[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?

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

                                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

                               __________

  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                    
          
-----------------------------------------------------------------------------------  

            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

                              ----------                              

                       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?

                              ----------                              


                       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\
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \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 
---------------------------------------------------------------------------
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?
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \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 
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
     \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/).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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).
---------------------------------------------------------------------------
    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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