate in the DeFi ecosystem.
Instead, what distinguishes DeFi from the established financial
system is the technology that it relies upon, which I have
already discussed, and what it is used for.
Our established financial system performs the important
functions of channeling capital to people and businesses so
that our economy can grow. That is why we have safety nets for
the financial industry, like deposit insurance and finance--
Federal Reserve emergency loans, that ensure that credit can
keep flowing to the real economy. It becomes problematic,
though, when the financial services being bailed out do not
serve the real economy but exist primarily to make profits for
industry leaders. This is already an issue in the established
financial system, and DeFi has the potential to take this to
the extreme.
DeFi has been described as an incorporeal casino, and that
is why it is critical that DeFi not grow into something that
the Government does feel compelled to bail out. A recent report
from the Bank for International Settlements concluded that,
given its self-contained nature, the potential for DeFi-driven
disruptions in the broader financial system and the real
economy seems limited for now, but allowing the integration of
DeFi with the traditional banking system could change that.
Congress or banking regulators should therefore prohibit
insured depository institutions and their affiliates from
participating in DeFi.
Insuring the issuers of the stablecoins that fuel DeFi
would also encourage its growth in systemic importance, and so
I disagree with the President's working group recommendation
that Congress adopt legislation regulating stablecoin issuers
as insured depository institutions. The run risk associated
with stablecoins can be dealt with in other ways. One
possibility is to ban stablecoins or to introduce a licensing
regime that would only authorize the issuance of stablecoins if
they can demonstrate a purpose outside of the DeFi ecosystem
and that they do not pose any obvious threats to financial
stability or monetary policy.
A ban or licensing regime would create some barriers to
innovation, to be sure, but not all financial innovation is
created equal. A recent World Economic Forum white paper
concluded that stablecoins, as currently deployed, would not
provide compelling new benefits for financial inclusion beyond
those offered by preexisting options. Simpler mobile payments
innovations may be a better and less risky way to promote
financial inclusion than a system built on runnable stablecoins
that operate on the distributed ledger with a convoluted
governance structure that entails significant environmental
cost to operate.
An alternative approach would be for stablecoins to remain
regulated as they are currently, with the SEC and CFTC
monitoring them from an investor protection perspective. The
system risks associated with stablecoins and runs could be
addressed by, first, prohibiting insured deposit-taking
institutions from accepting any deposits from stablecoin
issuers or from issuing their own stablecoins; second, the FSOC
and the OFR monitoring the stablecoins for changes in usage;
third, if necessary, the FSOC using its designation powers to
designate a stablecoin as systemically important; and fourth,
using antitrust regulation as well as the FSOC's designation
power to prevent a large tech firm, like Meta or Facebook, from
launching a stablecoin.
Thank you, and I look forward to your questions.
Chairman Brown. Thank you, Professor Allen.
I will begin with Ms. Goldstein. I first just thought there
were three votes beginning around 11, we think, and so meaning
no disrespect to the four of you, but we will all be moving in
and out but keeping the hearing going and asking questions.
Ms. Goldstein, even though--and please be brief on these
because there is a lot of material to cover, of course.
Stablecoins are mostly used for speculative betting. Some
crypto advocates argue they have the potential to make the
payment system faster and more efficient. Are they a better way
to settle payments nationally or internationally than the
traditional finance system?
Ms. Goldstein. Senator, thank you for the question. I think
for that to be true you need four things. You need low fees.
You need predictability. You need to be able to exchange them
for goods and services. And, it needs to be consistently fast.
And I do not think stablecoins meet all of those needed
objectives.
As someone who has played around with sending them, both
personally and sort of in my work, it often makes Western Union
look cheap when you rack up all of the fees that you need in
order to send it from one person to another, especially when
the Ethereum blockchain gets congested. It can be very
unpredictable. Fees can be very high.
And I think as you know, Senator, you know, people with low
incomes cannot afford surprises, and unfortunately,
transferring assets especially on the dominant Ethereum
blockchain can be full of a lot of surprises and very high
fees.
Chairman Brown. Thank you, Ms. Goldstein.
Professor Allen, do you agree with her that stablecoins do
not really show much promise as a payment system?
Ms. Allen. Yes, I think that is right. I think it is also
important to think about the structure of the distributed
ledgers. If there were problems, there is not someone you can
go to if there is a problem, if it is run on a decentralized
ledger with a lot of nodes managing its governance.
Chairman Brown. And if stablecoins did in fact hold promise
to provide faster, more inclusive payments, do you think it
would make sense, Professor Allen, to bring them in the
traditional finance system?
Ms. Allen. I think there are real concerns about bringing
them into the traditional finance system primarily because of
their relationship with DeFi. There is also the issue of their
run risk, of course. So if they were to be brought--if they
were to be used as payments and to be brought within the proper
financial system, we would have to be very careful about
monitoring their systemic risk, and I think that is a place
where the FSOC and the OFR can play an important role.
Chairman Brown. Thank you.
Speaking of, Mr. Disparte, bringing them into the financial
system, at last week's hearing in the House your CEO agreed
that stablecoins are still mostly used for trading in
speculation, but your company is currently seeking a bank
charter based on what you call USDC. Just be clear, interesting
name to be sure, U.S. Dollar Coin is what it stands for, being
a payment product. If Circle does become a bank, would you
limit USDC, Mr. Disparte, to internet payments platforms, or
would you allow--still allow USDC to be used to facilitate
cryptocurrency speculation?
Mr. Disparte. Thank you for the question, Senator. The
advent of a whole host of internet native capital market
payments in an always-on economy that is built around these
innovations in public blockchains is important. It is also
important that the dollar fundamentally and dollar-referenced
stablecoins ultimately win what that innovation represents.
And so Circle's counterparties, as a company, are other
institutions and companies. We do not face the retail market as
a retail payment system. And a lot of what that is supporting
ultimately are payments, cryptocapital market trading, and
other activities.
And we are also seeing--and I think this is a critical
point we would like to highlight in this hearing. We are also
seeing this increasingly becoming embedded as a mechanism of
payment and settlement, including amongst traditional firms.
Credit card companies, banks, and many others are increasingly
using USDC as a settlement option on their networks, which
makes the medium of exchange and payment argument quite strong.
Chairman Brown. So if you are regulated, if you are inside
the--if you have become--if you become bank, it would still be
used for cryptocurrency speculation? Is that a ``yes'' or a
``no''?
Mr. Disparte. Well, again, USDC and the end users of USDC
have no expectation of a profit. It is ultimately a medium of
exchange. A dollar goes in; a dollar comes out. And we have
maintained price parity to the dollar with cash in short
duration treasuries, Senator, inside the care, custody, and
control of the U.S. regulated banking system.
Chairman Brown. Let me ask a different way. If Circle were
a traditional finance company, it would be a financial company.
You understand it would be illegal for you to sell metal coins
that said ``U.S. Dollar Coin'' on them, right?
Mr. Disparte. Senator, I think the question ultimately is
as Circle has----
Chairman Brown. Well, that is a pretty simple question. If
you were a traditional finance company, could you sell metal,
do you think you could sell metal coins that say ``U.S. Dollar
Coin'' on them?
Mr. Disparte. No, Senator.
Chairman Brown. OK. That is the answer. I mean, that is the
law.
Do you think the name of your stablecoin, U.S. Dollar Coin,
do you think it could mislead users to believe it is backed by
the U.S. Government? I noticed you said throughout this
hearing, USDC. You may have once at the beginning--I am not
sure you ever did--said ``U.S. Dollar Coin.'' I am sure you
market it that way to some who may be less sophisticated than
we pretend to be up here. But do you think that is misleading
in any way, to call it ``U.S. Dollar Coin?''
Mr. Disparte. No, Senator. The stablecoin innovation that
we support is regulated consistently across the country
according to electronic money and electronic money transfer and
statutes as a payment innovation. We are on a level playing
field with companies like PayPal and other major payments
companies inside the U.S.
Chairman Brown. OK. Fair enough. Let me ask a last
question. So if the Fed moves forward the central bank digital
currency, are you going to let them call theirs ``U.S. Dollar
Coin'' or ``U.S. Dollar?'' Now that is meant with some irony.
Mr. Disparte. I appreciate the irony.
Chairman Brown. I do not know if you have a copyright or a
patent on ``U.S. Dollar Coin,'' but I assume if there is, if we
do a central bank digital currency, that they may have rights
regardless of the Supreme Court or any financial regulators to
``U.S. Dollar Coin,'' but just putting that out there. Last
comment?
Mr. Disparte. Quickly, quickly, Senator. Thank you for
that. Indeed, sovereign-issued currencies have three currency
prefixes. So I am certain one day if a central bank digital
currency is issued by the Fed they would enjoy total autonomy
over that name choice. They would also, I think, enjoy the
experience of stablecoins in circulation that all reference the
dollar as important prototypes for what may one day be an
opportunity in which we could upgrade this infrastructure to
support a publicly issued digital currency as well.
Chairman Brown. You are a good representative for USDC.
Mr. Disparte. Thank you, Senator.
Senator Toomey. Thank you, Mr. Chairman.
Mr. Disparte, some of our witnesses today seem to think
that stablecoins are unlikely to ever serve any purpose other
than facilitating cryptospeculation. They have cited the cost
of transactions and various things although it seems to me this
technology is moving very rapidly in the direction of
facilitating and lowering the cost and increasing the volume
and the throughput. Could you tell us what else is actually
happening already with stablecoins outside of the facilitation
of cryptotrading and what you think is imminent?
Mr. Disparte. Thank you, Senator. The blend of these types
of innovations within the traditional payments and banking
system, I think, is exactly where we are right now, that while
we can, of course, acknowledge the original use case was to
support cryptocapital markets and a host of activities in the
trading domain, what we are seeing emerging however is
integration of stablecoin-based settlements and payments across
third-generation blockchains that are increasingly better,
cheaper, faster than a lot of the analog alternatives for how
we move money.
They increasingly also benefit from the immutable,
permanent ledgering of financial transactions, which have
enormous gains in terms of accounting and enormous gains in
financial integrity.
Senator Toomey. So would it be--I am sorry to cut you off,
but with the limited time, would it be fair to say that there
are large, sophisticated, traditional financial institutions
that are increasingly pursuing the use of these platforms for--
as an alternative mechanism for settling payments, for
instance?
Mr. Disparte. Indeed. And just to name a few of what would
be traditional household name payments and money transmission
companies and settlement networks, the Visa network has enabled
USDC as a native settlement option across a network of 70
million merchants. Traditional companies in the remittance
domain, like MoneyGram, have just announced a partnership with
enabling USDC on the Stellar blockchain for remittances and
solving for cash-in and cash-out across the world.
Senator Toomey. Visa probably knows something about
settling payments. Let me ask you, it seemed to be suggested
that one possible alternative we might consider would be to ban
stablecoins. If Congress banned stablecoins, do you think that
maybe people in other countries would develop stablecoins, and
then if anybody who has access to a computer and the internet,
wouldn't they be able to access those coins? In other words,
wouldn't that be very unlikely to actually work at prohibiting
the use of stablecoins?
Mr. Disparte. No question. I think it borrows then perhaps
from early experiences with the advent of the internet, in
which people creating websites was once upon a time considered
a precluded activity or an activity that might warrant
authorization. I think the same holds true here today with how
the so-called internet of value is beginning to emerge.
I think it is profoundly in the American national interest
and in our public interest that we have options for how people
can move money in an always-on economy. Our financial needs do
not take bank holidays, and our money should not either.
Senator Toomey. Let me move on to Ms. Massari. I think you
have made it clear that you think that there should be a
regulatory regime regarding stablecoins, but you point out that
requiring them to be insured depository institutions does not
make a lot of sense because their fundamental purpose is
different from that of insured depository institutions. Could
you just briefly elaborate on that a little bit, and then I
have got one last question.
Ms. Massari. Sure, happy to. Thank you for the question,
Senator Toomey. So I think the fundamental idea is that the
business models and the risks raised by what I think of as well
regulated stablecoins is quite different from that of
traditional banks. Traditional banks take in deposits, and they
make long-term loans and investments with those deposit
proceeds. And so that activity, the maturity transformation and
the liquidity transformation, that gives rise to run risks and
is sort of the core of what traditional bank regulation is
designed to address. This includes, for example, leverage
ratios designed to address those core banking activities.
And so in my view, imposing regulation for insured
depository institutions on stablecoins, which hold 100 percent
short-term liquid reserves and are designed for payments, not
lending, is the wrong approach.
Senator Toomey. Mr. Disparte, as Congress hopefully
wrestles with the question of what should an appropriate
regulatory regime look like, what are some of the principles
that you think we should keep in mind?
Mr. Disparte. Well, first, if we--you know, I would argue
do no harm and allow these innovations to continue thriving
inside the U.S. regulatory perimeter. As a company, the State
money transmission regulations have been the appropriate
starting point. Again, if companies like PayPal and many of the
other major American payments companies can exist and safely
transmit trillions of dollars of transactions on their
platforms under State money transmission statutes, I think that
is a powerful starting point.
The concept of then having bank-like risks, managing bank
like structures and supervision I think is similarly important.
But it should be risk-adjusted, and it should be based on the
type of activity. Technology neutrality and the type of
activity should be what drives our policy.
Senator Toomey. Thank you. And then let me just say, Ms.
Goldstein, I am going to submit to you a written question
because we are out of time here. But I do think that the
examples that you provide in the case where Western Union
provides a lower-cost transfer is an unusually expensive
transaction and that people who were interested in such a
transaction and were concerned about lowering the cost could
easily construct the transaction in alternative ways that would
be much lower cost. But I will submit a question for the record
to clarify that.
And with that, Mr. Chairman, I yield back.
Chairman Brown. Thank you, Senator Toomey.
Senator Reed is recognized, from Rhode Island.
Senator Reed. Thank you very much, Mr. Chairman.
Professor Allen, you, I believe, invited us to ask you
about the monetary policy aspects of the stablecoin. We all
understand that a critical part of our economy is the ability
of the Federal Reserve to control money supply. So could you
comment in whatever detail is appropriate about the impact of
these stablecoins on monetary policy?
Ms. Allen. Thank you for the question, Senator. If you are
dealing with a situation when there is high inflation or if you
are dealing with a situation with deflation, the central--
sorry, the central bank needs the ability to match the amount
of money in the system to the needs in the economy. That is how
monetary policy is carried out. If, however, the central bank
loses control over some of the monetary supply, they lose their
ability to put their hands on those levers. So this is
something that central banks are extremely concerned about, and
in fact, that is the impetus for a lot of interest in central
bank digital currencies.
Interestingly, the same central banks that are worried
about these issues are also worried about the financial
stability issues that come with the introduction of a central
bank digital currency, not to mention the privacy issues. So it
is an interesting question that they feel the need to compete
with stablecoins. Perhaps more interventionist policy is
justified.
Senator Reed. Well, thank you very much. And one other
aspect is that this is a novel, or at least a fairly recent,
phenomenon and it requires a great deal of thought, analysis,
and projecting as to what we should do. And after the crisis in
2008-2009, we created the Office of Financial Research.
Professor Allen, do you see a role for the Office of Financial
Research here in terms of analyzing, structuring, and making
recommendations to Congress with respect to the stablecoins?
Ms. Allen. Thank you, Senator. I very much do see a role
for the Office of Financial Research here. The Office of
Financial Research, as you know, was created to respond to the
data gaps that we saw following the financial crisis of 2008.
As finance has become more technologically informed, as
finance, sorry, faces risks from climate change and things like
that, we are now needing an interdisciplinary approach to
financial regulation that includes computer scientists, data
scientists, climate scientists. I think the OFR right now is
underutilized and could really be built up with that
interdisciplinary expertise, which would give regulators a more
informed foundation to engage on issues of stablecoins amongst
other things.
Senator Reed. Well, thank you. I concur.
Ms. Goldstein, there are data gaps in the cryptocurrency
markets. Could you highlight what you think are the most
significant data gaps that we have?
Ms. Goldstein. Sure. Thank you for the question, Senator
Reed. Unlike the stock market, where we can rely on things like
the consolidated audit trail, where we know that all the quotes
that go through every exchange are going to be reported back to
a regulator at the end of the day, we are sort of at the mercy
of what the cryptocurrency wants to self-report. And so we may
get information about particular prices throughout the day, or
trades, but we may not get quote information.
You also will see sort of arbitrage opportunities crop up,
right? The price of Bitcoin on one exchange may be different
than it is on another exchange, and I do not know that
regulators currently have all of the data to truly understand
why that might be.
And so there is a real sort of, I think, potential for
Congress to look at is there a way to make sure that we do have
standardized data reporting and a way that we make sure that
all of the different exchanges are giving regulators all the
information they need.
Senator Reed. And, Ms. Goldstein, I presume that you would
have some questions about the existing transparency, auditing,
and disclosure requirements that are imposed on these entities.
Is that correct?
Ms. Goldstein. Yes, Senator, that is correct.
Senator Reed [presiding]. Thank you very much.
Senator Brown, Chairman Brown, asked me to recognize
Senator Rounds at the conclusion of my questions. Senator
Rounds, you are recognized.
Senator Rounds. Thank you, Mr. Chairman.
First of all, thank you to all of you for appearing before
us today. As a consumer, I look at these and I say, OK, there
has got to be an opportunity here or there is a reason why we
have millions of people that are currently participating in
these transactions, using the products and services that you
provide. At the same time, it seems to me that we have a
regulatory responsibility to make sure that the illicit uses of
these types of services are limited. We are challenged because
in the United States, as we regulate, certain organizations may
very well simply move outside of the United States, move
elsewhere.
If I am a consumer, why would I want--and I will direct
this first of all to Mr. Disparte. If I am a consumer, why
would I want to use your service as opposed to that of a Visa
using dollars as the currency?
Mr. Disparte. Thank you, Senator for the question. So part
of what Circle's innovations are providing--bearing in mind
that our direct customers are typically businesses and we do
not work with retail consumers. But nonetheless, part of the
infrastructure that we are supporting today is enjoyed by more
than 20 million people in the United States and 200 million
people worldwide, for whom the price of access of the cost of
access to things like international remittances, payments,
money transfers both domestic and foreign, and then, candidly,
access to the capital markets have been prohibited, right? On
the one hand, if to be banked hinges on brick and mortar
infrastructure, then there will be hundreds of millions of
people around the world, if not billions, who will consistently
be left in the margins.
Senator Rounds. So let me cut to the chase on this then. So
what you are suggesting is that there is an economic benefit to
someone because the costs of actually executing the transaction
are less, I am going to say on average, for yours than what it
would be for someone through the traditional brick and mortar
processors. Is that the marketing that is being done?
Mr. Disparte. That is part of what the ultimate opportunity
is. For example, in the remittance use cases, of which we can
describe a number, there is companies like Tala, which is a
woman-founded startup that is partnered with Visa to use USDC
for remittances. The proposition ultimately is that sending
digital currency payments is no different than sending data, of
course subject to financial crime compliance and subject to the
appropriate, you know, guardrails around protecting the
financial system. But nonetheless, the value proposition is a
fundamentally lower cost transfer of value on the internet.
Senator Rounds. Thank you.
Ms. Goldstein, I am curious. You indicated that the cost,
the actual cost per transaction, was probably greater in this
particular case. There seems to be a discrepancy here between
your opinion on it and Mr. Disparte. Can you share with us why
you think it is more expensive in this particular case?
Ms. Goldstein. Sure, Senator Rounds. I think it has to do
with whether or not you are going to use the USDC coin to
purchase other crypto. Are you going to keep it in this closed
crypto ecosystem and just use it to buy something else?
My point is if you are using it for remittances, if you are
sending it to another country, chances are you cannot go to
your local grocery and use USDC to buy some milk. You are going
to need to convert it to your local currency.
There is also a fee. When say I want to send something
overseas, I need to send it to somebody else's wallet to do
that. The USDC coin, it runs on lots of blockchains, but the
predominant blockchain is the Ethereum one. There is an ERC-20
token standard that they use to do that. The Ethereum network
fees are incredibly high. It can cost $10; it can cost $20; I
have seen it as high as $40, just to send it from my wallet to
somebody else's wallet.
And then once it gets to their wallet, if they are not
going to use USDC to buy milk from the local grocery store,
they need to convert it to the local currency. That involves
putting it on an exchange. There may be a fee to trade it back
to their local currency. And then they need to get it into
their bank so they can pay for the milk at the grocery, and
that may also include a fee.
So it has to do with do you need to bring it back to fiat
or can you keep it within this closed crypto ecosystem. I think
that is where you see the disparity.
Senator Rounds. Thank you.
Mr. Disparte, I am going to give you a chance to respond.
What is your analysis of what you just heard?
Mr. Disparte. Yeah, so thank you for the opportunity,
Senator. The quick version of this is early blockchains are a
little bit akin to dial-up internet, and the argument to ban
the stablecoin innovation because the current experience on
certain early blockchains may be a little slower, a little cost
prohibitive ignores the fact that the innovation is not
standing still. There are late-generation blockchains, third
generation blockchains that are approaching transaction
throughput akin to major credit card networks and approaching
cost structures on pennies on the dollar for value transfer.
Senator Rounds. Thank you.
My time is expired. Thank you, Mr. Chairman.
Senator Reed. Thank you, Senator Rounds.
On behalf of Chairman Brown, let me recognize Senator
Daines.
Senator Daines. Senator Reed, thank you. Stablecoin policy
is an area where I think there should be, and hopefully there
will be, broad bipartisan agreement as well as compromise.
Stablecoins are distinct from cryptocurrency in that there is a
central entity that issues, and is responsible for, any
individual token.
Personally, I believe that we should pursue a lighter touch
approach to regulating the innovation taking place with
cryptocurrencies and with stablecoins, but I do believe a
bipartisan legislative framework that I hope this Committee
would agree on is both possible for stablecoins and, frankly,
necessary. I would urge my colleagues to avoid hyperpartisan
solutions and instead seek consensus on something that is truly
bipartisan that will provide certainty needed for the private
industry to grow as well as to prosper. This, I believe, will
help provide the best pathway forward for this technology to
grow in a way that will benefit Montanans, the American people,
as well as the global financial system.
Mr. Disparte, can you describe the current regulatory
environment facing stablecoin users such as Circle?
Mr. Disparte. Thank you for the question, Senator Daines.
And we agree with the spirit of appealing to a nonpartisan
approach to how to regulate these innovations inside the United
States.
Arguably, when I look at the experience of a company like
Circle, we are licensed from sea to shining sea under State
money transmission regulations and answerable through the
examination process to the bank supervisors and the State money
transmission supervisors across the country. We have also, as a
company, helped contribute to creating a model law to try to
make a more uniform operating environment. We are also a
registered money transmission company with FinCEN and have
worked over the years with law enforcement and other actors on
protecting the integrity of the financial system, which is an
important pillar.
When you think about this innovation outside of the United
States, however, and what it means to compete on a global
environment, this is where I think the U.S. faces a gap. At the
Bank for International Settlements, at the Financial Action
Task Force, the Financial Stability Board, State regulators are
not represented; it is the Federal and national regulators that
are. And I think that is where the U.S. potentially faces a
competitiveness gap at the moment, but broadly speaking, I
think our current regimes for money transmission provide for a
degree of sufficiency around the use of an electronic form of
payment and a medium of exchange like a stablecoin.
Senator Daines. Thank you. You touched on the issue,
certainly on the global situation, and that really leads me to
the question I have for Ms. Massari.
Can you describe how a U.S.D.-pegged stablecoin could
advance the role of the U.S. dollar from an international
viewpoint and how that might help preserve the dollar status as
the world's foremost reserve currency?
Ms. Massari. Thank you for the question, Senator. To me,
this is a very interesting line of thinking, about how
stablecoins could affect monetary policy. To me, it is not
entirely clear that they would be harmful to monetary policy
where regulated in the manner that I described in my testimony,
backed 100 percent, at least 100 percent by bank deposits, U.S.
treasuries.
As some of my fellow witnesses have spoken about, you know,
these stablecoins can be available for remittance transfers,
for use outside the United States, just as other dollar-type
accounts and payment instruments. And to my mind, just as those
instruments help to bolster the standing of the U.S. dollar as
the world's reserve currency, the argument should be the same
for stablecoins.
Senator Daines. So what do you think the future of
stablecoin regulation would be if Congress does not act in a
bipartisan fashion to foster safe and stable growth?
Ms. Massari. It is a great question, Senator. Thank you. My
own view is that it would be useful for Congress to think about
a Federal charter, an optional Federal charter for stablecoin
issuers. I think this is a really important aspect of ensuring
appropriate regulation at the Federal level to achieve all of
the policy goals that I think we care about in a nonpartisan
and bipartisan way. To my mind, the State regulatory regime
that exists today has gone a long way to serve the interests of
consumers in different States. I think a Federal framework
would provide additional clarity if it is available.
Senator Daines. Speaking of benefits perhaps, back to Mr.
Disparte, what are some of the ways in which stablecoins lower
costs within, and increase access to, financial systems?
Mr. Disparte. Indeed. Thank you for the question, Senator.
On the one front, I get back to the question of if to be banked
hinges on traditional brick and mortar infrastructure then
many, many people will be unbanked or underbanked. And we saw
that happening with the advent of the COVID-19 pandemic, and
the inability to move money at scale across the internet was a
vulnerability for the country and the world.
Stablecoins begin to solve for that by having a trusted
medium of exchange that are dollar-referenced on the internet
itself, and that allows for lower-cost transactions. It allows
for a whole host of other financial services to blossom, where
the fundamental trust in the dollar is protected and preserved.
Senator Daines. Senator Reed--oh, Chairman Brown.
Chairman Brown [presiding]. Thank you, Senator Daines.
Senator Daines. All right.
Chairman Brown. I just voted quickly. The senior Senator
from Montana is recognized.
Senator Tester. Yeah, thank you, Mr. Chairman. I want to
thank you and the Ranking Member for having this meeting, this
hearing, and I want to thank everybody for testifying.
So I have heard from a lot of folks in the cryptocurrency
space. Their descriptions of their product reminds me of
something, and it is not necessarily a good thing. It reminds
me of the synthetic products that we saw leading up to the
financial crisis of '08 because not in all cases, but in some,
there is not anything real behind them.
Now I know stablecoin is backed by real assets, but that
does not mean they cannot be manipulated, and it does not mean
when you combine all these products together that there is not
opportunity for some foul play. Let us put it that way.
So for you, Professor Allen, do you think that is a fair
comparison I just made between cryptocurrency and the synthetic
financial instruments?
Ms. Allen. Yes, I do. Thank you for that analogy, Senator.
When we heard about the synthetic products in the lead-up to
the financial crisis of 2008, we heard things like these will
promote home ownership. And so you have to be wary, I think, of
claims of financial inclusion because sometimes they are
overblown, and you particularly have to be wary of them in
circumstances where the means to providing that goal is
unnecessarily complex. Complexity is a problem for financial
stability. If we do not understand why things are the way they
are, if they are too complicated, that primes the system for
confusion, opacity, and then panics.
So when we have a product like the stablecoin that has been
composed to solve financial inclusion, we have to ask
ourselves: Why does it need to be so complex? Why does it need
to run on a distributed ledger with decentralized governance
mechanisms? You know, why do we need the environmental costs of
that kind of process? Are there not innovations that are
simpler, that could achieve the goal in a simpler way?
Senator Tester. Ms. Goldstein, do you have anything you
would like to add to that?
Ms. Goldstein. Senator, I would just add that I agree. I
mean, I worked on Wall Street before, during, and after the
financial crisis, and I do think that there are some important
comparisons to the products that you raise. I do think that the
secondary market where stablecoins participate, DeFi in
particular, in some ways reminds me of the over-the-counter
derivatives markets, but that was aimed at institutions. DeFi
is very much retail and institutions.
Senator Tester. Professor Allen, I want to go back to you
for a second. I believe you were the one that stated that if
you have problems there is no one to go to. Was that correct?
That would have been in your opening statement?
Ms. Allen. Yes, that is correct.
Senator Tester. So I have got to ask you. If I had a
problem, if I was using these products, who would I go to?
Ms. Allen. Well, it depends----
Senator Tester. Or, am I just out in the cold?
Ms. Allen. Thank you, Senator. I think it depends. If in
fact the stablecoin has an issuer behind it that manages the
reserve and there is a problem, you could go to that stablecoin
issuer. But then that sort of highlights that these things are
not as decentralized as anticipated. We are having new
intermediaries coming into the system, and those intermediaries
have profit motives like any established financial
intermediary. And so the sense of democratizing finance, I
think, falls apart.
If we are talking about a stablecoin that is being operated
in a truly decentralized fashion, where it is operating on a
ledger, where you need multiple nodes to agree to any change in
how it operates, then that is something that could cause
incredible problems. I mean, who would you go to? Which of
those people would you be able to reach out to if you needed a
transaction undone, for example, because there was a mistake
made?
Senator Tester. All right. Thank you.
Ms. Goldstein, you talked about that these--they have to
meet four objectives. One of them was fees. What were the other
three?
Ms. Goldstein. It needs to be predictable. You need to be
able to exchange it for goods and services. And you mentioned
fees. I forget what the third----
Senator Tester. That is OK. That is all right.
Ms. Goldstein. My fourth.
Senator Tester. You said it does not meet fees because fees
are high.
Ms. Goldstein. Correct.
Senator Tester. Does it meet the other three?
Ms. Goldstein. I think when you stay within the
cryptocurrency ecosystem, it does meet the speed requirement. I
do not think it meets the predictability requirement, and I do
not think it meets the exchanging it for goods and services
requirement, broadly.
Senator Tester. Very quickly, because my time is slim, what
kind of fees are we talking about compared to what we see in
the industry today?
Ms. Goldstein. It depends on the exchange. It depends if
you are moving back to fiat. But let us say you start at fiat.
You move into stablecoins. You buy one on--by buying one on an
exchange, right, because, as Mr. Disparte said, they do not
service retail customers. You have got to go to an exchange.
You send it to someone else. They put it on an exchange. You
bring it back to fiat. It can be as high as $80 front to back
or as low as $6. Western Union is about four or five.
Senator Tester. OK. And what kind of amount? That is a flat
fee regardless of how much money you are exchanging?
Ms. Goldstein. It is an accumulation of fees because you
have to take several steps----
Senator Tester. Gotcha.
Ms. Goldstein. ----throughout the whole system.
Senator Tester. Thank you very much. Thank you all.
Chairman Brown. Thank you, Senator Tester.
Senator Warner from Virginia is on from his office.
Senator Warner. Well, thank you, Mr. Chairman. I appreciate
you holding this hearing, and I am very concerned. I agree with
the Ranking Member that there is a lot of innovation going on
and we should not get rid of that.
I am very concerned, sitting from the intel standpoint,
that a lot of this is being used for illegal and illicit
purposes. We just had a major break-in to our State legislative
system in Virginia. Everything is frozen. A ransomware effort
has been--threat has been issued, and my fear is it will be
paid off in some level of Bitcoin and potentially using a
stablecoin as the ability to transfer it back to a fiat
currency.
But let me ask the question that--and I will start with Ms.
Goldstein, but I probably will take everybody. I think I
understand some on distributed ledger, DeFi, and the notion of
creating a different currency. Gold has no inherent value, so
the idea if we as a society made Bitcoin or some other entity
to have a value has some logic to me.
But the idea of a private-sector stablecoin, where you have
a literally dollar-for-dollar or totally liquid security and no
leverage at all, how do you make any money off this? I get it
if you are Facebook and you have got a whole network effect and
you become the default cryptowallet, then that means you are
collecting a whole lot more information.
But, Ms. Goldstein, I will start with you. I get it now if
they are making all these fees. But if Mr. Disparte is right
and they are going to ultimately get down to a frictionless
transaction, how do you make enough money just off the flow to
have this kind of stablecoin become a viable financial
investment?
Ms. Goldstein. I mean, Senator, I think that is a good
question. I think that is why you see, for example, on Circle
and some of the SEC filings have said they want to move
potentially into a Circle DeFi and offer additional services
that allow, you know, customers to access DeFi platforms like
Aave and Compound with APIs that Circle talks in their investor
presentation about building.
I also think, you know, they have a revenue sharing
agreement with Coinbase. Perhaps they are making some profits
from Coinbase.
I mean, I would direct the question to Mr. Disparte, but I
imagine that it is not--if it is just treasuries and it is just
cash, I think I understand why I see in the SEC investor
materials that they do want to provide other services like
Circle DeFi in the future.
Senator Warner. I am going to get to Mr. Disparte, but I
would like to hear from Ms. Massari first because, again, help
me out here. One of the big name firms, they have got to be
paying folks a lot of fees. If you have literally got no
leverage at all and you have got a one-for-one exchange and you
are going to bring down the transaction cost, how do you--and
you do not have a network effect the way Facebook would from
Libra or Diem or whatever they are calling it this week, how do
you make money?
Ms. Massari. Thank you, Senator. It is a great question.
And of course, I cannot speak about any of my clients or
particular projects, but I think your observation is right. If
we appropriately regulate stablecoin issuers, they should only
be holding short-term liquid assets to back their stablecoin
obligations. That likely is not the main source of revenues for
them. They can provide payment services and other services
adjacent to the issuance of the stablecoin, you know, the same
kinds of payment services that I think we see today, whether it
is remittances or peer-to-peer transfers or other kinds of
services, and perhaps charge fees for those services.
Senator Warner. But isn't it again--and I am going to get
to Mr. Disparte. But just, you know, these other--PayPal I do
not believe argues that it literally has a dollar backing every
dollar that goes through the PayPal transaction system. I am
going to let Ms. Allen answer as well, but I want to hear from
Mr. Disparte. How are you going to make any money if we get to
this frictionless system you claim to be heading toward?
Mr. Disparte. Thank you for the question, Senator. And for
just a general matter, as a company, we are in the process of
going public. So there is quite a lot of customer and market
face and disclosure around the business' revenue model, but
akin to a PayPal. PayPal holds an omnibus account that is held
in the interest of customers to execute transactions. So we
have a very similar business model and a very similar U.S.
licensing platform.
And our current reserve structure is cash and short-term
treasuries of 90 days or less. So there is a nominal degree of
interest rate sensitivity on that reserve composition. That is
part of our revenue model.
There is also a revenue model implied in terms of de
minimis transaction fees for using Circle accounts and other
services.
We also operate----
Senator Warner. Let me get to Ms.--my time is running out.
Let me get to Ms. Allen. I mean, again, stablecoins brags about
the fact that you have a dollar-for-dollar exchange. Ms. Allen,
my time is up, but if you want to add a comment I would
appreciate it.
Ms. Allen. I will just say very briefly no one is going to
offer this service if there is not a way for them to make
money. If we are trying to promote financial inclusion, we want
it to be a win-win. There are reasons to be skeptical when the
actual moneymaking nature of the innovation is not fully
disclosed.
Senator Warner. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warner.
Senator Warren from Massachusetts is recognized for 5
minutes.
Senator Warren. Thank you, Mr. Chairman. So unlike other
cryptocurrencies like Bitcoin, stablecoins like Tether and USDC
are supposedly pegged to the dollar, and the reason for this is
to reassure people that stablecoins are as stable as using the
dollars you have in your wallet or in your checking account. A
stablecoin dollar, in other words, will supposedly be worth a
real dollar. Now that would make it a lot easier and a lot
safer to trade among different tokens, to put up collateral for
a risky bet, or even to pay for a cup of coffee at your local
bodega. But I want to examine whether or not the stablecoin
talk matches the stablecoin reality.
Ms. Goldstein, let us say that I own $10 worth of Tether or
USDC, if I want to trade my $10 worth of these tokens, am I
guaranteed to get $10 back?
Ms. Goldstein. No, Senator. You are sort of dependent on
the exchange where you are trading it because as a U.S. retail
customer I cannot go to Circle and say, please redeem my USDC,
and Tether explicitly says no U.S. customer can redeem Tether.
So I have to trade it on an exchange. Sometimes it fluctuates.
Sometimes it is a little above the dollar; sometimes it is a
little below. But if there were a run, the peg could collapse.
And we also do not really know necessarily what is backing
all of these stablecoins, right? Tether is----
Senator Warren. Hold on a sec. I want to get into that, OK?
I promise. Because I want to just underscore this point, that
if Tether's tokens were actually backed one to one it would be
one of the 50 largest banks in the country, but we know that it
is not. And that is because according to Tether's own report
only about 10 percent of the assets backing its stablecoin are
real dollars in the bank; 90 percent is something else, not
real dollars.
And if that worries you--there is a little more news on
this one--the report that 10 percent of Tether's stablecoins
are backed up by dollars is not actually verified by a
comprehensive, audited financial statement or verified by any
Government regulator.
So, Professor Allen, let me ask you. Let us say I am not
the only one who wants to redeem my $10 worth of Tether or USDC
for dollars, and maybe there is bad news in the market and
people rush to cash in their stablecoins. What would a run on
the stablecoin market look like? Could it endanger our
financial system?
Ms. Allen. Thank you for that question, Senator. So a
number of the witnesses today have said that stablecoins do not
engage in maturity transformation and therefore do not suffer
the same fragilities as bank deposits and runs, and that is
probably true to some degree. But a run on a stablecoin would
look a lot like the runs that we have seen on money market
mutual funds in 2008 and again in 2020, and it could also share
dynamics with the foreign exchange crisis we have seen in the
past, like the Mexican peso crisis.
So if holders of the stablecoins suddenly lose confidence
in either the ability of the issuer of the stablecoin or the
reserve of assets backing it to maintain a stable value, they
could seek to redeem or exchange their stablecoin en masse. And
if they have direct redemption rights, that would force the
issuer to liquidate its reserve of assets.
So right now I do not think that would have systemic
consequences. If stablecoin holders are only using them to
speculate, they are not really going to expect stability, and
so a run will be less likely. But if a run did occur right now,
I think the impact would probably be felt in the DeFi
ecosystem, and that is why it is critical that we not provide
this Government support to the DeFi ecosystem and expect----
Senator Warren. OK. So let me go there. Sorry to interrupt,
but let me go there. We know that stablecoins are not always
stable. In fact, it is worse than that. In troubled economic
times, people are most likely to cash out of risky financial
products and move into real dollars. Stablecoins will take a
nosedive precisely when people most need stability, and that
run on the bank mentality could ultimately crash our whole
economy.
But there is another piece of the risk here, and you have
headed in that direction, Professor Allen. DeFi is the most
dangerous part of the cryptoworld. This is where the regulation
is effectively absent and, no surprise, it is where the
scammers and the cheats and the swindlers mix among part time
investors and first-time cryptotraders. In DeFi, someone cannot
even tell if they are dealing with a terrorist.
Stablecoins provide the lifeblood of the DeFi ecosystem. In
DeFi, people need stablecoins to trade between different coins,
to trade derivatives, to lend and borrow money, all outside the
regulated banking system. Without stablecoins, DeFi comes to a
halt.
So, Professor Allen, does DeFi threaten our financial
stability, and can DeFi continue to grow without stablecoins?
Ms. Allen. I do not think DeFi can grow without
stablecoins. I think it would struggle. Right now I think DeFi
is contained to the point where it will not impact financial
stability, but if it grows I think there is a real threat
there, particularly if it becomes intertwined with our
traditional financial system. And there is industry interest in
pursuing this integration on both the traditional finance and
the crypto side. So I think it is critical that stablecoins not
be allowed to fuel that growth.
Senator Warren. Well, I appreciate it. You know, this is
risk to traders, risk to our economy. The time to act is before
it all blows up. Stablecoins have no regulators, no independent
auditors, no guarantors, nothing, and they are propping up one
of the shadiest parts of the cryptoworld, the place where
consumers are least protected from getting scammed. Our
regulators need to get serious about clamping down on these
risks before it is too late.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warren.
Senator Smith from Minnesota is recognized.
Senator Smith. Thank you, Chair Brown, and thank you to our
panelists for being here today. I want to ask about this: So as
businesses transition to cashless models, some businesses could
adopt stablecoin or even crypto as an alternative or as the
only method for a payment, and I am trying to figure out what
impact that this could have on people, especially people of
color who are so often left out of the financial system.
According to a report by the FDIC, approximately 7.1
million households are unbanked. That was in 2019. And so as we
move to a cashless economy, what happens to people who are low-
income or homeless or undocumented, and how do they pay for
things that they would need in a stablecoins world? Does
stablecoins actually give them more freedom and access, or does
it become another barrier?
So, Ms. Goldstein and Professor Allen, could you help me
answer this question? Advocates for stablecoin argue that they
provide access for small businesses and unbanked people. What
do you think about that argument, and how exactly does
stablecoin work for someone who does not have a checking or a
savings account?
Ms. Goldstein. If I may briefly and then give Professor
Allen a chance to respond, again, because stablecoins are not
widely accepted for goods and services, you need a bank. And
not only do you need a bank, you need an account at a
cryptocurrency exchange in order to buy stablecoins in the
first place, at least the top two ones. And so I think this is
why we saw the World Economic Forum find that there are not
many financial inclusion benefits to stablecoins because it is
essentially using the rails of the existing banking system.
So until, you know, and if--I think it is a big ``if''--we
see mass adoption of stablecoins as a way to accept things at
the grocery store, to buy your groceries, I do not really see
how this helps the unbanked because you need a bank and you
need a cryptocurrency exchange.
Senator Smith. Yeah. OK. Thank you.
Professor Allen.
Ms. Allen. So I agree with Ms. Goldstein's comments. I just
want to add something further, which is financial literacy is
already a huge problem for a lot of people. We expect a lot of
consumers in terms of their ability to read complex financial
documents and understand them. With the move to cryptorelated
financial services, we are asking them as well often to
understand computer code because disclosures do not always
match the computer code, and so investors in these areas tend
to go to the code themselves. So I think that it is just
entirely unreasonable to expect people to be able to sense the
risks in these types of products on their own by looking at the
code.
Senator Smith. Yeah. I mean, it is difficult enough for--
you know. I mean, it is extremely difficult for anybody to
understand. So I really agree with you.
Let me ask you another question about this. We, of course,
need to make sure that workers can rely on their pensions, the
pensions that they have earned. This is something that Chair
Brown and I have worked on, focused on, since I first came to
the Senate. So as stablecoins and cryptocurrencies become more
prominent in the financial system, it seems like it is worth
looking at what this could mean for retirement plan assets and
figuring out whether it is a good idea for them to be offered
as an investment options for pension plans or 401(k) plans.
So, Professor Allen, let me stay with you. For workers or
teachers who are thinking about their retirement accounts or
pensions, what do you think is the right role, or is there a
role, for stablecoins in those plans?
Ms. Allen. I do not think that there is a role for them
there. I appreciate that people are going through a really hard
time right now. The search for yield in this environment, you
know, is a very real pressure. But I feel it is very dangerous
for people to gravitate toward highly volatile assets in that
search for yield, and particularly when we are talking about
long-term investments like retirement I think that is a recipe
for disaster.
Senator Smith. Ms. Goldstein, would you like to comment on
that?
Ms. Goldstein. Yes. I will just add that I agree with
Professor Allen. I do not really know that there is a
retirement, you know, investor that wants the volatility and
insolvency risk of Bitcoin that gives you, you know, very
little yield if any at all.
Senator Smith. Mm-hmm. Thank you. So we know that the
stablecoin market is worth about $130 billion and a lot of this
growth has happened really fast, in the last couple of years.
And I personally do not think that regulators have kept up with
this transition. The President's Working Group on Financial
Markets recently released a report on stablecoins with
suggestions for Congress as well as banking regulatory agencies
on recommendations for what we should think about as we
regulate stablecoin.
I just have a couple seconds left, but what--Ms. Goldstein,
I will stay with you. What do you think we should be
considering as policymakers as we think about a regulatory
framework for stablecoins?
Ms. Goldstein. Senator Smith, I think we need to think
about the secondary market and how stablecoins drive DeFi and
make sure that there is not a gap between the protections that
you receive as an investor in the equity markets and the
protections that you may receive as an investor in the crypto
asset markets. Whether it is best execution or making sure that
the trades are not manipulated or being spoofed, wash tradings,
you name it, I think we need to make sure that we are narrowing
that gap as much as possible so that we can all enjoy the
protections that we are used to seeing in the equity markets.
Senator Smith. Thank you so much.
I know I am out of time, so I will yield back. Thank you,
Mr. Chair.
Chairman Brown. Thank you, Senator Smith.
Senator Sinema from Arizona is recognized from her office.
[No audible response.]
Chairman Brown. I believe she is still getting on. She may
be on the floor voting, but I would like to hold for a moment.
And I will ask one question, if Senator Toomey wants to ask
one, too.
Ms. Goldstein, is it true that cryptocurrency speculation
on decentralized finance platforms would not work without
stablecoins?
Ms. Goldstein. Yes, Senator, I think that is right or at
least they would be a lot smaller.
Chairman Brown. So could a company like Circle create a
stablecoin that can be used for electronic payments but could
not be used to gamble in cryptocurrencies like Dogecoins?
Ms. Goldstein. Yes, Chairman, I think you could. You could
design the system however you would like, and there is
nothing--yes, they absolutely could do that.
Chairman Brown. So, Professor Allen, what are the risks of
allowing stablecoins to be used both as a payment system and as
a tool to allow gambling in DeFi markets?
Ms. Allen. In terms of allowing them to be used as a
payment system, I think the biggest financial stability risk is
if that is offered by a tech company like Meta, Facebook, or
Amazon because then you have the potential for these to scale
up really quickly to be used for everyday goods and services,
and then we do potentially have both monetary policy and
financial stability issues in the sense that the tech company
would become too big to fail and essentially part of the
Government safety net.
Unless one of those tech companies moves into this space,
though, I do not see stablecoins becoming used for everyday
goods and services payments absent some kind of Government
support in the form of deposit insurance or the equivalent. So
if that does happen, these could then be used potentially for
payments, but also they would be used to a large extent in the
DeFi ecosystem. And that is essentially, in my view, going to
be Shadow Banking 2.0 in terms of the Government essentially
having to bail out this entirely self-referential financial
system that operates outside the boundaries of what we normally
regulate.
Chairman Brown. Thank you, Professor Allen.
So, Mr. Disparte, since the name of your company was
invoked during this little discussion, when testifying in front
of Congress, Circle--and in the President's working group,
Circle--emphasized it is a payment platform that can help small
businesses or enable cheap international payments, a concern
also about which Senator Warner from Virginia was concerned, as
you heard. But on their website, Circle highlights the DeFi
protocols it is designed to work with. And your CEO recently
bragged on Twitter that your U.S. Dollar Coin is the most used
stablecoin for making bets in these unregulated markets.
So, Mr. Disparte, if Circle is a safe, stable banking
product to facilitate payments to small businesses, why is your
company also promoting its use to gamble on cryptocurrencies?
How does that actually help small businesses or the economy?
Mr. Disparte. There--Senator, thank you for the question.
There is, of course, a wide range of use cases for any payment
infrastructure, any payment innovation. In the software
intermediated capital markets, also known as DeFi, the use of
stablecoins is an important innovation. But its fundamental
function is exactly the same, and the expectation of the end
user is that they only get a dollar out from the economic use
of the stablecoin for any of these activities.
Chairman Brown. Thank you.
Senator Toomey and then we will--after Senator Toomey, we
will call on Senator Sinema if she is on. Otherwise, I think we
will likely adjourn. So, go ahead.
Senator Toomey. Thank you, Mr. Chairman.
Ms. Massari, I have had a little back and forth with the
SEC Chairman. Mr. Gensler has, I think, at times indicated that
stablecoins, at least some stablecoins, may actually be
securities even if they lack an inherent expectation of
profits. But he has not explained to me exactly what the
criteria he is using, what legal tests, what makes a stablecoin
that has no expectation of profit a security. And it seems to
me that some expectation of a gain on the part of an investor
is fundamentally at the heart of what we consider to be
securities.
So I want to ask you, if there is a non-interest bearing
stablecoins--and most are not intrinsically bearing interest.
And there is no explicit expectation of profits, and really the
value proposition is there is a utility that is the reason
people are interested in the stablecoin. But in such an
example, do you think that it meets our definition of what is
security and should be regulated as a security?
Ms. Massari. Senator Toomey, thank you for that question.
As you might imagine, every practitioner in this area is
extremely well versed in the Howey Test and the Reves Test, and
I will not bore you with the technical details. But in short,
in my view, a non-interest bearing stablecoin, fully reserved
and regulated as many stablecoin issuers are today, as money
transmitters, those stablecoins should not be viewed as
securities. They are appropriately not viewed as securities
under existing law.
Senator Toomey. Thank you.
And, Mr. Disparte, I was wondering if you could give us--
you made a really interesting and I think important observation
about how rapidly this space is evolving, how the capabilities
are expanding, how speed and throughput are accelerating, and
you made the analogy to back when the internet relied on dial-
up modems. It is a little bit faster today.
And I suspect that the capabilities of these platforms to
handle large volumes of transaction is also going to grow. And
as it does, it seems to me there is very interesting potential
for smart contracts. Could you give us an idea of how we should
think about smart contracts and maybe even an example of a
smart contract that would have a use case for an ordinary small
business or consumer?
Mr. Disparte. Absolutely. Thank you for the question,
Senator. Indeed, I would argue that the public infrastructure
and this open-source technology wave that is happening--what
many are likening to a Web 3, where Web 1 was read, Web 2 was
read and write, and Web 3 is read, write, own--is an important
innovation and has a lot of implications broadly for financial
resilience and competitiveness.
An example of a smart contract innovation could be
something really important and close to home for me, coming
from the insurance world, for example. One of the most elusive
aspects of the insurance world is this concept of a parametric
claim. A homeowner's policy that could liquidate a claim based
on a georeference where the disaster took place and there is no
equivocation that it in fact was a total loss would be a game
changer. The absence of being able to do that at scale and
quickly and in real time is partly solved for by a trusted
dollar digital currency, like USDC, but also partly solved for
what the capability is of a smart contract.
So you have started to see some blockchain-based
innovations taking place in that domain, in the insurance
domain, but an open internet dollar functionally becomes one of
the only missing links to enable that at scale.
Other examples, you know, are opportunities around zero
default loans. Effectively, programmable money enables you to
execute even micropayments, where by today's standards sending
even small amounts of money, it often costs more than the sum
of money sent. And so the ability to execute micropayments, I
use an example in my written testimony about a journalist being
able to accrue a penny for every like. By today's payment
standards, it is not possible to execute that penny to the
journalist, so the freelancer is effectively a starving artist
or a starving writer or a starving journalist.
And then there is a whole host of other use cases that are
enabled by this: cross-border payments, being able to have
sanctions-compliant money movement, for example, corruption,
bribery, and fraud internationally in a humanitarian context.
Money is the honeypot, especially physical money because of its
opacity. Stablecoin-based payments and blockchain-based
payments, because of their transparency, their speed, and their
auditability, can enable a whole host of applications. USDC was
used, for example, to support doctors in Venezuela as one use
case of moving humanitarian funds using these innovations.
So I think we are in the opening innings. And when people
say we have failed the financial inclusion test, the
presumption is the stablecoin has agency just as the dollar,
and both are patently wrong.
Senator Toomey. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey.
Senator Sinema is recognized from her office.
Senator Sinema. Thank you, Mr. Chairman, and thank you to
Senator Toomey in particular for extending the questions so I
was able to join today. I also want to thank our witnesses for
being here today.
As you know, Mr. Chairman, I cochair the Senate's Financial
Innovation Caucus alongside my friend, Senator Lummis of
Wyoming. So I am glad that we are holding this hearing on
stablecoins today.
As you know, stablecoins are cryptocurrencies that are
pegged to other external reference assets like a fiat currency,
another virtual currency, a commodity, or a combination of
these assets. As more Americans choose to invest and hold and
transact with digital assets, it is important for policymakers
to consider the regulatory implications of this trend and the
innovations happening in this ecosystem.
Ms. Massari, it is great to meet you and to discuss this
important topic. If an Arizonan is looking at holding a
stablecoin, how can he or she know for sure that it is truly
backed by the asset that the issuer claims?
Ms. Massari. Thank you for the question, Senator Sinema. So
today in the United States, stablecoin issuers, U.S. stablecoin
issuers, are regulated by the States in which they offer their
services and where they are located. This is regulation under
State money transmission licensing regimes, which exist in
every State but one. In addition, they are regulated for
financial crimes purposes by FinCEN, a bureau of the U.S.
Treasury Department, as money services businesses.
That being said, it is primarily the State regulators that
are responsible for oversight and supervision of money
transmitters, including stablecoin issuers. So we would look to
those State regulators to ensure that the stablecoin issuers,
like other payment service providers and stored value
providers, are living up to their promises.
Senator Sinema. Thank you. And as I understand it,
currently, stablecoin issuers are generally subject to State
level money transmitter laws. Do these State laws require a
particular standardized way of disclosing how the stablecoin is
backed?
Ms. Massari. It is a great question, Senator. So these laws
generally require stablecoin issuers, like other payment
providers and stored value providers, to maintain what are
called ``eligible assets'' to back their obligations to
customers. They are also required to provide financial reports
to their regulators, and of course, any disclosures that they
make about how they hold assets must be accurate.
Senator Sinema. I see. Now in the event that a stablecoin
is not truly backed, is there a risk that the Arizonan could
try and redeem their token for cash and the issuer may not be
able to provide it? Now that is a problem for the Arizonan in
the near term, but what bigger problems could that cause in the
long term?
Ms. Massari. It is a great question, Senator. I think the
short answer is, yes, that could certainly be a problem. That
is one reason why I support commonsense, strong regulation of
stablecoin issuers. As I mentioned, the States are currently
largely responsible for that regulation. In my view, a Federal
option could also be explored to achieve the same goals.
Senator Sinema. Thank you. Now, Ms. Massari, if the
Arizonan holds $10,000 in a particular stablecoin and then
there is a run on the issuer, how much of the $10,000 could the
Arizonan lose if the backing on the coin is not credible?
Ms. Massari. That is a great question again, and I think
these are really important questions to think about as we think
about how to regulate stablecoins. Unfortunately, I am going to
give you a lawyerly answer, which is it depends. It depends on
the assets that are available in bankruptcy to redeem out the
stablecoin holders, if the stablecoin goes into bankruptcy and,
in general, how much money is left with the stablecoin holder
that is available for the stablecoin holders to get in that
kind of situation.
Senator Sinema. Thank you. You know, this is an important
issue for which consumers and investors deserve a clear answer.
At the same time, though, we should not assume that simply
overlaying every law and regulation we have for other issuers
or depository institutions is automatically the correct issue
here.
Now in the short time we have left, I would love to hear
from Ms. Massari and Ms. Goldstein on my last question.
Relative to banks or other issuers of digital currency, can you
highlight the key differences, good and bad, that policymakers
should continue when thinking about regulation of stablecoin
issuers? So first, Ms. Massari.
Ms. Massari. Again, thank you for the question. To my mind,
when thinking about stablecoin regulation, this regulation is
really important. It is really important to protect consumers.
It is really important to protect our financial system. But at
its core, the most important thing is to make sure that the
regulation fits the activity, right? Stablecoin issuance is
different from traditional banking, and therefore, in my view,
it does not make sense to overlay the same regulations that we
have for traditional banks on top of stablecoin issuers.
Ms. Goldstein. And, Senator, I will just add very quickly
that I think that stablecoin issuers, in particular when they
go to raise funds or they are going to issue new tokens, we
sort of have this uneven playing field. There are looser
standards for fundraising for cryptotokens, including
stablecoins, than say for a pharmaceutical company going in the
public markets and raising money. And that is sort of like
having a triathlon where you are asking--say 10 percent of the
participants, they get to skip the swim, right?
And so I do not think that we should be----
Senator Sinema. I would like to do that, personally, just
to be clear.
Ms. Goldstein. Yeah, no. I think it would be a good trick,
right? So I do not think we should be advantaging one industry
over another when it comes to fundraising from the public
markets.
Senator Sinema. Thank you.
Thank you, Mr. Chairman and Ranking Member, for extending
the hearing. I really appreciate the time today. And I thank
our witnesses for appearing.
Chairman Brown. Thank you, Senator Sinema.
This has been--and Senator Cramer is not on. OK. Thank you.
This has been an important and eye-opening discussion. In
the past, this Committee and financial regulators have failed
to pay attention to these issues until it is too late. They
have devastated--workers and families in too many cases have
been devastated in this country, in the Ranking Member's State
and my State, all over the country. We will continue to keep a
close eye on stablecoins and cryptocurrency as well to ensure
that this economic recovery that we have worked so hard to
build is not destroyed by another crisis.
Thank you to the four witnesses today.
For Senators who wish to submit questions for the record,
these questions are due 1 week from today, Tuesday, December
21st. Witnesses will have 45 days to respond to any questions.
Thank you again to the four of you.
The Committee is adjourned.
[Whereupon, at 11:57 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
A few years ago, most people had never heard of cryptocurrency--
most people still don't know what all these terms mean, from
stablecoins to nonfungible tokens.
But they've become a hot topic in Washington--and on Wall Street,
and online, among millions of Americans who, understandably, don't
trust big banks, and are looking for an opportunity to make money.
Over the last several years, the number of cryptocurrencies has
exploded--from the hundreds to the thousands. The supposed value of all
of these digital assets in circulation recently passed three trillion
dollars.
That's about the size of JPMorgan Chase's balance sheet--the
biggest bank in the country.
With that much money tied up, that's pretty much the definition of
a systemic issue in our economy.
And those big numbers have come with big promises.
We've been told that blockchain--the technology these coins are
built on--will ``democratize'' money, or build a more inclusive
economy.
But none of those promises have materialized, and likely never
will. Instead, we've gotten wild financial speculation.
As we've heard before in this Committee, the wild price swings and
high transaction fees for many cryptocurrencies make them useless for
payments--the one thing they claim to be designed for.
Stablecoins were supposed to solve this problem.
Unlike other cryptocurrencies, their value isn't just based on
market enthusiasm--a stablecoin's value is supposed to be backed by
real assets held by the company that issues the stablecoin.
In other words, stablecoins are a particular type of cryptocurrency
whose value is managed by a single company. These include Tether,
Circle, and Abracadabra--a fast-growing scheme that makes ``Magic
Internet Money''. Their words, not mine--what could possibly go wrong
with something that claims to be ``magic money''?
Cryptocurrencies' advocates argue that crypto assets are superior
to real dollars, because they are decentralized and transparent. But
stablecoins are neither.
Most of them, and certainly the largest ones, rely on a single,
centralized company to manage the reserve assets and their supply of
coins. That sounds a lot like what traditional financial institutions
do.
It's not decentralized when one company controls when people can
access their own money. And it's certainly not transparent when
critical information about stablecoins, and the companies that issue
them, isn't available to people who have their money tied up in these
assets.
Last month, I wrote to some of the biggest stablecoin issuers to
get more information on how they manage the funds that back their
coins, and to ask what rights their users have. Their responses were
not very enlightening--and should lead us to assume most ordinary
customers don't have much in the way of rights at all.
So let's be clear about one thing: if you put your money in
stablecoins, there's no guarantee you're going to get it back.
They call it a currency, implying it's the same as having dollars
in the bank, and you can withdraw the money at any time.
But many of these companies hide their terms and conditions in the
fine print, allowing them to trap customers' money.
And if there's no guarantee you'll get your money back, that's not
a currency with a fixed value--it's gambling. And with this much money
tied up, it sure looks to me like a potential asset bubble.
Stablecoins make it easier than ever to risk real dollars on
cryptocurrencies that are at best volatile, and at worst outright
fraudulent.
Just a few weeks ago, we saw how quickly these tokens can crash,
with cryptomarkets diving by almost 30 percent in one day. History
tells us we should be very concerned when any investment becomes so
untethered from reality.
Look at the 1929 stock market crash.
Securities started out as a way for regular Americans to invest in
new companies that wanted to bring new products to market or expand
their operations.
By the end of the decade, companies were invented out of thin air,
to create more stocks to satisfy wild demand. Banks allowed customers
to borrow against one stock to buy another, until the whole market
collapsed.
And of course we should all remember the 2008 crash.
Subprime mortgages were supposedly created to give more families
access to the American dream, while derivatives were created to help
financial companies reduce their risks.
In reality, predatory mortgages were used to strip homeowners of
the equity they had in their homes in order to create complex mortgage-
backed securities and derivatives that ended up increasing risks at
banks and financial companies.
We all know how that turned out.
We can't deny that betting on cryptocurrencies has made a few
people rich--just like some people became fabulously wealthy trading
stocks in the 1920s. And we all heard the stories about mortgage
brokers and house-flippers becoming millionaires in the 2000s.
But for most people, this kind of wild speculation ends in
disaster. And the only ones who tend to walk away unscathed are the big
guys--it's always the big guys--the ones who call it ``innovation''
while lining their own pockets.
So far, what happens in the cryptomarkets has stayed in the
cryptomarkets. But stablecoins create a very real link between the real
economy and this new fantasy economy.
We saw this with ``Dogecoins,'' a satirical cryptocurrency that was
all of a sudden worth billions when a tech billionaire tweeted about
it.
It's understandable that a lot of people are looking for an
alternative to our current financial system. Wall Street banks
dominate, and they make record profits no matter what's happening to
workers and small businesses and the country at large.
To a whole lot of people, that seems like a fantasy economy too.
But a Big Tech scheme that makes it easy for hardworking Americans
to put their money at risk isn't the answer.
Stablecoins and cryptomarkets aren't actually an alternative to our
banking system. They're a mirror of the same broken system--with even
less accountability, and no rules at all.
Today we'll hear the same arguments from this industry against
regulation that we've heard from financial industry lobbyists so many
times before--it harms innovation, the free market will solve all our
problems, America needs to be globally competitive.
What makes America the strongest economy in the world isn't wild
betting in the financial sector. It's our workers--their talent, their
ingenuity, their dedication. That's what our economy is built on.
You can't fake that. But as we've seen so many times before, you
can put it all at risk.
The rest of the world trusts the U.S. dollar when we have orderly,
sane markets. The real threat to our global competitiveness is
regulators who ignore clear warning signs.
We have reason to be encouraged this time around, though.
The Biden administration is putting strong watchdogs in place at
the banking and market regulators. We're empowering workers. Wages are
rising. Infrastructure investment is about to spur more job growth. And
we're fighting to bring down costs with the Build Back Better plan.
We can't put all that potential at risk.
I will continue to work with the financial watchdogs to ensure they
have all of the tools they need to protect people's hard-earned money
and our economic recovery from another bubble, and another crash.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Thank you, Mr. Chairman.
Stablecoins are a central component of the cryptocurrency
ecosystem, which is itself at the vanguard of the tokenization of
assets.
Stablecoins can speed up payments, especially cross-border
transfers, reduce costs, including remittances, and help combat money
laundering and terrorist financing through an immutable and transparent
transaction record.
Stablecoins can also be programmed and made interoperable with
other currencies, creating efficiencies to improve access to financial
services for more Americans.
But unlike volatile cryptocurrencies like Bitcoin, stablecoins
don't fluctuate in their dollar price.
In today's hearing, we will focus on stablecoins designed to
maintain a 1-to-1 value relative to the U.S. Dollar, meaning one
stablecoin is meant to always equal one dollar.
Over the past year, the stablecoin market has exploded. As one of
our witnesses, Dante Disparte, will explain, stablecoins are beginning
to be used for small business payments and international remittances.
While traditional payment systems can be expensive and take several
days to settle, transferring funds via stablecoins is low-cost and
nearly instantaneous.
Given that stablecoins disrupt the status quo, they've naturally
drawn skepticism from incumbent industries and regulators. Last month,
the President's Working Group on Financial Markets, or PWG, issued a
report recommending that Congress pass legislation to establish a
Federal regulatory framework for stablecoins. In their report, the
Treasury Department and others expressed their worries about consumer
protection and financial stability with stablecoins.
Although the report did little to highlight the potential benefits
of stablecoins, I was encouraged the report acknowledged that
responsibility for clarifying whether, and to what extent, Federal
agencies have jurisdiction over stablecoins rests with Congress. I am
open to working with the Administration and my Democrat colleagues on
this front.
But whatever Congress does, let's be sure that we don't stifle
innovation in an evolving digital economy or undermine our own
country's competitiveness. Let's have the humility to recognize that
many of our views about how financial services are delivered and how
investments work are quickly becoming outdated.
This morning, I'm releasing a set of guiding principles that I
think should influence our work on a stablecoin legislative framework.
Innovation
These principles recognize that stablecoins are a very important
innovation, and they introduce new capabilities into money that did not
previously exist. In addition to their ease of use and reduced fees
associated with their transfer, stablecoins can improve the privacy and
security of our transactions. They also introduce the concept of money
programmability, or smart contracts, which allow automated transactions
based on a sequence of verifiable events.
In recognition of the potential of these new capabilities, any
regulation should be narrowly tailored and designed to do no harm. At
the same time, sensible regulatory standards may help to protect
against key risks, such as redemption or run risk. These principles
take a different approach than the PWG report.
Options for Stablecoin Issuers
For example, the PWG report recommends that all stablecoin issuers
must be insured depository institutions. There are three reasons I
disagree with that recommendation.
First, stablecoin issuers have different business models than
banks. They do not provide the same services as banks and do not
present the same risks.
As one of today's witnesses, Jai Massari has observed, stablecoin
providers do not engage in taking deposits and making loans like banks
do. Because of these important differences, subjecting all stablecoin
providers to the full suite of bank rules and regulations meant to
address maturity transformation is not appropriately tailored to the
potential risks.
Second, requiring all stablecoin issuers to become banks would
stifle innovation. We know that a tremendous amount of innovation
occurs outside of the banking system, including by technology
companies. It is unlikely that much of this development could happen
within the banking system because of onerous regulations, which create
a difficult environment for innovation. Allowing entrepreneurs to
innovate with digital assets like stablecoins will promote greater
competition and deliver better results for consumers.
Finally, the regulation of payments activities should create an
equal playing field. Great innovators like PayPal, Venmo, and Apple Pay
are already subject to a State-by-State licensing regime, as well as
registration with a Federal regulator.
Recognizing the range of different business models, there should be
at least three options for stablecoin providers: operate under a
conventional bank charter; comply with or acquire a special-purpose
banking charter designed for stablecoin providers, which would be
designed in accordance with legislation; or register as a money
transmitter under the existing State regime and as a money services
business with FinCEN at the Federal level.
This optionality would match each stablecoin provider with the
regulatory framework most appropriate to the business model.
Requirements for All Stablecoin Issuers
Regardless of the charter or license they pursue, all stablecoin
providers should meet certain minimum requirements. For example, they
should clearly disclose what assets back the stablecoin, as well as
give clear redemption policies and subject themselves to periodic
audits.
These requirements would ensure that consumers have sufficient
information about which stablecoin they use. It might also be
appropriate to set minimum reserve requirements and attestations as
well.
In addition, legislation should stipulate that non-interest bearing
stablecoins are not necessarily securities and shouldn't automatically
be regulated as such.
This framework should protect the privacy, security, and
confidentiality of individuals using stablecoins, allowing customers to
opt out of sharing personal information with third parties.
Finally, anti- money laundering and other requirements regarding
financial surveillance under the Bank Secrecy Act should be modernized
for all financial institutions subject to them, given the emergence of
stablecoins, cryptocurrencies, and other new technologies, including
artificial intelligence.
The emergence of stablecoins represents to me the latest
development in the ongoing evolution of money. I stand ready to work on
this issue and do so in a manner that doesn't discourage innovation or
competition moving forward.
I look forward to hearing from your witnesses and yield back.
______
PREPARED STATEMENT OF ALEXIS GOLDSTEIN
Director of Financial Policy, Open Markets Institute
December 14, 2021
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF JAI MASSARI
Partner, Davis Polk & Wardwell, L.L.P.
December 14, 2021
Chairman Brown, Ranking Member Toomey, and Members of the
Committee, thank you for inviting me to speak today on this interesting
and complex topic.
Since the earliest days of our Nation, as our economy has grown and
transformed, so too has our understanding of money. The dramatic
changes we are all familiar with have seen purses of gold and silver
coins eventually replaced by wallets holding State and later national
bank notes, then Federal Reserve notes alongside checkbooks tied to
demand deposits, followed by the proliferation of credit and debit
cards, and more recently the swift rise of payment apps.
Like the innovations in public and private money that preceded
them, stablecoins squarely present the same core regulatory concerns as
earlier forms of money--those of consumer protection, systemic
stability, safety and soundness, and combating illicit finance. But
with thoughtful regulation, stablecoins can perhaps offer benefits over
the technologies that came before, including lower costs, faster
services, new services made possible by programmability, opportunities
to expand financial inclusiveness, greater traceability, and the
potential for enhanced operational resiliency through the use of
distributed networks.
The Committee is today asking the key questions: how do stablecoins
work; how are they used now and how will they be used in the future;
and what are the resulting risks? To this, I would add: what are the
potential benefits? The answers to these questions form the basis for
understanding how stablecoin activities should be regulated.
U.S. regulators have made important progress in examining these
questions. As you know, the President's Working Group on Financial
Markets (PWG) published a policy statement on stablecoins in 2020. \1\
Along with the FDIC and OCC, the PWG also published a report last month
on Federal regulation of the issuance of stablecoins and related
stablecoin activities. \2\ Indeed, regulators around the world have
been thinking about these questions in earnest since 2019. \3\
---------------------------------------------------------------------------
\1\ President's Working Group on Financial Markets, Statement on
Key Regulatory and Supervisory Issues Relevant to Certain Stablecoins
(Dec. 2020), https://home.treasury.gov/system/files/136/PWG-Stablecoin-
Statement-12-23-2020-CLEAN.pdf.
\2\ President's Working Group on Financial Markets, The Federal
Deposit Insurance Corporation, and The Office of the Comptroller of the
Currency, Report on Stablecoins (Nov. 2021), https://home.treasury.gov/
system/files/136/StableCoinReport-Nov1-508.pdf [hereinafter ``PWG
Report''].
\3\ E.g., Bank for International Settlements Committee on Payments
and Market Infrastructures and Board of the International Organization
of Securities Commissions, ``Application of the Principles for
Financial Market Infrastructures to Stablecoin Arrangements'' (Oct.
2021); Financial Stability Board, ``Regulation, Supervision and
Oversight of `Global Stablecoin' Arrangements'' (Oct. 2020); G20
Finance Ministers and Central Bank Governors Meeting, G20 Press Release
on Global Stablecoins (Oct. 2019); Financial Stability Board,
``Regulatory Issues of Stablecoins'' (Oct. 2019); G7 Working Group on
Stablecoins, ``Investigating the Impact of Global Stablecoins'' (Oct.
2019).
---------------------------------------------------------------------------
I'll focus my comments today on ``true'' or ``payment'' stablecoins
as described in the PWG Report. \4\ As I've written previously, \5\
true stablecoins are non-interest bearing financial instruments
designed to maintain a stable value against a reference fiat currency--
say one dollar. This reference value is also referred to as the
stablecoin's par value. A well-designed stablecoin typically holds its
value through a pair of promises. First, the stablecoin issuer agrees
to sell and buy them back at par value (perhaps for a fee). Second, the
issuer agrees to hold a pool of safe assets--the ``reserve''--that has
an aggregate market value at least equal to 100 percent of the
aggregate par value of the stablecoins. Such a reserve is designed to
back the issuer's obligation to repurchase stablecoins at par, and is
replenished with the proceeds of stablecoin sales.
---------------------------------------------------------------------------
\4\ PWG Report, supra n. 2, at 2 (defining ``payment stablecoins''
as ``those stablecoins that are designed to maintain a stable value
relative to a fiat currency and, therefore, have the potential to be
used as a widespread means of payment''). While there are many
different types of stablecoins, including algorithmic stablecoins and
stablecoins pegged to gold and other real assets, assessing the
regulatory treatment of true stablecoins is an appropriate priority
given their potential to play a wider role in consumer and business
payment activities outside of cryptocurrency trading. Id. From here,
any references to ``stablecoins'' throughout this written statement
mean ``true stablecoins'' or ``payment stablecoins.''
\5\ Christian Catalini and Jai Massari, ``Stablecoins and the
Future of Money'', Harv. Bus. Rev. (Aug. 10, 2021), https://hbr.org/
2021/08/stablecoins-and-the-future-of-money.
---------------------------------------------------------------------------
The reserve is meant to ensure that the issuer can always redeem
outstanding stablecoins at their par value on demand. For this reason,
reserve assets of a well-designed stablecoin would consist of cash and
genuine cash equivalents, such as bank deposits and short-term U.S.
Government securities. This should enable the reserve to remain liquid
even during stressed market conditions, minimizing the risk of loss if
large numbers of stablecoin holders seek redemptions at once. \6\
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\6\ Today, reserve assets vary among stablecoin issuers. For most
U.S. dollar stablecoin issuers, their reserves are legally constrained
by requirements under existing State money transmitter laws, with some
making public commitments to maintain their reserves only in cash and
genuine cash equivalents.
---------------------------------------------------------------------------
The insight underlying a true stablecoin is not new. It's instead a
form of ``narrow bank''--a concept that has been in the public
discourse since at least the Great Depression. \7\ Narrow banks
sometimes have not been considered as economically useful as fractional
reserve banks. This is because they do not engage in maturity and
liquidity transformation--that is, using short-term deposits to make
long-term loans and investments--which is the core function of modern
banking and the lifeblood of the real economy. \8\ But because narrow
banks do not engage in maturity or liquidity transformation, they are
generally considered safer than fractional reserve banks. We tolerate
the risk traditional banking activities impose on the economy because
of the benefits.
---------------------------------------------------------------------------
\7\ E.g., Paul H. Douglas et al., ``A Program for Monetary
Reform'', (1939) (outlining the Chicago Plan), https://
www.monetary.org/pdfs/a-program-for-monetary-reform.pdf; Milton
Friedman, ``A Program for Monetary Stability'' (Fordham Univ. Press
1992); Ronnie J. Phillips, ``The `Chicago Plan' and New Deal Banking
Reform'', Working Paper No. 76 (June 1992), https://
www.levyinstitute.org/pubs/wp/76.pdf; Jaromir Benes and Michael Kumhof,
``The Chicago Plan Revisited'', IMF Working Paper (2012), https://
www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf. Some banking
historians have argued that the concept of narrow banks has even deeper
roots, tracing back to deposit banks in Medieval Europe and Rome, which
were what we would call custody banks today.
\8\ E.g., Kenneth J. Arrow, ``The Organization of Economic
Activity: Issues Pertinent to the Choice of Market Versus Non-Market
Allocation'', in Joint Economic Committee of the Congress of the United
States, the Analysis and Evaluation of Public Expenditures: The PPB
System 48 (1969) (``The creation of money is in many respects an
example of a public good'').
---------------------------------------------------------------------------
While stablecoin issuers have structural similarities to narrow
banks, they provide potential new benefits that are worth recognizing.
The basic business model for a stablecoin is to serve as a payment
instrument. Today, stablecoins are used primarily in connection with
cryptocurrency trading and decentralized finance (DeFi) applications.
For the moment, therefore, they are largely on the margins of the
banking system and the real economy.
Some, however, view stablecoins as having a potentially broader use
in retail payment services. \9\ Payments using blockchain rails would
complement existing payment systems grounded in the traditional banking
sector such as cash, checks, credit and debit cards, and wire
transfers. These incumbent technologies offer varying benefits and
drawbacks. As stablecoins begin to play a role in retail payment
transactions, they offer a way to decouple payment services from credit
services, presenting us with the potential for increased competition
from new entrants, expanded services, lower costs for consumers and
greater opportunities for financial inclusion.
---------------------------------------------------------------------------
\9\ See, e.g., PWG Report, supra n. 2, at 8 (``Beyond digital
asset trading, several existing stablecoin issuers and entities with
stablecoin projects under development have the stated ambition for the
stablecoins they create to be used widely by retail users to pay for
goods and services, by corporations in the context of supply chain
payments, and in the context of international remittances.'').
---------------------------------------------------------------------------
Particularly if they begin to realize this potential, and even more
so if they approach systemic scale, stablecoins should be regulated in
a manner that addresses the risks they present, which U.S. regulators
have identified. As set out in the PWG Report, these include the risk
of runs on poorly designed reserves, risks associated with the
operation of payment systems generally, risks of scale, and risks
arising from regulatory gaps. \10\
---------------------------------------------------------------------------
\10\ PWG Report, supra n. 2, at 12-14.
---------------------------------------------------------------------------
There already appears to be broad agreement among U.S.
policymakers, regulators, and the industry on the general principles of
stablecoin regulation. Regulation of stablecoin issuers should include
restrictions on permissible types of reserve assets to ensure
sufficient short-term, liquid backing; auditing and transparency
standards so regulators and the public can evaluate reserve
composition; restrictions that preclude maturity and liquidity
transformation activities in order to shield reserve assets from the
associated risks; obligations to address illicit financing and
sanctions considerations; and requirements to address operational risks
arising from settling transfers on blockchain networks. U.S. financial
regulators have addressed these topics before and, with Congressional
guidance, can do so again.
However, requiring stablecoin issuers to be insured depository
institutions (that is, insured banks)--as suggested in the PWG Report--
is not necessary and, unless certain adjustments are made, is not
workable. I will explain why.
An insured-depository requirement is unnecessary because
stablecoins can be structured and regulated to avoid the risks that
require deposit insurance and the application of traditional banking
oversight in the first place. Banks--by design--are in the business of
maturity and liquidity transformation. Banks take in deposits that can
be withdrawn on demand, against which they hold some short-term liquid
assets, like cash in a Federal Reserve Bank account, but more
importantly they hold long-term, relatively illiquid assets, like 30-
year mortgages and long-term corporate loans. This activity creates
economic value in the form of increased money supply and credit.
But it also creates run risk and the need for deposit insurance.
\11\ Limiting stablecoin reserves to short-term, liquid assets, and
requiring the market value of those reserves to be no less than the par
value of stablecoins outstanding, is an alternative way to avoid run
risk--as U.S. policymakers have recognized since at least the 1930s.
\12\
---------------------------------------------------------------------------
\11\ E.g., Douglas W. Diamond and Philip H. Dybvig, ``Bank Runs,
Deposit Insurance, and Liquidity'', 91 J. Pol. Econ. 401 (1983) (``It
is precisely the `transformation' of illiquid assets into liquid assets
that is responsible both for the liquidity service provided by banks
and for their susceptibility to runs.'').
\12\ Douglas, Friedman, Phillips, Benes, and Kumhof, supra n. 7;
See also, Davis Polk & Wardwell LLP, ``U.S. Regulators Speak on
Stablecoin and Crypto Regulation'', (Nov. 12, 2021), at n. 12-13 and
accompanying text, https://www.davispolk.com/insights/client-update/us-
regulators-speak-stablecoin-and-crypto-regulation.
---------------------------------------------------------------------------
An insured-depository requirement is unworkable, without
adjustments to the existing bank regulatory framework, because banks
are subject to leverage and risk-based capital ratios that are
calibrated based on the assumption that a majority of their assets are
relatively illiquid and riskier than cash and genuine cash equivalents.
Leverage ratios, in particular, are designed to backstop risk-weighted
capital requirements. They treat cash and cash equivalents as if they
had the same risk-and-return profile as long-term consumer and business
debt, which they do not.
To take an example, a stablecoin issuer subject to a 4 percent
leverage ratio would need to hold $104 billion of cash and genuine cash
equivalents against $100 billion of circulating stablecoins--$100
billion backing the stablecoins on a dollar-for-dollar basis and a
cushion of $4 billion of required capital in the form of shareholders'
equity. A bank that engages in customary lending activities, such as
credit card, real estate, and business lending, is able to price its
loan products to cover the cost of the required capital and still make
a reasonable return. A stablecoin issuer, whose assets may be limited
to zero-to-low interest paying cash and genuine cash equivalents such
as bank deposits and short-term U.S. Government securities, has no such
ability. Therefore, unless Congress recalibrates the ratios to reflect
the lower risk-and-return profile of stablecoin issuers who limit their
reserve assets to cash and genuine cash equivalents, the stablecoin
business model would be uneconomic for an insured depository
institution--except perhaps as a sideline for a large, diversified
financial services provider.
How, then, should stablecoins be regulated? Today, U.S. stablecoin
issuers and digital wallet service providers are largely regulated by
the States under money-transmitter regimes and trust-company
authorities. New York regulates stablecoin activities under its
special-purpose virtual currency licensing program, known as the
BitLicense. \13\ Wyoming has developed its own special-purpose bank
license to accommodate cryptocurrency custody and payments activities.
\14\ The innovative work of State regulators has already played a key
role in the expansion of stablecoin activities.
---------------------------------------------------------------------------
\13\ 23 NYCRR Part 200.
\14\ HB0074, Special Purpose Depository Institutions, 2019 Wyo.
Sess. Laws 328.
---------------------------------------------------------------------------
There is at present some Federal regulation of stablecoin
activities. U.S. stablecoin issuers and digital wallet providers are,
for example, subject to the Bank Secrecy Act's anti- money laundering
requirements as money services businesses registered with FinCEN, the
U.S. Treasury's Financial Crimes Enforcement Network.
But an expanded Federal role may well be appropriate and useful.
This could include an optional Federal charter for stablecoin issuers
that would preempt the need for State-by-State licensing in return for
supervision by Federal regulators. A new and well-designed Federal
charter could accommodate a business model premised on the issuance of
stablecoins fully backed by short-term, liquid assets and the provision
of related payments services. This charter could impose requirements
for reserve asset composition while tailoring leverage ratios or risk-
based capital requirements and other requirements to the nature of the
business model. And it could restrict the stablecoin issuer from
engaging in riskier activities, to minimize other claims on reserve
assets. This option would likely be welcomed by many stablecoin issuers
even though it would entail comprehensive Federal oversight.
I would like to close by thanking the Committee for its focus on
these important issues. The Committee's work today in understanding how
stablecoins work, how they can be used, and the risks they present is
indispensable to developing a resilient regulatory framework. While I
do not believe that stablecoin issuers should be limited to insured
depository institutions, I strongly support commonsense regulation of
stablecoins and their issuers in a way that takes account of their
benefits and risks. And I am optimistic that there is much common
ground among innovators, policymakers, regulators, and the public on
these questions. This common ground can pave the way for a regulatory
approach that safeguards consumers, the financial system and the
broader economy, while continuing to promote innovation in this
exciting and promising new financial technology.
I am happy to answer questions.
______
PREPARED STATEMENT OF DANTE DISPARTE
Chief Strategy Officer and Head of Global Policy, Circle
December 14, 2021
Chairman Brown, Ranking Member Toomey, Members of the Senate
Committee on Banking, Housing, and Urban Affairs, thank you for the
opportunity to share my testimony with you today.
My name is Dante Disparte and I am the Chief Strategy Officer and
Head of Global Policy for Circle, a leading digital financial services
firm and the sole issuer of USD Coin, or USDC--a dollar digital
currency supporting the extensibility of the U.S. Dollar in a
competitive, always-on global economy.
Having recently completed my 3-year term on the Federal Emergency
Management Agency's National Advisory Council, and being no stranger to
disaster displacement and hardship, I want to acknowledge the
communities affected by last week's devastating storms. Indeed, as this
disaster and others have shown, with the movement of financial aid and
disaster relief, when speed matters most, friction stands in the way.
As a country, we have faced a Great Depression, a Great
Deleveraging and in 2020 with the onset of the COVID-19 pandemic, we
faced nothing short of a Great Correction. In this correction, the
centrality of technology for any semblance of political, business,
economic, and household continuity was laid bare. What was also clear
is that access to the internet and other digital public goods was
unequal. How we engage with money and payments in digital form was
clearly an area of prepandemic vulnerability in the U.S. and around the
world.
The advent of stablecoins or what we like to refer to as dollar
digital currencies like USDC, are an important innovation enabling
greater control over how we send, spend, save, and secure our money. To
define a stablecoin--noting that, like money itself, not all of these
innovations are created equal--is tantamount to the moment we converted
our compact discs (CDs) into MP3s. The CD and music is still yours, but
now enjoys the powers of programmability, user control, and a digitally
native form factor that works anywhere, on any device, across the
planet.
Stablecoins, in effect, are designed to reference and import the
economic properties of an underlying asset. By circulation the most
successful of which all reference the dollar, with the economic aim of
combating the ``buyer's and spender's remorse'' that plagued early
cryptocurrencies. USDC is a now 3-year old dollar digital currency
standing at more than $40 billion in circulation and cumulatively
supporting more than $1.4 trillion in on-chain transactions, in a
manner that enhances financial inclusion, responsible innovation and
integrity. Critically, the dollar-denominated assets backing USDC,
which are strictly cash and short-duration U.S. Treasuries of 90 days
or less, are all held in the care, custody and control of U.S.
regulated financial institutions.
Indeed, as this internet-native financial infrastructure continues
to grow, we aim to do our part ensuring the future of payments and
money is more inclusive than the past. Our recently announced Circle
Impact initiative has four core components, each of which is close to
home for me having grown up in poverty and being a first generation
high school and college graduate.
These include:
Allocating a share of USDC dollar reserves to Minority
Depository Institutions (MDIs) and community banks across the
country. We hope this will accrue to billions of dollars over
time, strengthening the balance sheet of these banks and,
thereby, strengthening their communities.
Embarking on Digital Financial Literacy initiatives
together with Historically Black Colleges and Universities
(HBCUs) and other partners supporting the development of
essential learning and hands-on approaches to
entrepreneurialism.
Leveraging our SeedInvest platform, which is one of the
Nation's leading equity crowdfunding businesses, to catalyze
targeted campaigns for women and minority entrepreneurs across
the country.
Assisting humanitarian interventions and coordinating
public-private partnerships to mobilize blockchain-based
payments and USDC to deliver corruption-resistant, real-time
aid and relief.
Because nothing worth doing is worth doing alone, our hope is to
catalyze uncommon coalitions on these initiatives, which are deeply
connected to our mission of raising global economic prosperity through
the frictionless exchange of financial value.
While some argue the U.S. may lose the digital currency space race
if it fails to issue a Central Bank Digital Currency (CBDC). I argue
that we are winning this race because of the sum of free market
activity taking place inside the U.S. regulatory perimeter with digital
currencies and blockchain-based financial services. The sum of these
activities are advancing broad U.S. economic competitiveness and
national security interests.
Thank you again Chairman Brown and Ranking Member Toomey for the
opportunity to speak with you today. I look forward to addressing the
Committee's questions.
Reflections on the Policy Environment
With the emergence of digital currency innovations as important
financial markets infrastructure, Circle has continued to prioritize
engagement with U.S. State, Federal, and international regulators and
policymakers. This culminated with the President's Working Group on
Financial Markets report on stablecoins (PWG), which highlighted the
recommendation that stablecoin arrangements be managed by insured
depository institutions. The report goes on to raise a number of other
potential risks to financial markets and consumers, which Circle has
prioritized satisfying. It is important to note that the most enduring
financial markets policies espouse a same risk, same rules technology-
neutral approach to regulation. With the advent of digital assets, it
is important to also look at the economic behavior of the digital asset
or token.
Indeed, well before the PWG issued its recommendations, Circle
announced its intention to become a federally chartered commercial
bank. In the interim, USDC in circulation and the appropriate consumer
protection, financial crime compliance and other standards are governed
on a level footing to other major U.S. payments companies. One core
difference, however, is that payments companies tend to build payment
systems on proprietary technology, which creates a walled garden
environment and often exacts the highest fees from those who can least
afford it. Circle's approach, on the other hand, is to build on public
blockchain infrastructure and in accordance with open source technology
standards. This not only promotes innovation and competition, it
promotes interoperability across payment systems, akin to how email
networks work across platforms and service providers. Imagine how
usable a Gmail account would be if Gmail could not send a message to a
Hotmail user or a Yahoo account? Many of the world's payment networks
labor under this walled garden challenge where the cost of
interoperability, speed and distance traveled draw close parallels to
pre-internet telecommunications networks.
Along these lines, Circle's services and USDC in particular, are
increasingly being leveraged as a pro-competition open medium of
exchange based on the U.S. dollar being the currency of the internet.
Major credit card companies, small businesses, remittance companies,
and many others, are making USDC a native settlement option for their
businesses. This in turn is increasing market optionality with
payments, while building a bridge between digitally native financial
services and real-world use cases. One recent example is the enablement
of USDC as a settlement option on the MoneyGram network leveraging the
Stellar blockchain as open financial infrastructure.
Some digital currency projects may resemble monetary airline miles,
which are usable only if you wish to travel on a specific, closed
network or if you were born in the ``right'' postal code. The structure
of USDC and other Circle services based on public blockchain networks,
promotes wide adoption, network effects and much needed price
competition and interoperability, all without sacrificing requirements
to protect the integrity of the financial system. Over time, important
companion innovations in the digital identity domain will ensure
privacy preserving approaches to financial access and novel internet-
native financial markets based on digital currencies and blockchains
can continue to grow.
In an always-on global economy, markets and people's financial
needs do not take bank holidays. The advent of trusted digital
currencies like USDC are enabling a wide range of use cases, including
supporting cross-border remittances such as the MoneyGram example
mentioned above. Remittances are the veritable flywheel of the global
economy and are typically recession resistant money flows. However,
with the onset of the COVID-19 pandemic, global remittance flows may
have lost up to $200 billion in volume according to the World Bank
(down from more than $700 billion prepandemic) due to the double-
jeopardy of economic slowdowns, as well as the void of open payment
networks. Digital currencies and the corresponding blockchain-based
financial services ecosystem are beginning to fill this void as more
than 200 million people worldwide (and more than 20 million) in the
U.S. adopt these services.
Another use case in keeping with lower cost peer-to-peer payments
and remittances, is the use of USDC and blockchain-based payments for
disbursing aid and humanitarian relief. Moving physical cash into a
humanitarian setting may often be a honey pot for corruption, bribery,
and fraud due to the limited traceability of physical money. The
auditing fidelity of blockchains and the trust and price parity to the
dollar of USDC can be used to support corruption-resistant, real-time
relief payments. A successful program supporting doctors in Venezuela
is emblematic of the opportunity for faster aid, development, and
humanitarian support using digital currencies.
Micropayments and programmable money, which are elusive but needed
areas in our economy, are also made possible with dollar digital
currencies and blockchain-based transaction ledgering. By prevailing
payment standards, it often costs more to send a small amount of money
than the sum of money sent. Micropayments for example for a freelance
journalist who can accrue payments for each ``like'' of their article
becomes a possibility with the increasingly widespread use of USDC for
high-trust low-friction internet commerce and payments. Indeed, the
bootstrap use case of USDC supporting the growth of digital asset
market activity has satisfied exacting performance and operational
standards.
In terms of market trust, transparency and accountability, Circle
has consistently and voluntarily reported on the status of dollar-
denominated reserves and their sufficiency to meet demands for USDC
outstanding. This has been done with third party attestations from a
leading global accounting firm. Circle has also prioritized building,
designing, and guarding the prudential standards for USDC inside of and
conforming with prevailing U.S. regulatory standards that apply to
leading fintech and payments firms such as PayPal, Square, Venmo and
Stripe, among others.
Since its inception, USDC has always been easily redeemable and
most redemptions happen speedily. Additionally, given the growing
integration as a settlement option in leading merchant and credit card
networks, the use of USDC in its digitally native form for the
procurement of goods and services remains a growing use case. The first
USDC stablecoin was minted in September 2018. Since then,
$95,976,829,528.16 have been issued and, as of December 1, 2021,
$57,129,781,321.95 have been redeemed. This demonstrates a vibrant
market is evolving around the use of USDC for payments, as well as a
well functioning on and off ramp supporting redemption requests.
The extensibility of the U.S. Dollar as the reference currency of
the internet is not a zero-sum proposition. As and when the potential
for a CBDC becomes a possibility in the U.S. (notwithstanding some of
the potential design risks and drawbacks), the experience, transaction
throughput, and openly competitive market powered by dollar digital
currencies and blockchains, will be a useful pathway for future
upgradability. In short, it is better to get it right, than to get it
fast. The same also holds true with acknowledging that most ``value
added'' money in circulation today, whether enshrined on a plastic card
or stemming from the money creation of the fractional reserve banking
system, is in fact privately issued. The advent of dollar digital
currencies like USDC inherit, are answerable and additive to U.S.
monetary, regulatory, and compliance policy.
Emerging policy and regulation for the future growth of stablecoins
and the digital assets market in the U.S. should aspire to do no harm,
spur responsible financial services innovation, and recognize the
importance of U.S. States for being our fintech innovation labs. One
challenge however, is that the States are not often represented in
global macroprudential and regulatory bodies such as the Bank for
International Settlements (BIS), the Financial Action Task Force
(FATF), among others.
Harmonizing a broad U.S. approach to digital assets and competition
in the digital currency space race, can improve U.S. competitiveness,
security, and lower fundamental costs for basic financial access.
PREPARED STATEMENT OF HILARY J. ALLEN
Professor, American University Washington College of Law
December 14, 2021
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM ALEXIS GOLDSTEIN
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM JAI MASSARI
Q.1. Ms. Massari, during your testimony you encouraged Congress
to consider an optional Federal charter specific to stablecoin
issuers. Specifically, you said that a ``new and well-designed
Federal charter could accommodate a business model premised on
the issuance of stablecoins fully backed by short-term, liquid
assets and the provision of related payments services. This
charter could impose requirements for reserve asset composition
while tailoring leverage ratios or risk-based capital
requirements and other requirements to the nature of the
business model. And it could restrict the stablecoin issuer
from engaging in riskier activities, to minimize other claims
on reserve assets. This option would likely be welcomed by many
stablecoin issuers even though it would entail comprehensive
Federal oversight.''
How should a new charter designed for stablecoin issuers
differ from existing bank charters at the State or Federal
level?
A.1. The purpose of a new type of charter would be to
accommodate the different business model of true stablecoin
issuers from the business model of banks. As discussed in my
testimony, banks engage in maturity transformation and
liquidity transformation because they have short-term demand
liabilities--that is, demand deposits--and are able to hold
long-term loans and other illiquid and risky assets--for
example, 30-year nonconforming mortgages, credit card loans,
and real estate used as business premises. These activities are
important to U.S. consumers, businesses, and the U.S. economy.
Accordingly, U.S. banking regulations have been developed
to ensure that banks can execute their business model in a safe
and sound manner. For example, banks are subject to leverage
and risk-based capital ratios that are calibrated based on the
assumption that a majority of their assets are relatively
illiquid and riskier than cash and genuine cash equivalents.
Deposit insurance requirements and lender-of-last resort
facilities are designed to address the risk of bank runs that
can occur when depositors lose confidence that their banks are
able to convert their illiquid assets to cash fast enough to
satisfy withdrawal requests.
True stablecoin issuers, \1\ on the other hand, should not
meaningfully engage in maturity or liquidity transformation in
connection with their stablecoin activities. Their obligation
to redeem the stablecoins they issue should be at least 100
percent backed by cash and cash equivalents. The stablecoin
business, rather than generating returns from long-term lending
and investments, is instead focused on payment services.
Indeed, it is the potential for stablecoin systems to operate
as retail payments systems at scale that has raised concerns
among U.S. financial regulators, as reflected in the PWG
report. \2\
---------------------------------------------------------------------------
\1\ I describe the characteristics of ``true stablecoins'' in more
detail in my written testimony.
\2\ President's Working Group on Financial Markets, the Federal
Deposit Insurance Corporation, and the Office of the Comptroller of the
Currency, Report on Stablecoins (Nov. 2021) 15, https://
home.treasury.gov/system/files/136/StableCoinReport-Nov1-508.pdf
(noting that ``prudential concerns relate to the potential for
stablecoin runs, payment system risks, and the possibility that some
stablecoins may rapidly scale'').
---------------------------------------------------------------------------
A Federal charter for stablecoin issuers should be designed
to address the business model of true stablecoin issuers and
the characteristics of true stablecoins and the risks arising
from the issuer's activities--which, in the case of credit,
liquidity, and price risks, are substantially less than the
same risks arising from maturity and liquidity transformation.
Regulation of true stablecoin issuers should include
restrictions on permissible types of stablecoin reserve assets
to cash and genuine cash equivalents, auditing and transparency
standards, obligations to address illicit financing and
sanctions considerations, and requirements to address
traditional and novel operational risks. In addition,
permitting stablecoin issuers to be members of the Federal
Reserve System with Federal Reserve master accounts would
provide the Federal Reserve with regulatory authority over
those issuers. A new Federal charter should tailor existing
leverage ratios to the business model of true stablecoin
issuers. The current leverage ratios applicable to banks
engaged in maturity or liquidity transformation are excessive,
unnecessary, and unworkable when applied to true stablecoin
issuers whose obligations to redeem their stablecoins are at
least 100 percent backed by cash and cash equivalents.
Likewise, a requirement that federally chartered stablecoin
issuers obtain deposit insurance is not needed because a
properly designed reserve requirement is an alternative to
Federal deposit insurance, as recognized by leading economists
since at least the 1930s. \3\
---------------------------------------------------------------------------
\3\ See, e.g., Paul H. Douglas et al., ``A Program for Monetary
Reform'', (1939) (outlining the Chicago Plan), https://
www.monetary.org/pdfs/a-program-for-monetary-reform.pdf; Milton
Friedman, ``A Program for Monetary Stability'', (Fordham Univ. Press
1992); Ronnie J. Phillips, ``The `Chicago Plan' and New Deal Banking
Reform'', Working Paper No. 76 (June 1992), https://
www.levyinstitute.org/pubs/wp/76.pdf; Jaromir Benes and Michael Kumhof,
``The Chicago Plan Revisited'', IMF Working Paper (2012), https://
www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf; see also Davis Polk &
Wardwell LLP, ``U.S. Regulators Speak on Stablecoin and Crypto
Regulation'', (Nov. 12, 2021), at n. 12-13 and accompanying text,
https://www.davispolk.com/insights/client-update/us-regulators-speak-
stablecoin-and-crypto-regulation.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM JAI MASSARI
Q.1. In recent years, digital assets have become increasingly
popular holdings for publicly traded standards. Currently, the
generally accepted accounting principles (GAAP) set by the
Financial Accounting Standards Board use an intangible assets
model for accounting digital assets. What potential issues, if
any, may arise from using an intangible assets model to assess
stablecoin holdings?
A.1. As you note, how digital assets, including stablecoins,
are treated from an accounting perspective is an important
issue. I am not an accounting expert and, therefore, I cannot
provide input on the specifics of GAAP or the precise issues
associated with any particular accounting method. Based on my
experience as a legal practitioner, however, I believe it would
be helpful for GAAP standard setters to evaluate whether
differences in treatment between digital assets and other types
of financial assets make sense, particularly in light of
increasing corporate holdings of digital assets.
Q.2. If a new model of accounting is designed for digital
assets, should stablecoins be treated similarly to other
cryptocurrencies?
A.2. I am not an accounting expert and therefore cannot speak
to the appropriate accounting treatment of digital assets
generally or stablecoins specifically. Based on my experience
as a legal practitioner focused on U.S. financial regulation,
however, I observe that different types of digital assets have
different economic and legal characteristics. Viewing all
digital assets as the same--either for legal or accounting
purposes--merely because they are recorded and transferred on a
blockchain seems inconsistent with the approach we take for
other types of assets. Therefore, as should be the case with
the legal classification of these assets, the accounting
treatment of digital assets should be based upon the economic
characteristics of the digital asset.
Q.3. How can the GAAP accurately account for stablecoin
issuers' holdings with awareness of holdings for the purpose of
stablecoin backing?
A.3. I am not an accounting expert and therefore cannot comment
on the GAAP treatment of stablecoins. However, as a matter of
consumer protection more broadly, I think it is critically
important that stablecoin holders have clear and accurate
information about stablecoin reserve composition.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM DANTE DISPARTE
Q.1. At the hearing, I asked whether Circle would continue to
allow USDC to be used to facilitate cryptocurrency speculation
if Circle received a bank charter. To be clear, if Circle
received a bank charter, would it place any limitations on how
USDC could be used in DeFi markets? If so, please describe such
limitations.
A.1. As the sole issuer of USDC, Circle supports its broad
adoption to enable U.S. dollars to exist in digital form on the
internet. We will continue to support digital dollars on the
internet as a medium of exchange, a store of value, and a unit
of account, whether we receive a national bank charter or not.
Respectfully, Circle does not ``allow USDC to be used to
facilitate cryptocurrency speculation,'' any more than the
United States Mint or a United States bank ``allows'' U.S.
currency to be used to speculate on gold or individual stocks.
The use of USDC for investments and digital asset capital
markets activities still only confers the USDC holder with
something denominated and pegged to a dollar. Put another way,
USDC has the same use cases as a U.S. dollar, and because
Circle is regulated by the appropriate authorities, we have the
same relationship with USDC users as banks have with people and
institutions that use U.S. dollars.
Circle does restrict its customers to institutions that
comply with and satisfy the company's Know Your Customer (KYC)
requirements and are not on sanctions lists, such as the U.S.
Department of the Treasury Office of Foreign Assets Control
(OFAC) list. Broadly speaking, if a USDC user breaks the law or
violates applicable regulations, Circle will follow appropriate
measures, including applicable financial crime compliance steps
in collaboration with law enforcement.
We believe becoming a full-reserve national digital
currency bank will enable frictionless, instant, and nearly
free payments of U.S. digital dollars on open, permissionless
blockchains. We believe a digital bank will create a safer and
more resilient financial system. It will also build on open
networks to support new forms of capital formation and
intermediation. Traditional capital formation through today's
banking system, including the borrowing and lending of money,
is expensive, inefficient, and exclusive. Lending money to
banks for most individuals yields near-zero interest returns.
At today's inflation rate, individual depositors are losing
approximately 7 percent of their wealth every year. We can do
better. Digital dollars can increase global prosperity and
economic freedom. New forms of digital asset capital market
activities offer a less expensive, more prosperous, faster, and
more inclusive alternative.
Q.2. In response to my question about limiting the use of USDC
in DeFi, you noted that ``Circle's counterparties, as a
company, are other institutions and companies,'' and that
``[w]e don't face the retail market as a retail payment
system.'' You also said that the ``advent of a whole host of
internet-native capital markets, payments, and an always-on
economy that is built around these innovations in public
blockchains is important.''
You emphasized in your testimony as well that USDC has
important applications in strengthening financial inclusion,
and could even be used in humanitarian contexts.
How can Circle ensure that USDC benefits consumers if its
counterparties are institutions and companies, whose practices
with respect to the retail market may undermine financial
inclusion, and consumer and investor protection? Can Circle
advance its goals if the policies and practices that govern how
consumers use USDC are determined by other institutions?
A.2. Circle promotes responsible financial service innovation
in the growing digital asset market. USDC provides an important
component of a robust and interoperable payment system,
fostering financial inclusion and competition, which in turn
helps reduce costs for financial success. Circle strongly
believes that institutions and companies, including Circle,
must be committed to financial inclusion. That is why we have
announced our Circle Impact initiative, and why we are
deliberately focusing on where we can apply USDC to
humanitarian use cases, such as our collaborative efforts to
support doctors in Venezuela, among other efforts.
Moreover, for the reasons provided in response to Senator
Brown's first question, Circle believes we are able to advance
our goals notwithstanding counterparties who might not share
Circle's commitment to financial inclusion and investor
protection. There are two reasons for this: first, the very
nature of USDC fosters increased financial inclusion and
investor protection, for all the reasons previously identified.
Second, the fact that other intermediaries might have policies
or practices that are inconsistent with inclusion and consumer
protection is not the fault of USDC itself. Once again, the
proper analogy is to U.S. dollars: a company that transacts
exclusively in U.S. dollars, but does bad things, does not
implicate the dollar itself--it is that company and its
policies that are to blame, not the currency in which it
transacts business. The existence and increasing prevalence of
companies with similar goals and compliance protocols as Circle
will help strengthen financial inclusion, and reduce the risk
to consumers and investors.
Q.3. Further, once USDC has been issued to a Circle
institutional customer, is Circle deprived of control of the
token? Could it regulate how that entity uses USDC, or regulate
services the entity offers retail customers that employ USDC?
If so, how?
A.3. Congress has the authority to prohibit certain activities,
and regulators have the obligation to enforce the law. Users
and issuers of stablecoins like USDC have the obligation to
comply with the law. The issuer of a stablecoin should not use
its position to either make law or regulate otherwise lawful
conduct of a stablecoin user. Circle does not intend to use its
position as issuer of USDC to control lawful use cases of USDC.
Circle's institutional customers make USDC available to
their respective markets. Circle partners only with those
institutions that comply with and satisfy Circle's KYC
requirements and are not on sanctions lists, such as the OFAC
list. Circle also verifies the identity all of its customers
pursuant to the company's Anti- Money Laundering (AML)/Counter
Terrorist Financing (CTF) and Sanctions Program in compliance
with regulatory requirements and expectations, including but
not limited to the Bank Secrecy Act (BSA). Circle has the
ability to take action to freeze or seize USDC on its platform.
That represents the first line of defense and the first line of
control. Circle also works in accordance with its licensing and
other regulatory requirements to support the safe and sound use
of USDC on the blockchains that it supports. Similarly, once a
USDC token is redeemed, Circle and law enforcement have a line
of sight into whether illegal activity has taken place.
Additionally, the Centre Consortium has the ability to
block individual blockchain addresses from sending and
receiving USDC. Examples of such a scenario in which Centre
would take action include to comply with applicable law,
regulation, or court order, or a threat to the USDC network.
Circle does not exercise control over USDC blocking.
Finally, a virtual asset service provider (VASP), digital
wallet, bank or another intermediary, whether or not they are a
Circle customer, also has the ability, and at times the duty,
to freeze transactions or tokens, subject to their respective
regulatory, legal, and compliance requirements.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM DANTE DISPARTE
Q.1. Mr. Disparte, as you and I discussed at the hearing, I am
concerned about the misleading assertion that stablecoins are
only used to facilitate lending, borrowing, and trading of
other digital assets, and that stablecoins are not used to make
payments for real-world goods and services. Contrary to this
claim, your testimony noted that the stablecoin USDC is
increasingly being leveraged by major credit card companies,
small businesses, remittance companies, and others as a
settlement option for their businesses.
Could you provide data and/or examples regarding the extent
to which USDC is being used for payments (including cross-
border payments) and remittances?
A.1. Trusted digital currencies like USDC and blockchain-based
financial services are building bridges between internet-native
applications and real-world financial use cases and
transactions. None is more important for financial inclusion
than peer-to-peer remittances, which cumulatively in
prepandemic times amounted to more than $700 billion a year.
Circle is working to address inefficiencies that have plagued
traditional remittance transfers, such as slow delivery and
high fees for sending money across borders. Examples of
Circle's work in this area include:
Partnering with MoneyGram International, one of the
world's largest money transfer companies, to enable
USDC-denominated remittances on the Stellar blockchain
and facilitate cross-border payments for millions of
customers worldwide. With the global reach of
MoneyGram's services and the speed and low cost of
transactions on Stellar, people can convert their cash
into and out of USDC, giving them access to fast and
affordable digital asset services that may have
previously been out of reach.
Leveraging Circle's payments infrastructure and
USDC, Bitso, the largest cryptocurrency exchange
platform in Latin America with more than 3 million
users, launched an initiative to make it easier, faster
and more secure for Mexican residents to send and
receive cross-border payments to or from the U.S. In
2020, remittances increased nearly 10 percent to over
$40 billion. Remittances continued to increase in 2021,
largely attributed to the growth of migrant labor in
the United States.
Helping the legitimate, elected Government of
Venezuela distribute millions of dollars of desperately
needed aid to the Nation's frontline medical workers as
they battled coronavirus under horrendous conditions.
Circle partnered with the Bolivarian Republic of
Venezuela (led by President-elect Juan Guaido), U.S.-
based fintech Airtm, and the U.S. Government to send
the relief funds. The joint initiative established a
disbursement pipeline that leveraged USDC to bypass the
controls that Nicolas Maduro's authoritarian Government
placed on Venezuela's financial system.
Additional examples of how Circle is powering USDC to
facilitate payments include:
Working in concert with Clothia, Visa, and
Crypto.com, Circle is making it easier for a clothing
marketplace to pay designers globally. Traditional
cross-border payments are complex, costly and can take
a long time to process. Clothia, a U.S.-based, curated
marketplace that showcases the best up-and-coming
fashion designers from around the world-managing
operations and distribution so their designers can
focus on design, artistic expression, and
manufacturing. The company currently represents 140+
designers in 24 countries. Given their global business
model, Clothia must make timely payments to designers
around the world. Clothia chose Circle, USDC, Visa, and
Crypto.com as their payout partner to improve the
designers' payment experience.
Partnering with Aid:Tech, a financial services
company that brings transparency and accountability to
Federal relief distribution, to leverage Circle's APIs
and USDC to speed up the delivery of aid.
Partnering with Wintermute, which selected USDC to
convert digital assets into fiat in support of the
Covid Relief Fund in India, an initiative to provide
food, medical equipment and even vaccines to those
affected by the virus. Wintermute selected Circle
because of the company's swift minting and redeeming
procedure, reliable transfer capabilities on multiple
blockchains, and its worldwide presence which allows
for efficient conversions to fiat.
Coordinating with Visa, the Stellar blockchain and
the fintech startup Tala to drive crypto adoption for
underbanked customers in emerging markets. More than 3
billion people have limited or no access to services to
borrow, save, or grow their money; Tala's partnership
with Visa and Circle will help bring equitable
financial tools to a massive underserved population.
Partnering with the philanthropy Endaoment to
create a disaster relief fund to help communities in
the Midwest and South regions of the United States that
were devastated by tornadoes in December 2021.
Additional data points on how USDC is helping to create and
enable an internet-native ecosystem built on digital dollars,
with U.S. Dollar assets held within the care and custody of
U.S. regulated financial institutions:
Over 100 billion USDC issued, with over 50 billion
in circulation as of February 6, 2022, and 10,000
percent growth over 2 years.
Nearly $2.5 trillion in on-blockchain payments and
settlements in 2021, and 4.6 million active wallet
addresses with USDC transactions in 2021 (Source:
Internal Data Aggregations).
223 digital wallets support USDC transactions in
over 175 countries (Source: Apple App Store and Google
Play Store combined).
34 leading exchanges support trading and USDC
conversion in 180+ countries, providing liquidity and
convertibility to key currency markets around the
world.
More than 200 blockchain protocols supporting USDC.
Hundreds of regulated financial institutions
(VASPs) in financial centers around the world are
supporting USDC.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM DANTE DISPARTE
Q.1. In recent years, digital assets have become increasingly
popular holdings for publicly traded standards. Currently, the
generally accepted accounting principles (GAAP) set by the
Financial Accounting Standards Board use an intangible assets
model for accounting digital assets. What potential issues, if
any, may arise from using an intangible assets model to assess
stablecoin holdings?
A.1. There are many different types of digital assets that
exist today, and while these assets all rely on blockchain
technology, there are significant differences among them in
terms of economics, rights, obligations and risks, which need
to be considered in determining the appropriate accounting
framework. U.S. GAAP does not specifically address a holder's
accounting for digital assets. The accounting therefore has to
be evaluated based on the nature of the asset, the type of
entity that holds the asset, and how the asset is held. In
applying existing accounting standards, companies typically
consider the definitions of intangible assets, financial
instruments, inventory as well as cash and cash equivalents. In
this response, we will differentiate between cryptocurrencies,
such as Bitcoin, and reserve-backed stablecoins, such as USDC.
Cryptocurrencies
Current U.S. GAAP does not provide specific authoritative
guidance related to the accounting for digital assets, and as
such, cryptocurrencies like Bitcoin are typically classified as
indefinite-lived intangible assets. As a result, holders record
impairment losses as the cryptocurrencies' fair value falls
below their carrying value, however such impairment losses are
not reversed when the market values of these assets
subsequently increase. Given the inherent volatility in many
cryptocurrencies' market values, this accounting framework does
not reflect the true economic value of the digital assets held
by companies on their balance sheet at each reporting period.
Therefore, companies that hold these digital assets generally
use non-GAAP earnings measures in order to provide more
relevant information to financial statement users, which
reflect the true economics, rights, obligations, and risks of
the digital assets held and more accurately explain their
financial performance.
In the recent Financial Accounting Standards Board (FASB)
Invitation to Comment (ITC) Agenda Consultation, many
cryptocurrency industry members, public companies, and public
accounting firms raised similar concerns about the application
of the intangible asset accounting framework to
cryptocurrencies, stating it does not provide relevant
information to financial statement users because it does not
appropriately reflect the underlying economics associated with
digital assets and places unnecessary operational burdens on
the financial reporting process for the companies that hold
them. Our view is that a fair value accounting model for
cryptocurrencies would give a more comprehensive view of the
underlying economics and provide more relevant information to
financial statement users.
Clear and authoritative U.S. GAAP guidance providing a fair
value accounting model for cryptocurrencies would allow
companies to more accurately present the economics, risks, and
rewards of holding these assets, making financial statements
more relevant and useful to financial statement users. Clear
guidance would also minimize the operational burden on
companies and align U.S. GAAP with International Financial
Reporting Standards (which does provide an option to record
upward movements after an indefinite-lived intangible asset has
been impaired).
Stablecoins
A stablecoin is a blockchain-powered digital currency that
combines the benefits of traditional digital assets
(cryptographic security, digital transfer and settlement
finality, fast transaction speeds, potentially lower
transaction costs, and clear auditability) with the price
stability of traditional fiat currencies. This is achieved by
pegging the value of the stablecoin to a national currency or
other reference assets. Because of the variety of facts and
circumstances that may exist, there is no authoritative
guidance around the accounting for stablecoins.
At Circle, we believe the accounting treatment of reserve-
backed stablecoins should reflect the underlying economics of
the reserves and the regulatory framework in which the
stablecoin operates, which supports the value, intended use,
functionality, and features of the stablecoin. Given the lack
of authoritative guidance under U.S. GAAP, there is diversity
in practice. Holders may elect to apply the intangible assets
model while others have regarded them as financial instruments,
as they are entitled to redeem the coins for cash from the
issuer. As previously outlined, the intangible assets model
does not reflect the stability and rights related to a
stablecoin, resulting in substantial operating burdens to
accounting and financial reporting processes, and having little
relevance to financial statements users.
The accounting treatment of stablecoins like USDC is a
policy opportunity for the United States. In September 2021,
the Conference of State Bank Supervisors released the Money
Transmission Modernization Act for State adoption as part of
States' broader effort to modernize their financial regulatory
systems. This model law aims to replace 50 sets of State-
specific money transmitter laws and rules with one single set
of nationwide standards and requirements created by State and
industry experts. The measure proposes a legal classification
that applies to stablecoins, which reads as follows:
(aa) ``Stored value'' means monetary value representing
a claim against the issuer evidenced by an electronic
or digital record, and that is intended and accepted
for use as a means of redemption for money or monetary
value, or payment for goods or services.
Notwithstanding the fact that there will likely be further
accounting standard developments around digital assets and
stablecoins, we believe reference to the underlying reserves,
the rights conferred to holders of a stablecoin, and the
applicable regulatory framework under which the stablecoin
operates can inform the relevant U.S. GAAP framework to apply
in the absence of authoritative guidance. In the case of
Circle, the U.S. dollar-denominated reserves backing USDC are
held in the care, custody and control of the U.S. regulated
banking system and issued in compliance with money transmitter
requirements under the electronic stored value definition
above. The reserves are strictly comprised of cash and short-
duration U.S. obligations, and we have consistently made
publicly available reports on the reserves and their
sufficiency to meet demands for USDC outstanding with third
party attestations from a leading global accounting firm on a
monthly basis.
Under the current U.S. GAAP framework, our view would be
that U.S. dollar-denominated asset-backed stablecoins like USDC
should be accounted for by holders as financial instruments (as
USDC represents a right to receive cash from the issuer).
Holders of a stablecoin from an issuer who meets the definition
of a financial institution which functions similar to a demand
deposit with rights to that deposit transferable over a public
blockchain, could potentially meet the definition of and could
be considered cash and cash equivalents under current U.S.
GAAP.
We believe that a comprehensive framework under U.S. GAAP
should be developed and given the prudential standards
underlying USDC issuance, USDC should be accounted for in
contemplation of a holders' right to redeem the tokens for U.S.
dollars with consideration to the high-quality liquid assets
the reserves supporting its value and the regulatory framework
we operate in. The financial reporting of the reserves that
support the stablecoin should focus on providing transparency
about the nature and risks of these holdings to financial
statements users.
We look forward to working with standard-setting bodies,
public accounting firms, and others to advance those
principles.
Q.2. If a new model of accounting is designed for digital
assets, should stablecoins be treated similarly to other
cryptocurrencies?
A.2. We believe that a comprehensive accounting framework
designed for digital assets should reflect the different types
of digital assets and the different underlying economics,
rights, obligations, risks, and uses of those assets.
The purpose of USDC and other similar stablecoins, is to
function as a stable store of value and convenient medium of
exchange, with the same range of potential downstream
applications as a U.S. dollar (or other equivalent fiat
currency). USDC is not designed as an investment product as
there is no reasonable expectation of profits by USDC holders,
and accordingly is not a security. As the reserves backing USDC
are solely invested in U.S. dollars and short-duration U.S.
obligations, the instrument imports the monetary policy of the
U.S. Federal Reserve Board. The regulatory framework under
which we operate requires us to redeem USDC for one U.S.
dollar; however, most digital assets, such as Bitcoin and
Ether, do not hold value related to specific reference assets
and are therefore subject to volatility and differing risks and
rewards. Given the differing underlying economics and risks and
rewards associated with different digital assets, we believe
USDC and other stablecoins should be accounted for as a
distinct class of digital assets within a future authoritative
framework for accounting for digital assets.
When considering how stablecoins, as a distinct class of
digital assets should be accounted for within a future
authoritative accounting framework, we believe USDC and other
similar stablecoins should be accounted for in contemplation of
a holders' right to redeem the tokens for U.S. dollars and in
relation to the high-quality liquid assets the reserves
supporting the value are invested in. In our view this would
mean that stablecoins like USDC should be accounted for as a
financial instrument or as cash and cash equivalents by
holders.
Q.3. How can the GAAP accurately account for stablecoin
issuers' holdings with awareness of holdings for the purpose of
stablecoin backing?
A.3. We value trust, transparency and compliance and would be
supportive of U.S. GAAP disclosure requirements which provide
financial statements users with relevant information to assist
in their determination as to the stability, composition, and
values of reserves supporting the stablecoins issued by the
respective issuer.
In terms of market trust, transparency, and accountability,
Circle has consistently and voluntarily reported our U.S.
dollar-denominated reserves and the sufficiency of these
reserves to meet the demands of all USDC outstanding as
evidenced by third-party attestations published monthly. Circle
has also prioritized building, designing, and guarding the
prudential standards for USDC inside of and conforming with the
prevailing U.S. regulatory standards that apply to leading
fintech and payments firms such as PayPal, Block (formerly,
Square), Venmo, and Stripe, among others.
Circle would welcome Federal regulations requiring rigorous
standards for the assets backing U.S. dollar-denominated
stablecoins as well as requirements for public disclosure and
accountability. In Circle's view, the assets backing dollar-
referenced stablecoins should be fully reserved and backed by
U.S. dollars or short-duration U.S. obligations. In addition,
financial statement disclosure requirements need to focus on
providing transparency about the nature and risks of these
assets and should be applied consistently by stablecoin
issuers, who should be required to regularly report on the
reserves and be subject to rigorous and consistent capital
requirements.
From an economic competitiveness standpoint, this is an
opportunity for the United States financial accounting
standards setters, such as the FASB, to lay the foundation for
how stablecoins are accounted for and disclosed on companies'
balance sheets. The FASB should lead the way in developing a
robust and clear accounting framework to provide financial
statement users with high quality and comparable information,
while balancing financial statement preparers' financial
reporting and operational challenges, especially given
consideration that the U.S. dollar is the reference asset of
choice for the most widely used and popular stablecoins in
circulation.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM HILARY J. ALLEN
Q.1. Stablecoin companies frequently claim that their products
are safe because reserves are invested in low-risk, highly
liquid assets, such as bank deposits. Very low-risk assets,
however, have low or even nominal returns. If stablecoin
reserves are invested in these assets, do stablecoin providers
face pressure to obtain revenue from stablecoin users in other
ways, such as by cross-selling DeFi investments or charging
transaction fees? Is there evidence in the market so far that
firms face these incentives?
A.1. It goes without saying that firms need to generate
revenue; if reserve assets generate insufficient returns, then
stablecoin issuers will have to generate revenue elsewhere. If
transaction fees are disclosed upfront and not structured to
exploit consumers' cognitive biases, there is nothing wrong
with charging fees for services that people are willing to pay
for. A lack of transparency about revenue sources may be cause
for concern, though; it may be that the stablecoin is being
financially supported by hidden fees or by arrangements that
conceal a hidden conflict of interest (as an analogy, in 2020,
the SEC brought an enforcement action against Robinhood
Financial LLC for failing to disclose to its customers that its
commission free brokerage model was supported by ``payments
from trading firms for routing customer orders to them''). \1\
---------------------------------------------------------------------------
\1\ SEC, ``SEC Charges Robinhood Financial With Misleading
Customers About Revenue Sources and Failing To Satisfy Duty of Best
Execution'', (Dec. 17, 2020) (available at https://www.sec.gov/news/
press-release/2020-321).
---------------------------------------------------------------------------
Circle's Amended S-4 disclosure (filed with the SEC on
December 23, 2021) states that for the 9 months ended September
30, 2021, it generated more revenue from what it terms
``Transaction and Treasury Services'' ($29,108,000) than ``USDC
interest income'' ($21,214,000). \2\ Circle projects that by
2023, $622,000,000 of revenue will come from Transaction and
Treasury Services while $196,000,000 of revenue will come from
USDC interest income. \3\ Circle describes Transaction and
Treasury Services as including ``(1) Transaction Services, (2)
Integration Services, and (3) Circle Yield. All three of the
services are components of a unified suite of services that are
accessed by, and integrated with, the Circle Account by
providing customers with the infrastructure required to process
a wide variety of transactions and support their financial
infrastructure.'' \4\ One industry journalist described these
transaction and treasury services as ``probably the least
understood and least detailed part of [Circle's] offerings''
\5\--Circle may ultimately face conflicts between the interests
of the businesses and financial institutions that utilize these
transaction and treasury services on the one hand, and the
consumers who use the USDC on the other hand.
---------------------------------------------------------------------------
\2\ Circle Internet Finance Public Limited Company, Amendment No.
2 to S-4 Filing, p. 112 (Dec. 23, 2010) (available at https://
www.sec.gov/Archives/edgar/data/0001876042/000110465921153174/
tm2124445-4-s4a.htm).
\3\ Id. at 132.
\4\ Id. at 107; see also id. at 182.
\5\ Brady Dale, ``USDC Is Only Circle's Second-Biggest Business'',
SPAC Filing Shows, Coindesk (Jul. 8, 2021) https://www.coindesk.com/
business/2021/07/08/usdc-is-only-circles-second-biggest-business-spac-
filing-shows/.
Q.2. Major stablecoin issuers, including Circle and Tether, do
not allow retail stablecoin users to redeem their coins
directly at the issuer. Yet most DeFi arrangements are used
extensively or even predominantly by retail consumers, and, as
discussed at the hearing, stablecoins are integral to these
platforms. Are there risks that arise from the fact that DeFi
is accessible to consumers, but important stablecoin redemption
---------------------------------------------------------------------------
processes are not? Please explain.
A.2. Consumers are vulnerable to many new types of scams
proliferating in the DeFi ecosystem, including rug pulls. \6\
Consumers may also find that the stablecoins themselves become
worthless (at least outside of the DeFi ecosystem) if exchanges
like Coinbase become compromised and so the stablecoins cannot
be converted into cash. If this were to happen, any profits
made in the DeFi ecosystem would be unavailable for the
purchase of real-world goods and services. I discuss problems
associated with exchange outages in more detail in response to
the next question.
---------------------------------------------------------------------------
\6\ Marco Castrovilli, ``How To Spot a Rug Pull in DeFi'',
Cointelegraph (Nov. 11, 2021) (available at https://cointelegraph.com/
news/how-to-spot-a-rug-pull-in-defi-6-tips-by-cointelegraph).
---------------------------------------------------------------------------
I would also observe that where stablecoin issuers do not
allow retail stablecoin users to redeem their coins directly at
the issuer, that calls into question the value of the reserve
for consumers. If a stablecoin is backed by a reserve of assets
held by the stablecoin issuer AND a stablecoin holder can
redeem their stablecoin directly from the issuer, then the
reserve inspires confidence that when the time comes for
redemption, the stablecoin issuer will be able to honor the
request by liquidating reserve assets (if necessary). In this
situation, the stablecoin holder is in a similar position to
the holder of a share in a money market mutual fund. If,
however, there is no direct redemption right, it is unclear
what claim stablecoin holders have on reserve assets. Do
holders have contractual rights against an exchange that would
force the exchange to convert their stablecoins at the expected
value? If so, does the exchange have any direct contractual
right of redemption against the stablecoin issuer at the
expected value? Can these contractual rights be suspended in an
emergency? I would humbly submit that the Senator might wish to
seek answers to these questions to determine both the value of
the reserve for stablecoin holders, and whether there is real
run risk associated with stablecoins.
Q.3. When stablecoin issuers preclude retail users from
redeeming directly, consumers can convert stablecoins into fiat
currency by selling the tokens for dollars on exchanges. But as
we saw on the day of the hearing--when major crypto exchanges
experienced glitches in their price quote systems--exchanges
have been prone to outages and malfunction. Please discuss how
exchange outages or errors can affect stablecoin markets and
stablecoin holders. Are there scenarios involving exchange
failures that give rise to particular concern?
A.3. When a stablecoin is designed so that a holder has no
direct right of redemption, holders are entirely reliant upon
exchanges like Coinbase to ``cash out'' of their stablecoin.
Because stablecoins aren't readily accepted by sellers of goods
and services outside of the DeFi ecosystem, exchange outages
can obviously cause real harm for a holder who needs to convert
their stablecoins to cash to make time-sensitive purchases of
real-world goods and services.
At a systemic level, this kind of outage can damage
confidence in the convertibility of stablecoins more generally,
which could even cause runs on stablecoins through unaffected
exchanges (assuming that stablecoin holders have a contractual
right to compel those exchanges to convert their stablecoins,
which they might not). During a panic, unexpected volumes of
conversions could stress the infrastructure of exchanges,
causing more operational problems and potential shutdowns,
which would further damage confidence in a vicious cycle.
Q.4. Please describe any risks and benefits that you believe
are presented by smart contracts. In what contexts, if any, are
smart contracts a valuable tool? Could smart contracts create
systemic risks? As compared with traditional contracts, are
smart contracts useful in consumer or small business contexts?
A.4. I believe there are significant systemic risks associated
with smart contracts, because of their automated execution.
Rigid execution often seems appealing to parties in good times
because it creates more certainty and the increased efficiency
reduces transaction costs. However, in bad times, this can
create systemic problems, as I explain in the following excerpt
from my forthcoming book Driverless Finance: Fintech's Impact
on Financial Stability (OUP 2022):
because the future is inherently uncertain, no contract
(paper or smart) will ever be able to cater for every
possible eventuality that a financial asset might be
confronted with. With paper contracts, though, the
parties have opportunities to amend their contracts or
agree not to enforce them. Courts can also intervene to
fill in the blanks in paper contracts: law professor
Katharina Pistor has observed that ``the elasticity of
law has proved time and again critical for avoiding a
complete financial meltdown.'' In a financial system
dominated by smart contracts, though, these kinds of
interventions may come too late to prevent runs, fire
sales, and other destabilizing harm. These problems
arise because, even if the parties agree among
themselves not to enforce a smart contract or a court
issues an injunction preventing them from carrying out
a smart contract, the parties can't effect this on
their own. The execution of a smart contract can only
be paused, changed, or undone with the consent of
whoever controls the relevant distributed ledger, and
where the ledger is decentralized and permissionless
(like the Ethereum ledger) there is no single
individual who can coordinate the process-even if the
parties to the smart contract (as well as the public
interest) all support it.
Instead, any pause, change or reversal of a smart
contract will require the consensus of all the nodes in
the distributed ledger supporting the smart contract,
which will take time. To give some context, after the
DAO was hacked, it took over a month for the nodes of
the Ethereum distributed ledger to coordinate their
response. It seems highly unlikely that this kind of
consensus could ever be achieved before the smart
contract executes; undoing the transaction will
probably be the only alternative. Undoing a transaction
requires either a change in the ledger's underlying
software, or what is known as a ``hard fork,'' where
the ledger is split in two with one version of the
ledger not recognizing the problematic transaction.
Identifying, contacting, and convincing a majority of
the nodes of a decentralized ledger to accept either of
these approaches would not be a quick process, and the
run or fire sale we are trying to prevent could be
over--and the damage done--long before the transaction
were reversed.
Turning from systemic risk to the consumer/small business
context, Professor Katharina Pistor has emphasized the
hardships consumers faced because of the limited contractual
relief available to them during the 2008 crisis. Pistor pointed
out that the more rigid the contract, the more difficult the
consumer's position:
Consider the different fates of homeowners in the
context of plummeting real estate markets in countries
around the world. Homeowners in the U.S. may be on the
periphery of the U.S. financial system.: While major
financial intermediaries received emergency liquidity
support from the Fed or Government bailouts, homeowners
faced personal bankruptcy and foreclosure in accordance
with the law. However, they are still better off than
their counterparts in Hungary or Spain. The debt of
Hungarian homeowners, for example, was compounded by
the fact that two-thirds of mortgages were made in
foreign currency--the euro or Swiss franc--and these
currencies appreciated in the midst of the crisis (by
40 percent) relative to the domestic currency.
Moreover, in Spain (and most other countries),
mortgage-backed loans are full recourse loans (whereas
in many States in the U.S. they are not. If property
value is under water, homeowners still carry the burden
of the entire amount they had contracted for. \7\
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\7\ Katharina Pistor, ``A Legal Theory of Finance'', 41 J.
Comparative Econ. 315, 320 (2013).
Self-executing smart contracts are more rigid than any
contractual structures adopted before the 2008 crisis. For this
reason, I would be very concerned by the mass adoption of smart
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contracts in consumer or small business contexts.
Q.5. Some stablecoin providers and commentators believe that
Congress should create a new form of financial institution
charter, specifically for stablecoin issuers. In a recently
released framework for stablecoin legislation, Senator Toomey
has also adopted this view. \8\ From your perspective, would a
novel stablecoin charter be preferable to requiring firms to
follow existing law and conform to the regulatory categories it
creates? Could new regulatory carve-outs incentivize regulatory
arbitrages or otherwise undermine key existing rules?
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\8\ See ``Toomey Outlines Stablecoin Principles To Guide Future
Legislation'', (Dec. 14, 2021), https://www.banking.senate.gov/
newsroom/minority/toomey-outlines-stablecoin-principles-to-guide-
future-legislation.
A.5. From my perspective, it is preferable to require
stablecoin issuers to follow existing law; a specialized
charter for stablecoins is undesirable for a number of reasons.
Creating specialized regulatory regimes often leads to
duplicative regulatory efforts and turf wars on the one hand,
and on the other hand, issues falling through regulatory gaps
as private sector entities arbitrage the definitional
boundaries of the specialized regime. Also, as I noted in my
written testimony, ``the more specialized the regulator, the
more opportunities there are for the industry to `capture' the
regulator.'' Capture could become a serious problem if a cadre
of regulators were dedicated solely to a specialized stablecoin
charter.
Speaking more specifically about regulatory arbitrage, any
regulatory regime that is devised to apply to a particular
technology at a particular moment in time is going to be
particularly vulnerable to arbitrage by private sector entities
(who can refine their technology to fall outside the regulatory
definition). Legal tests that are more functional and
technology-neutral (like the Howey test for what constitutes an
``investment contract'', and therefore a ``security'') are
harder to arbitrage, and more like to withstand the test of
time as technology evolves. As I concluded in my written
testimony, the SEC (and the CFTC) should continue to oversee
the stablecoins under their jurisdiction.
Q.6. In Senator Toomey's framework, he also suggested that some
stablecoin issuers could, ``based on their business models,''
choose to be regulated by ``[r]egister[ing] as a money
transmitter under the existing State regime and as a money
services business under FinCEN's Federal regime.'' Are State
money transmitter and Federal MSB rules adequate for managing
the risks to consumers and the economy created by stablecoins?
Please describe the strengths and limitations of these regimes,
as applied to stablecoins.
A.6. As discussed during the hearing, stablecoins pose issues
for consumers/investors, and for the stability of the financial
system, and so any proposal that limits stablecoin regulation
to State money transmitter rules and FinCEN will be inadequate.
FinCEN is a financial intelligence unit, and has no consumer/
investor protection or financial stability mandate. Instead,
FinCEN's mission ``is to safeguard the financial system from
illicit use and combat money laundering and promote national
security through the collection, analysis, and dissemination of
financial intelligence and strategic use of financial
authorities.'' \9\ State money transmitter laws may involve
consumer/investor protections, but they vary significantly by
jurisdiction, which will provide consumers/investors with
uneven protections. In addition, State regulators generally do
not pay much attention to financial stability issues, because
financial stability is a borderless public good that will
accrue largely to persons residing outside of their State. \10\
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\9\ FinCEN, ``What We Do'', (available at https://www.fincen.gov/
what-we-do).
\10\ Daniel Schwarcz and Steven L. Schwarcz, ``Regulating Systemic
Risk in Insurance'', 81 U. Chi. L. Rev. 1569, 1628 (2014).
Q.7. Senator Toomey's framework further proposes that
``[c]ommercial entities should be eligible to issue
stablecoins, provided they choose one of these regimes [i.e., a
bank charter, a special purpose stablecoin charter, or money
transmitter and MSB rules].'' Please discuss whether, in your
view, it would be prudent to allow large, nonfinancial
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companies like Amazon or Alphabet to issue stablecoins.
A.7. In my view, allowing Amazon, Alphabet, or Meta/Facebook to
issue stablecoins would be a worst-case outcome. To explain
why, I excerpt here a few paragraphs from my forthcoming book
Driverless Finance (in which I use the term ``techfin'' to
refer to these tech firms):
A payments service is . . . likely to be many tech
firms' first foray into finance, but they won't
necessarily stop there. As more users adopt the payment
service, more user data is generated (about the
customers and their transactions), which the tech firm
can use not only to target advertising or identify
potential customers for its nonfinancial services
(which will yield yet more data) but also to expand
into financial services that involve some data-
dependent risk assessment (such as making loans or
offering insurance). Offering more types of financial
services will create new networks and generate yet more
user data in a cycle that is virtuous for the tech
firm, but not necessarily for a competitive marketplace
or stable financial system.
The techfins have a potential advantage over even the
largest banks here, because they can exploit large
troves of customer data (like social media posts or
search histories or shopping patterns) that they have
collected through their nonfinancial activities. In the
United States, banks are prevented from engaging in
nonfinancial activities, so the types of data that
banks can collect are more limited (Goldman Sachs can't
purchase a search engine, and Citibank can't start up
an e-commerce platform). Because of the competitive
advantages that come from their data supremacy (and
because they are already huge), Google, Amazon,
Facebook, and Apple could quickly become ``too big to
fail'' providers of financial services. ``Too big to
fail'' is used to describe a firm that is so critical
to the provision of financial services (because of
factors like its size, a lack of substitute providers,
or interconnections with other parts of the financial
system) that a Government simply will not allow it to
fail. Unfortunately, firms that recognize that they are
``too big to fail'' are perversely encouraged to take
extra risks: they will profit if those risks turn out
well, but they know that any disastrous failures will
probably be covered by a Government bailout. Profit
therefore comes at the expense of the public, which is
left holding the bag if the firm's risks don't pan out.
And in some ways, that's a best-case scenario. What if
a Government bailout isn't actually feasible?
Google, Amazon, Facebook, and Apple are so big that in
many ways, they make our existing notions of ``too big
to fail'' seem quaint. A recent Government report
concluded that Facebook and Google have monopoly power
in their defined markets, and that Amazon and Apple
have ``significant and durable market power.'' If any
of these behemoths were to add payments or lending
services to their existing markets, they could
outcompete many of the alternatives, leaving few
substitutes if they were to fail. In the absence of
substitutes, a bailout seems inevitable--but what would
a bailout on this scale look like? For example, might
the Government have to bailout Amazon's e-commerce
business as well as any lending arm? And which
country's Government would be responsible? Some smaller
countries (like Iceland and Switzerland) have already
had to grapple with the issue that their banks might be
too big for them to bail out, but when it comes to the
techfins, even large countries like the United States
might find them ``too big to save.''
Q.8. Finally, Senator Toomey's proposal states that
``[r]egulation should protect the privacy--and confidentiality
of individuals using stablecoins.'' Could creating carve-outs
for stablecoins from existing know-your-customer or BSA/AML
rules raise national security concerns? If so, how?
A.8. National security issues are largely beyond my expertise,
but I see no reason why stablecoins should be treated
differently from any other payment method when it comes to BSA/
AML rules.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM HILARY J. ALLEN
Q.1. The defining feature of stablecoins versus other types of
crypto is that they are backed by assets such as fiat
currencies or commodities. However, without proper transparency
this feature only provides the illusion of stability.
Are market participants able to easily verify the portfolio
holdings backing the stablecoins they invest in?
A.1. Generally speaking, there are no disclosure requirements
pertaining to stablecoin reserves (although Tether is required
to provide reports on the composition of its reserves pursuant
to its settlement with the New York Attorney General). \1\
However, an industry standard is starting to evolve where some
stablecoin issuers make voluntary disclosures known as
``attestation reports,'' where ``the stablecoin issuer attests
to its auditor how many reserves it has, and the auditor
examines this claim for validity. The auditor's findings then
get posted for the public to see.'' \2\ While better than no
disclosure, such periodic voluntary disclosures are suboptimal
because they only describe the reserve at a particular moment
in time, and investors are forced to rely only on the
information the stablecoin issuer chooses to disclose. Bad
information may be omitted, insufficient detail may be
provided, and disclosures will potentially be inconsistent as
between stablecoin issuers, making comparisons difficult for
investors.
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\1\ Letitia James, New York Attorney-General, ``Attorney General
James Ends Virtual Currency Trading Platform Bitfinex's Illegal
Activities in New York'' (Feb. 23, 2021) (available at https://
ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-
currency-trading-platform-bitfinexs-illegal).
\2\ For more on stablecoin attestation reports, see J.P. Koning,
``The Race for Stablecoin Transparency'' (Aug. 16, 2021) (available at
https://www.coindesk.com/markets/2021/08/16/the-race-for-stablecoin-
transparency/).
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Also, I would add that (as I noted in a response to
Question 2 from Senator Brown (see above)), even with full
disclosure, the value of the reserve assets to consumers is
questionable if stablecoin issuers do not allow retail
stablecoin users to redeem their coins directly from them.
Q.2. Transparency is a cornerstone of the economy. Consumers
make the best decisions when they have the all of the necessary
information, which is why I have always advocated for robust
disclosure rules in across the financial system.
How can we increase transparency to ensure market
participants properly disclose the value of stablecoins and
other cryptocurrency so that the average investor is able to
understand the true risks associated with such assets?
A.2. Unfortunately, it is hard to convey the true risks
associated with investing in cryptocurrencies because we lack
methodologies for valuing them. Nobel Prize-winning economist
Robert Shiller has said that Bitcoin ``has no value at all
unless there is some common consensus that it has value. Other
things like gold would at least have some value if people
didn't see it as an investment,'' \3\ and that ``no one can
attach objective probabilities to the various possible outcomes
of the current Bitcoin enthusiasm. How can we even start
estimating the fundamental value of Bitcoin . . . ? Any attempt
will soon sound silly.'' \4\ In the absence of appropriate
valuation methodologies, there is no metric that can convey to
investors the true risks associated with most crypto assets.
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\3\ William Suburg, ``Yale Prof. Shiller Thinks Bitcoin's `Bubble'
Could Actually Linger 100 Years'', Cointelegraph (Jan. 19, 2018)
(available at https://cointelegraph.com/news/yale-prof-shiller-thinks-
bitcoins-bubble-could-actually-linger-100-years).
\4\ Robert J. Shiller, ``What Is Bitcoin Really Worth? Don't Even
Ask'', N.Y. Times (Dec. 15, 2017).
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Valuation of stablecoins is potentially more effective, to
the extent that their value depends on the composition of their
reserve assets. The danger here is that people will believe
that the assets backing a single stablecoin will always be
worth exactly $1, even though their value may fluctuate in
reality. Investors in money market mutual funds face similar
issues, and so some people have argued that all money market
mutual funds should be required to have a floating value (to
prevent investors from being misled about the stability of
money market mutual fund share prices).
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