    [Senate Hearing 117-697]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 117-697

    EXAMINING THE PRESIDENT'S WORKING GROUP ON FINANCIAL MARKETS REPORT ON
                                  STABLECOINS

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

                                    HEARING

                                   before the

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 SECOND SESSION

                                       ON

    EXAMINING THE PRESIDENT'S WORKING GROUP ON FINANCIAL MARKETS REPORT ON
                                  STABLECOINS

                                   __________

                               FEBRUARY 15, 2022

                                   __________

      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

    52-882 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

                     Dan Sullivan, Republican Chief Counsel

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                            Pat Lally, Hearing Clerk

                                      (ii)

                                C O N T E N T S

                                  ----------

                           TUESDAY, FEBRUARY 15, 2022

                                                                       Page
    Opening statement of Chairman Brown..............................     1
            Prepared statement.......................................    30

    Opening statements, comments, or prepared statements of:
        Senator Toomey...............................................     4
            Prepared statement.......................................    31

                                    WITNESS

    Jean Nellie Liang, Under Secretary for Domestic Finance,
      Department of the Treasury.....................................     6
        Prepared statement...........................................    33
        Responses to written questions of:
            Chairman Brown...........................................    37
            Senator Menendez.........................................    39
            Senator Warnock..........................................    41
            Senator Scott............................................    42
            Senator Hagerty..........................................    42

                  Additional Material Supplied for the Record

    Statement submitted by ICBA......................................    44
    Statement submitted by ABA.......................................    47
    Letter submitted by The Clearing House...........................    53
    Letter submitted by NAFCU........................................    62
    Letter submitted by CUNA.........................................    64
    Statement submitted by BPI.......................................    66
    Letter submitted by ETA..........................................    74

                                     (iii)

    EXAMINING THE PRESIDENT'S WORKING GROUP ON FINANCIAL MARKETS REPORT ON
                                  STABLECOINS

                                  ----------

                           TUESDAY, FEBRUARY 15, 2022

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10:03 a.m., in room SD-538, Dirksen
    Senate Office Building, Hon. Sherrod Brown, Chairman of the
    Committee, presiding.

              OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

        Chairman Brown. The Senate Banking, Housing, and Urban
    Affairs will come to order.
        Under Secretary Liang, welcome. Glad you are here. Thank
    you.
        Our witness is in person. Members have the option to appear
    either in person or virtually, so thank you.
        Let me start out by talking about the Federal Reserve for a
    moment. This afternoon at 2:15, we will be meeting in SVC-200,
    the Visitors Center at the bottom of the steps, to mark up five
    Federal Reserve nominees and one for the FHFA. We need a full
    Federal Reserve Board of Governors to bring down prices and put
    workers first. It will be the first time in a decade we have
    seen a full complement of Governors once we confirm in
    Committee and on the floor, these five nominees.
        Ranking Member Toomey and I agreed on the dates. Three
    weeks ago, we agreed on the dates for the hearing and markup.
    Americans are depending on us to get these people on the job as
    soon as possible. If my colleagues are as concerned about
    inflation as they claim to be in this Committee and beyond,
    they will not slow down this process, which will only hurt
    workers, their families, and our recovery.
        If you watched the Super Bowl on Sunday, you saw ad after
    ad for a product that most Americans have heard of, but almost
    nobody knows what it really is. Even many of the people who
    have bought it often do not really understand it. Big
    cryptocompanies are looking to make big profits, are desperate
    to reach as many Americans as they can. They brought in
    celebrities and gimmicks to make crypto sound exciting and
    daring and profitable.
        But the ads left a few things out. They did not mention the
    fraud, the scams, and the outright theft. The ads did not point
    out that you can lose big in crypto's huge price swings. They
    did not tell you about the high fees pocketed by the
    cryptocompanies. They sure did not explain that cryptomarkets
    lack basic investor protections and oversight.
        Just a few weeks ago, hackers stole $300 million of
    people's investments from a cryptoplatform. The fact that these
    companies felt the need to advertise at all is a bit of a
    giveaway about one of their major claims. If this were actually
    meant to be used as currency, why would you need to buy ads? I
    do not think I have never seen in 40 years of Super Bowl
    watching, the Federal Reserve buy a multimillion-dollar
    commercial for U.S. dollars. That is because crypto is not
    money. It is designed for speculation.
        Watching those ads reminded a lot of us of some asset
    bubbles we have been before. The 2000 Super Bowl featured 21
    ads from 14 different dot-com startups. The internet may have
    been the next frontier, but these companies surely were not.
    Many of them were defunct within a year or two. Only 4 from
    those 14 are still around.
        We are here today because, once again, real people's real
    money is at risk. We need to look beyond the unproven promises,
    protect Americans and our entire financial system.
        In a hearing last July, this Committee examined the risks
    of cryptocurrencies to our economy. In December, we looked
    closely at the mechanics behind stablecoins and stablecoin
    companies.
        Today we are joined by Treasury Under Secretary Liang to
    look at the risks stablecoins pose and how regulators and
    Congress can protect consumers.
        Last fall, the Treasury Department led a team of our
    financial regulators to conduct a report on stablecoins. This
    report makes it clear that without regulation, stablecoins can
    endanger our economy, our payments systems, our hard-earned
    money. And while stablecoins suggest they are like money, good
    luck trying to use one at the store. Their main purpose today
    is to make it easier to trade, to speculate, and in some cases,
    unfortunately, especially, even hide assets in crypto and
    digital markets.
        In just a few years, stablecoins have mushroomed into a 175
    billion--``billion'' with a B--dollar market. They are asking
    us to believe that what they have built is as good as real
    money and that it works the way these startups say it does.
    Americans and this Committee should look carefully at those
    promises. The companies claim that a stablecoin is backed by
    real dollars invested in a reserve account; that is what makes
    it stable.
        But our financial regulators have tested that claim by a
    giant stablecoin issuer. That issuer ended up paying nearly $60
    million in fines because it lied about its reserves. It turns
    out that for over 2 years, the stablecoin was really backed 28
    percent of the time.
        Stablecoin companies say that you can, quote, ``redeem'' a
    stablecoin whenever you want, exchanging it back into dollars
    from the stablecoin's reserve, but the fine print in the
    agreements of some of the biggest companies says that ordinary
    consumers cannot actually redeem their stablecoins for dollars
    from the company that issues them. Only institutions like hedge
    funds can, and even then, many stablecoin issuers can delay
    redemptions or refuse them entirely.
        So, if you saw a Super Bowl ad, you would figured out you
    would give this a try. You change your mind and want to
    exchange your stablecoin for dollars? You might be out of luck.
    The website could be down. Your money could be trapped.
        Stablecoin issuers also promise that their product will
    serve people who have been left behind in the financial system.
    Their interest in helping the unbanked, they always start with
    that. But, as we have established, crypto does not actually
    function as real currency in any traditional sense that
    Americans for decades have understood. Allowing more people to
    trap their money in risky, speculative investments is not the
    kind of financial inclusion that people seek. It is not going
    to do anything to help Americans working hourly jobs who do not
    put their paychecks in the banks because of abusive fees.
        Finally, stablecoin companies say that if you hand them
    your money, your money will be safe. They tell us that they
    structure their reserves so that people's money is protected,
    that their businesses will weather any kind of crisis.
        Now, maybe the stablecoin companies are right. Maybe we
    should just close our eyes and trust that a product called
    ``Magic Internet Money'' run by an outfit called
    ``Abracadabra,'' that is a safe place for your money. I am not
    sure working Americans want to take that risk.
        Remember in 2007 and '08 when the banks said homes prices
    would only go up and mortgages would never be underwater? Do
    you remember those days? Then, as now, it is workers and their
    families whose homes and hard-earned savings are being used as
    gambling chips. They are the ones always, always, always, often
    because of the actions of this House and Senate in this
    conservative-too-often Committee, they are the ones who pay the
    price.
        I understand the appeal of crypto. Americans have been
    burned over and over again by Wall Street. The 2008 crisis,
    abusive fees, a stock market that is just detached from
    reality, of course, people do not trust big banks. They figure,
    how could putting my money in one of these new products be any
    worse than the scams I have seen in the banking system? Maybe
    they are thinking I will finally get in on the kinds of deals
    that have been making investment bankers wealthy for a
    generation.
        Some of those Super Bowl ads were pretty compelling
    television. They make vague allusions to innovation and the
    future, and who could be against innovation? But we have
    ignored warnings like the report we are talking about too many
    times before. Before the crisis, Congress and regulators
    ignored warnings about the risky bets and the increasing
    leverage and over-the-counter derivatives on Wall Street. Then
    the banks got a bailout. Again, working people paid the price.
    That is why I want Congress and regulators to work together to
    tackle these issues now before it us too late.
        I urge my colleagues to listen carefully to Under Secretary
    Liang's testimony and to the warnings in the PWG, the
    President's Working Group report. We need a strong, proactive
    approach from regulators and Congress to limit stablecoin risks
    for working Americans.
        As our economy continues to recover from COVID-19, as
    workers finally, finally, finally are starting to see higher
    wages and more bargaining power in the workplace, the last
    thing we need is for a risky new financial product to cause
    disaster.
        This is not the first hearing that the Banking, Housing,
    and Urban Affairs Committee has had on stablecoins. It will not
    be the last.
        Ranking Member Toomey.

             OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

        Senator Toomey. Thank you, Mr. Chairman, and, Ms. Liang,
    welcome. Thank you for coming to the Committee. Thanks for
    taking the time to chat recently. I enjoyed our conversation.
        It was about 2 months ago that this Committee held its
    first hearing on stablecoins, and I was encouraged to hear from
    our witnesses about the essential role that stablecoins play in
    the larger cryptocurrency trading ecosystem. But it also
    important to note the tremendous potential stablecoins have to
    be adopted as a common medium of exchange in the broader,
    ordinary goods and services economy.
        Unlike cryptocurrencies that fluctuate in value,
    stablecoins are designed to maintain a one-to-one value
    relative to some reference asset, typically a fiat currency
    such as the U.S. dollar. Put simply, one stablecoin is meant
    always to be worth one dollar.
        Because of this price stability, stablecoins have the
    potential to serve all the traditional functions of money by
    acting as a medium of exchange, unit of account, as well as a
    store of value.
        Stablecoins can also improve upon traditional forms of
    money by increasing payment speed, especially cross-border
    transfers, reducing transaction costs, and helping to combat
    illicit finance through the creation of an immutable and
    transparent transaction record.
        Stablecoins can also be programmed to execute payments
    automatically upon the occurrence of some predesignated,
    verifiable event. This capability in particular has the
    potential to transform finance and, in time, much of our
    economy.
        Any regulatory regime for stablecoins will inevitably focus
    on consumer protections and systemic stability, but at least as
    important will be preserving the tremendous, unimagined
    benefits that will flow from future innovations.
        As stablecoin usage has grown significantly, regulators
    have increasingly taken interest. Last November's report from
    the President's Working Group on Financial Markets, spearheaded
    by Ms. Liang, appropriately recommended Congress pass
    legislation to establish a Federal regulatory framework for
    stablecoins. The PWG report recommends Congress address three
    perceived prudential concerns: first, stablecoin runs; second,
    payment system risks; and third, systemic risk and
    concentration of economic power.
        Now, the principal recommendation is that stablecoin
    issuance be limited to insured depository institutions. I
    commend the contribution of the public discussion that the PWG
    has contributed, but I strongly disagree with that
    recommendation. I think we can protect against concerns such as
    run risk through a less restrictive and more appropriately
    tailored approach.
        So, to accomplish those objectives, I released a set of
    guiding principles for stablecoin legislation. These principles
    recognize that stablecoin issuers have significantly different
    business models than banks, and they present different risks.
    For example, stablecoin issuers typically neither make loans
    nor take deposits. They may choose not to transform maturity or
    intermediate credit risk. As such, stablecoin issuers using
    cash or cash equivalents to back its coin is likely safer than
    most existing financial institutions. Because of these
    differences, it would be inappropriate to subject stablecoin
    issuers to the full range of bank regulations meant to address
    risks posed by the fractional reserve, deposit and lending
    banking system.
        So I was encouraged that Ms. Liang has recognized these
    differences and sensibly agreed there should be regulatory
    flexibility for stablecoin issuers not engaged in traditional
    banking, but that does raise the natural question: Why require
    all stablecoin issuers to become insured depository
    institutions then?
        My legislation will take a different approach. It will
    provide regulatory treatment that is flexible and adaptable to
    future technological innovation. It will also promote
    competition in the stablecoin market by allowing at least three
    types of regulated entities to issue stablecoins.
        First, my legislation would preserve the regime to which
    the majority of stablecoin issuers are currently subject as
    State-registered money service businesses and money
    transmitters. To disrupt this regime would both introduce
    unnecessary burdens to an emerging technology and unwisely
    diminish the success of States with experience and expertise in
    this area. Rather than discard this regime, we should build on
    it to ensure the public has the right disclosures about
    stablecoin reserves to make an appropriately informed decision
    about whether to use any particular stablecoin.
        Second, my legislation will clarify that insured depository
    institutions are actually in fact permitted to issue
    stablecoins. The former head of the OCC, Brian Brooks,
    pioneered work to give banks clarity on digital asset
    activities, but the current OCC has created confusion regarding
    permissible activities.
        Finally, my approach will establish a new stablecoin
    charter with regulatory requirements designed specifically for
    stablecoin issuers. The requirements will address the risks
    identified by the PWG report, but will not force stablecoin
    issuers into a one-size-fits-all system created for traditional
    banks.
        Ms. Liang's recent testimony indicates to me that I think
    she agrees with the idea of a tailored approach for such
    issuers. Rather than just rely on the flexibility of the
    existing framework for depository institutions, which leaves
    full discretion to bank regulators, however, I think it is the
    responsibility of Congress to design this approach.
        So these three paths would allow each stablecoin issuer to
    choose the regulatory framework most appropriate for its own
    business model.
        Now, under this legislation, each stablecoin issuer would
    be required to meet certain minimum requirements, regardless of
    its charter or license. For example, all would be required to
    disclose the assets that back the stablecoin. All would be
    required to adopt and clearly disclose redemption policies, and
    they would have to undergo third-party audits. These
    requirements would ensure that consumers have sufficient
    information to choose which stablecoin they use.
        Ms. Liang's thoughtful comments on stablecoin regulation
    lead me to believe there are many issues on which we can find
    common ground. So I look forward to developing legislation with
    my Senate colleagues and working with the administration to
    establish a regulatory framework for stablecoins that addresses
    potential risks while also encouraging innovation and
    competition. Thank you.
        Chairman Crapo. Thank you, Ranking Member Toomey.
        Today's witness, we will hear from Nellie Liang, the Under
    Secretary of the Treasury for Domestic Finance.
        Madam Under Secretary, please proceed with your testimony.
    Thank you.

      STATEMENT OF JEAN NELLIE LIANG, UNDER SECRETARY FOR DOMESTIC
                  FINANCE, DEPARTMENT OF THE TREASURY

        Ms. Liang. Chairman Brown, Ranking Member Toomey, and other
    Members of the Committee, thank you for the opportunity to
    testify this morning on stablecoin report by the President's
    Working Group on Financial Markets.
        The PWG is chaired by the Secretary of the Treasury and
    composed of the Federal Reserve Board, the SEC, and the CFTC.
    It was formed by a Presidential Executive Order in response to
    the 1987 stock market crash and regularly produces reports on
    financial market issues for the President, which may include
    recommended legislative changes. For the stablecoin report, the
    PWG was joined by the FDIC and the OCC.
        Stablecoins are part of an emerging set of digital assets,
    activities, and services that could have profound implications
    for the U.S. financial system and economy. The distinguishing
    feature of stablecoins as compared to other digital assets is
    that they are designed to maintain a stable value relative to a
    reference asset, often the U.S. dollar.
        Stablecoins have grown rapidly from a market capitalization
    of roughly $5 billion at the start of 2020 to approximately
    $175 billion today.
        The PWG report focused on stablecoins because the offer of
    a stable value means they have the potential to be used widely
    as a means of payment by households, businesses, and financial
    firms. This potential use could create significant benefits for
    stablecoin users and payment transactions, but it could also
    pose risks.
        The PWG report focused on three prudential risks associated
    with the use of stablecoins for payments: first, run risk, a
    scenario in which loss of confidence in a stablecoin triggers a
    wave of redemptions, which could have spillover effects for the
    broader financial system; second, payment risk, including
    operational issues that could interfere with the ability of
    users to store stablecoins or use them to make payments; and
    third, concerns related to concentration of economic power, for
    example, if a stablecoin provider scaled up quickly and gained
    market power as a provider of payment services.
        The PWG report found significant gaps and authorities that
    would address these prudential risks. Some of the largest
    stablecoin issues operate with limited regulatory oversight,
    raising significant questions about whether their stablecoins
    are adequately backed. Even where a stablecoin issuer is
    subject to oversight, supervisors may not have sufficient
    visibility into the broader operations that support the use of
    stablecoins, which may be distributed across multiple entities.
        Neither State money transmitter nor securities law
    requirements were designed to address the financial stability
    payment system risks for a payment instrument based on new
    distributed ledger technology. To fill this regulatory gap, the
    PWG report recommended legislation to ensure that stablecoins
    are subject to a consistent and comprehensive framework that is
    proportionate to the risks posed. Such legislation would
    complement existing authorities with respect to market
    integrity, investor and consumer protection, and illicit
    finance.
        Specifically, the report recommended limiting issuance of
    stablecoins to ensure depository institutions, giving
    supervisors of stablecoin issuers visibility into the broader
    stablecoin arrangements and authority to set risk management
    standards for critical activities related to the use of
    stablecoins for payment, and certain measures to reduce
    concerns related to concentration of economic power.
        In developing the recommendation for stablecoin issuers to
    be insured depository institutions, the PWG report relied upon
    the flexibility that banking agencies would have to adjust for
    differences between stablecoin issuers and traditional
    commercial banks and to adjust to new products and structures
    that may emerge over time.
        As noted at the beginning of my testimony, stablecoins are
    a subset of the large and quickly evolving digital assets
    market. The Treasury Department supports responsible innovation
    from digital assets but is also committed to protecting against
    risk to users, the financial system, and the broader economy.
        The Biden administration continues to work across the
    agencies to develop a comprehensive strategy for all digital
    assets with the goals of ensuring that cryptocurrency is not
    used for illicit finance, addressing risk related to financial
    stability in consumer and investor protection, and furthering
    financial inclusion and our continued leadership of the global
    financial system.
        We look forward to working with Congress on these critical
    issues as we make progress and appreciate the Committee's
    leadership in this area.
        Thank you for the opportunity to testify this morning. I
    would be happy to answer your questions.
        Chairman Brown. Thank you, Madam Under Secretary.
        Stablecoins are, as we know, only a few years old. We know
    most Americans have never bought one. Commercials in Silicon
    Valley just tell us stablecoins are an innovation.
        I want to be clear, though, Madam Under Secretary, about
    the stakes here. How important is it we act now to regulate
    stablecoins before they can hurt our economy? How could
    stablecoins hurt working families if Congress and regulars do
    not reign in the risks of these products?
        Ms. Liang. Thank you for your question, Senator Brown.
        As I mentioned, the crypto, the digital asset market is
    growing very rapidly. The fundamental change is this new
    innovation that can allow for new provision of financial
    services and could radically change the way financial services
    are provided. This provides a lot of benefits, could bring
    efficiencies, especially to the payment system when we are
    speaking of cryptocurrencies.
        It also raises some of the concerns, of course, that you
    raised earlier on illicit finance, tax evasion, and fraud. So
    it is important to address those issues.
        My view is, given these risks and the growth of the market,
    it is for our regulators and policymakers to take some actions
    to protect users and ensure the resilience of the financial
    system.
        Stablecoins are a subset of this digital asset space. The
    prospect of stable value gives them the potential to be used
    for payment transactions, a store value, a medium of exchange.
    That raises a different set of risks. They have the ability to
    provide payments on 24/7, to reduce the costs of payments in a
    substantive way. I think it has the potential to be part of the
    future payment system.
        So I think it is important to assess the stability of
    stablecoins. Are they stable? Can they provide the services
    that they offer themselves to? The Secretary of the Treasury
    convened the PWG to evaluate whether they can be stable and to
    address whether this new product has an adequate regulatory
    framework, and the PWG report recommended that there should be
    additional authorities provided to regulators for this product.
        Chairman Brown. Thank you.
        The stablecoin companies assure us they are transparent.
    They tell us they follow the law. They even say they like to
    say they are built on trust, but of course, they say that. They
    want to suggest if you buy stablecoins with dollars, your
    dollars will be safe, that you will be able to exchange
    stablecoins back for dollars without a problem.
        Madam Under Secretary, is there any risk that people with
    stablecoins will not always be able to exchange stablecoins for
    dollars? If so, do these companies make that clear to
    consumers?
        Ms. Liang. There is risk that stablecoins cannot deliver a
    dollar. This is the--they ought--they say they are stablecoins.
    The assets backing the stablecoins may not be able to deliver a
    dollar under stress periods, and in fact, if you look at
    stablecoins, they do fluctuate.
        In addition, there are issues around redemption as well as
    there could be fees that may not be disclosed. So I do think
    there are features of stablecoins that create run risk, which
    is the first risk that the PWG report identified.
        Chairman Brown. Are those companies informing potential
    purchasers of stablecoin that there is that risk?
        Ms. Liang. They are not required to by any regulators
    because they are not regulated.
        Chairman Brown. I understand that, but are they doing that,
    in your experience?
        Ms. Liang. So there are probably 50 or 60 different
    stablecoins at this point in time. I imagine the practices vary
    quite a bit.
        Chairman Brown. I think it is more worth knowing that the
    answer to that are most of them If there are 50 or 60, do they
    disclose the risk at all? I am not asking right now--I am
    asking right now, but I think it is something important to
    know.
        Last question. For a long time in this country, we have
    prevented commercial companies from partnering with financial
    companies. In some ways, we built a wall between the two.
        There have been reports that companies like Walmart think
    about issuing a stablecoin. Is anything right now stopping
    Amazon or Walmart or another big company from starting their
    own stablecoin, and if so, what are the risks if they do that?
        Ms. Liang. So, currently, I do not believe--because
    stablecoin issues are licensed by State money transmitter
    responsibilities, there is nothing that stops a commercial
    company from wanting to issue a stablecoin.
        The PWG proposal for an IDI for the issuer would preclude a
    commercial company from being an issuer. The PWG
    recommendations also are to consider whether--for Congress to
    consider whether the custodial wallet providers or other
    service providers related to the stablecoin arrangement could
    be commercial or should be limited to financial, but this is an
    issue that Congress--the separation of banking and commerce has
    been a long--has been an issue that Congress has grappled with
    over many times in different periods, and this is another area
    where it should issue--it is an area for them to consider
    carefully.
        Chairman Brown. Thank you, Madam Under Secretary.
        Senator Toomey.
        Senator Toomey. Thank you, Mr. Chairman.
        Ms. Liang, so, as I said, I appreciate the work that the
    PWG has done. I disagree with some of the conclusions, but it
    was a constructive addition to this ongoing public discussion.
        One of my criticisms is I do not think that the PWG report
    took sufficient account of the existing state-based regulatory
    framework, and as you just pointed out, stablecoin issuers do
    operate as State-based money transmitters, also trust
    companies. And it occurs to me that a stablecoin issued by a
    trust company, if it is backed solely by cash and cash
    equivalents, could very well be safer than many existing
    financial institutions, including many banks.
        It seems that it would be sensible for a trust company that
    issued such a safe, fully backed stablecoin ought to be subject
    to a different regulatory regime than a traditional bank
    because its business model is so different.
        So my question for you, if Congress were to authorize a
    well-defined charter that was specific to stablecoins for, let
    us say, this type of institution, a trust company that issues a
    stablecoin fully backed, do you think that that could be
    designed in a manner that is consistent with safety and
    soundness?
        Ms. Liang. Thank you for the question.
        So I believe that the regulation for stablecoin should be
    flexible, should reflect the risks of the stablecoin activity,
    and stablecoin issuers that issue only stablecoins do not
    extend credit, should not need to be subject to the sort of
    full set of banking regulations that relate to credit
    provision. So flexibility, I agree, is very important.
        The trust charters--and this may vary across States--are
    designed more for--have been developed for fiduciary
    responsibilities. They may not be as currently structured, have
    the authority to reach in and see how the whole stablecoin
    arrangement that is needed to be a payment service is
    conducted, and so I think, as we have talked to State
    supervisors--and we have learned a lot from the experience they
    are building--they have less insight into the overall
    arrangement than at times they might like.
        Senator Toomey. Yeah. And I guess that goes to the point
    that I was trying to make. I am not suggesting that the
    existing State-based regime is perfect and we are finished and
    there is no work to be done here, but I am suggesting that it
    might serve as a part of a regulatory framework, an option that
    would be available, with the overlay that would address some of
    the concerns that you just raised.
        Now, I appreciate you just, once again, reiterated a point
    that I think you have made before that the full set of bank
    regulations really should not need to apply if the issuer is
    not engaged in the full range of traditional banking. I think
    that is a really important distinction.
        And I think one of the things that we ought to consider is
    creating--some people call it ``narrow bank,'' you know, a
    narrowly defined charter that would be well suited for
    stablecoin issuers. Do you think a narrow bank could be
    consistent with the goals of the PWG report?
        Ms. Liang. On a specific type of charter, I guess I could
    be more comfortable with the issues it is trying to address. So
    I think staying flexible within an IDI framework, which I
    believe is flexible, to better match the activities and risks
    with the regulation, it does not need--the PWG report did not
    necessarily recommend deposit insurance, for example. So that
    would be consistent with a narrow bank, but it did require--it
    would like financial firms to be issuers. And for other parts
    of the stablecoin arrangement, it could be commercial, but that
    would be something for Congress to consider.
        So I think in terms of a narrow bank, that can be defined
    separately. I think it is within the IDI charter with lots of
    flexibility to match the risks of the activities.
        Senator Toomey. So where I think there is common ground
    here is a recognition that we both have that the nature of
    stablecoins and their issuers is very distinct from traditional
    banking, and therefore, a different regulatory approach makes
    sense.
        Where we might have--I am not sure, but we might have
    somewhat different views is how clearly Congress should
    prescribe what that looks like. My own preference is not--I
    acknowledge there is a lot of regulatory discretion. I do not
    think that is the optimal way to proceed. I think it is better
    for Congress to provide some guide points.
        I want to make one last point, and I see I am out of time.
    This is not a criticism of you. This is not an observation
    about Ms. Liang at all, but it is a general observation that
    Congress and regulators should remember our mission is not to
    make it impossible for a financial institution to fail. It is
    not to make it impossible for an investor to lose money. It is,
    in my view, to ensure that investors are well informed about
    the risks that they choose to take and to make sure that if
    there is a financial institution that fails, it does not have
    catastrophic, systemic consequences. I hope we will keep that
    in mind as we go down this road.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Toomey.
        Senator Menendez from New Jersey is recognized from his
    office, I believe.
        [No response.]
        Chairman Brown. Senator Warner is recognized from Virginia
    from his office.
        [No response.]
        Senator Warner. Thank you, Mr. Chairman. You got me a
    little bit quicker there.
        Chairman Brown. Sorry. Let me just allow a second or two.
        Senator Warner. I appreciate again you having this hearing,
    Mr. Chairman. This is an issue I think we all need to learn a
    little more about.
        I have got a twofold question. One is I want to reiterate.
    I think maybe you and the Ranking Member already raised this.
    Can we check on a real-time basis that there is sufficient
    backing on these stablecoins? And let us assume for a moment
    there is, but I would like to get a reiteration of that from
    the Under Secretary.
        But the bigger question I had is, assuming there is this
    backing and you have got, in a sense, potentially billions and
    billions of assets having that one-to-one backing, how is there
    a viable business model here for these stablecoins unless they
    are charging exorbitant amount of fees and other add-on costs?
        I know the idea behind oftentimes stablecoins is that there
    is less friction. You can transfer these resources from dollars
    here to currencies that may be unstable in second- and third-
    world Nations, but still, if you have got a one-to-one backing
    and that kind of capital basically set aside, other than large
    transaction fees, how do these entities make any money? Under
    Secretary Liang?
        Ms. Liang. Sure. Thank you for your question.
        So, in terms of real-time backing, some of the----
        Senator Warner. I have got no volume, Mr. Chairman, here. I
    do not hear the----
        Ms. Liang. Yeah. I seemed to have lost the camera.
        Senator Warner. All right.
        Ms. Liang. I am not sure if you can hear me. Some
    stablecoins do provide audits of their assets and post them.
    They are not--there are no regulations, and there is no
    regulator to confirm those statements.
        In terms of the stablecoin business model, it strikes me as
    there is probably several, and they probably vary. One is the
    backing for the stablecoin of a dollar. Those assets could be
    invested in, say, longer-term securities, even safe securities,
    and there would be some spread. But I think as you point out,
    certainly, there are fees that are charged to help to provide
    some revenue.
        It is an area that is changing very rapidly. New products
    are being introduced every day. So I think the business model
    will evolve over time.
        Senator Warner. Madam Under Secretary, one thing I had
    reported to me from an expert in this field is if we look at
    these tokens on a bigger basis, not just in terms of
    stablecoins, we have got about 7,000 publicly traded stocks in
    this country with the attendant regulations that are in place.
    If you look at the crypto exchanges, there are about 17,000
    tokens that are being traded on these crypto exchanges with,
    again, varying levels of backing, many of them not even
    claiming to be stablecoins.
        An area that I know the Ranking Member and I have
    discussed--and we have got some legislation to make sure that
    people are not unfairly penalized, but in the world if DeFi,
    decentralized finance, there have been estimates. And I do not
    think there is an accurate number yet, but there could be
    upwards, literally, of a million different coins or different
    tokens out in that field, all of them potentially moving to
    some of these cryptocurrency exchanges. Should we be concerned
    about this and the lack of transparency and the volume simply
    of these items that are being traded?
        Ms. Liang. Yeah. So I think what you are referring to is
    the rapid increase in the digital assets market and new
    products and new services that are being provided, and there
    are concerns about lack of transparency, fraud, potential for
    manipulation, misleading advertising. Those are areas that are
    of great concern to regulators and believe that there needs to
    be important investor and consumer protections put in place for
    that, and that is an area that SEC and the CFTC are working
    actively in that space.
        Stablecoins, just again to emphasize, are a subset, a small
    subset of that smaller space of digital assets, and they
    purport to have stable value. Their prices are not nearly as
    volatile as the prices of digital assets more broadly, but it
    is because of that promise of stable value, they become the
    possibility used for payments on a wide basis in the non-crypto
    world. So, in that sense, it raises a whole different set of
    risks, these potential risks that the PWG report highlighted:
    the run risk, the payment system risk, and concentration of
    economic power.
        Senator Warner. Well, Mr. Chairman, I appreciate you
    holding the hearing, and I think there is great potential in
    digital assets, but, boy, I think we have got a lot of
    education to go on.
        Thank you.
        Chairman Brown. Senator Rounds from South Dakota is
    recognized.
        Senator Rounds. Thank you, Mr. Chairman, and I think this
    is an excellent time to have this particular hearing as well.
        Under Secretary Liang, I am just curious. In South Dakota,
    we have a number of different licensed cryptocustodians. They
    have been licensed through the State of South Dakota and, in
    some cases, federally.
        Just to give you an example, we have Anchorage. This
    company received their charter from South Dakota Division of
    Banking in July of 2019. Anchorage Trust Company received its
    OCC charter in early 2021, becoming the first federally charter
    digital asset bank in history, and although a bank, it does not
    offer deposit or lending services.
        BitGo. In September of 2018, BitGo was approved by the
    South Dakota Division of Banking to act as a qualified
    custodian for digital assets and created the BitGo trust
    company, Kingdom Trust. Kingdom Trust serves as an independent
    qualified custodian for the assets of clients of registered
    investment advisors, broker-dealers, and investment sponsors,
    as well as their individual retirement accounts, nonqualified
    plans, and qualified defined contribution 401(k) plans. Kingdom
    Trust platform was the first to allow self-directed retirement
    accounts holding digital currency investments directly.
        Now, in each of these cases, these are custodians. They do
    not issue a stablecoin, but they act as a custodian for digital
    assets. Stablecoins, as you indicated, were just a small part
    of what could be used out there in terms of different cryptos--
    or cryptocurrencies.
        I am just curious. I think that stablecoins definitely have
    a future, and I am concerned that if we do not put in
    appropriate but measured regulatory--a system in place here
    that we may very well fall behind other Nations that do. If we
    want to continue to be the reserve currency of choice, I think
    we have to allow options for very efficient ways in which to
    make payments.
        I think stablecoins can fit into that. If they are a viable
    payment mechanism, then it means that a regulatory environment
    that promotes that. And just the fact that all of these have
    occurred in just the last few years means that there is
    probably a lot more innovation to come in the future, and we
    most certainly do not want that innovation to be unnecessarily
    stymied by a one-size-fits-all regulatory environment here in
    the United States.
        Do you believe--after your review, do you believe that
    stablecoins have this capability of assisting and competing on
    an international basis if we put in a limited regulatory
    environment here in the United States?
        Ms. Liang. Thank you, Senator Rounds.
        So the PWG recommendations were designed to promote
    innovation that is responsible and protects users and the
    economy at the same time while addressing some of the risks
    that it can pose as stablecoins is used for payments, so agree
    with the principles and believe that a stable stablecoin would
    go far in preserving the global reserve currency. The dollar is
    the global reserve currency. I think there is no conflict
    there. I think it is actually important.
        It is part of, in my view, the future of the payment
    system. It serves a purpose. It may not be the only payment
    mechanism or the only payment option, but it could be an
    important part.
        Senator Rounds. Thank you.
        Can the development of both a central bank digital currency
    and private stablecoins coexist?
        Ms. Liang. I see no reason why they could not coexist.
        Senator Rounds. In looking at the report in its entirety,
    where do you believe that the regulatory framework should exist
    after reviewing it? Where should it exist within the Federal
    Government?
        Ms. Liang. So the PWG report came down on the view that a
    consistent, less fragmented regulatory framework is preferable
    to one that is inconsistent, that less fragmentation will spur
    innovation more than a very fragment system.
        When we reached out when developing the report, we were
    hearing from firms, developers that they would like more
    regulatory clarity. Currently, States do issue charters. They
    are learning a lot from this experience, but they do differ
    across States. State money transmitter licenses are across 49
    different States. They vary quite a bit in terms of what they
    cover. They usually address consumer protection, but they are
    not designed for modern payment systems.
        The PWG came out on the side of a less fragmented, more
    consistent, more comprehensive framework.
        Senator Rounds. My time has expired. Thank you, Mr.
    Chairman.
        Chairman Brown. Thank you, Senator Rounds.
        Senator Menendez, I believe, is now with us from New Jersey
    from his office.
        Senator Menendez. Thank you, Mr. Chairman.
        The defining feature of stablecoins versus other types of
    cryptocurrencies is that they claim to be backed by reference
    assets such as the dollar and other currency. However, without
    proper transparency, this only provides the illusion of
    stability for stablecoin investors.
        Madam Under Secretary, are market participants able to
    verify the portfolio of holdings backing what stablecoins they
    invest in?
        Ms. Liang. Stablecoin issuers, perhaps under pressure from
    investors and regulators, are providing self-audited
    statements. Some of the major ones are providing self-audited
    statements on their holdings, but regulators are not in place
    to confirm those or to set the standards for them.
        Senator Menendez. Well, I look at Tether, which is the
    world's largest stablecoin, which was created with a promise of
    a one-to-one backing with the dollar, and instead, a reporting
    from Bloomberg found that many Tether stablecoins are backed by
    risky loans to Chinese real estate companies.
        So it seems to me that transparency is a cornerstone of our
    economy. Consumers and investors make the best decisions when
    they have the necessary information, and that is why I have
    always advocated for robust disclosure rules in different areas
    of the financial system.
        How does the Treasury intend to--do you propose to increase
    transparency to ensure market participants properly disclose
    the value of the assets backing stablecoins so that investors
    can have a true understanding of the risks associated with such
    assets?
        Ms. Liang. Yes. The PWG report would--is in favor of
    transparency of the assets. I think that is an important
    element in reducing run risk.
        I would highlight--I would mention, however, that
    transparency and disclosure are not sufficient to address run
    risk, that there still needs to be a certain about the backing
    and the ability to actually deliver to an investor if they
    redeem their stablecoin. So it probably requires more than
    disclosure and transparency.
        Senator Menendez. OK. I am for that.
        As stablecoins become more broadly used both as a payment
    method and as an investment vehicle, Congress and the financial
    regulators need to address their more illicit uses, including
    money laundering, fraud, and sanctions evasion.
        As the working group noted in its report, criminals often
    use the most common and liquid forms of value. So stablecoins
    could be a particularly attractive vehicle for money laundering
    and terrorist financing. And that report also noted that
    effective international implementations of AML standards is
    critical.
        So the Financial Action Task Force published updated
    guidance on virtual currencies in October. What is your
    understanding of the level of effective implementation by our
    global partners? Who is doing well, and who is not?
        Ms. Liang. Yeah. The illicit finance issues are of serious
    concern to Treasury. Treasury has been leading the work in the
    Financial Action Task Force, as you mentioned. They issued a
    report. They are continuing to work on this.
        As I understand, implementation of standards is not even
    across jurisdictions. There are concerns about lack of
    implementation, consistency in some, and they are working on
    that, those issues specifically.
        I think, certainly, my colleagues in FinCEN would be happy
    to follow up with you if you had additional questions.
        Senator Menendez. Well, I would like to.
        What are Treasury's priorities over the next 6 months with
    reference to increase that implementation?
        Ms. Liang. So, as I mentioned, they are leading the
    Financial Action Task Force and focus specifically on
    implementation, especially exchanges that are operating in some
    foreign jurisdictions.
        I would mention the broader administration effort on
    digital assets is ongoing, and I understand there will be some
    more details announced in the next few weeks. So that can also
    provide some additional information, and again, we would be
    happy to follow up with you on that.
        Senator Menendez. Well, let me close by saying, you know,
    as Chairman of the Foreign Relations Committee, I am
    particularly concerned that countries like Venezuela, Russia,
    Iran will continue to use digital currencies to evade
    sanctions, which would weaken one of our most effective policy
    tools in terms of foreign policy. The anonymity touted as a
    major benefit of stablecoins and other cryptocurrencies is
    inherently very useful for facilitating all kinds of illegal
    activity, and it is imperative that Treasury prioritize
    achieving concrete progress on this issue in the near term as
    the technology becomes a key part of the financial system. And
    we look forward to working with you on that.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Menendez.
        Senator Hagerty of Tennessee is recognized.
        Senator Hagerty. Chairman Brown, thank you, and Ranking
    Member Toomey. I appreciate you holding this hearing.
        Before I get to questions, I would just like to reflect the
    fact that I also serve on the Foreign Relations Committee with
    Senator Menendez, and I share the concerns that he raised in
    terms of illicit activity, and I very much appreciate the
    ongoing work and your keeping us posted as to how you address
    that.
        At the same time that many of us are concerned about
    illicit activity, though, we see great promise in this
    industry, and some of the comments that you mentioned have
    raised some concerns with me, your interchange with Senator
    Rounds, for example, talking about how the President's Working
    Group report has interpreted integrating States' rights and
    States' regulatory authorities in the grand scheme of things.
        I have approved of the innovation that occurs at a State
    level, and I would be very interested in your view on how you
    would intend to incorporate State perspectives, or is this
    going to be a heavy-handed, one-size-fits-all approach?
        Ms. Liang. So I think the recommendations of the PWG report
    are building on the State frameworks that currently exist. The
    first recommendation that stablecoin issuers be an IDI, an
    insured depository institution, given the flexibility within
    that framework is still that the IDI can be a State or Federal
    charter.
        Senator Hagerty. Mm-hmm.
        Ms. Liang. Second, it is building on the State money
    transmitter licenses. It was not a recommendation to replace. I
    do think some of the State money transmitter licenses
    requirements probably need to be updated for digital assets,
    for example, and they were not designed for the kind of new
    emerging modern payment system. But it would--the
    recommendation is that you be able to require some higher risk
    management standards but not to replace the existing framework.
        Senator Hagerty. I appreciate your desire not to replace
    it.
        I hail from Tennessee. We have a wonderful State system
    there and I think one that is agile and capable of
    incorporating recommendations but, at the same time, solving in
    an agile way for new innovation. So I encourage that you
    continue to incorporate the State's perspective.
        I would also like to touch on another notion that you
    discussed with Senator Menendez regarding the risk of runs on a
    given stablecoin, and here, just on a theoretical level, would
    a fully reserve stablecoin pose a substantial risk of
    experiencing a run, or would that risk be higher or lower than,
    say, a fractional reserve bank, the risk of a run on a
    fractional reserve bank?
        Ms. Liang. The fractional reserve bank is backed by either
    deposit insurance or lender of last resort, discount window
    facilities that can--with regulation of the assets and the
    fractional reserve can prevent runs.
        Fully reserved, for example, a money market fund fully
    reserves, 100 percent, high-quality assets have limited
    reserve--run, but for payment--so the difference between
    stablecoin and, say, a money market fund is that a money market
    fund, in my view, is purchased for the purpose of earning
    yield. You purchase a stablecoin to be able to use it as a
    payment mechanism. So they are slightly different. So I think
    the redemption features will distinguish a stablecoin from,
    say, a money market fund, a Government money market fund.
        Senator Hagerty. I think as we look at this, we should be
    just particularly careful to accommodate the great potential
    that this shows, to recognize that we want to keep America a
    competitive market, that that is the interest of our economy
    security.
        We also need to take our national security interest into
    account, but I hope that we do so in a way that it continues to
    make America a desired jurisdiction to do this, rather than
    pushing this activity, which is very jurisdictionally movable.
    We would rather do it here than push it to another market where
    we would have much less control and visibility on it.
        Ms. Liang. So I would agree with your comment. Stablecoins
    that are stable, stablecoins that are tied to the U.S. dollar
    that are stable, I think, would be an important component of
    preserving a global reserve currency.
        Senator Hagerty. Yeah. I think we should work together to
    make certain that our vital concerns, our vital national
    security concerns are addressed as we try to make this market
    the leader, and I think we have every potential to do so. We
    have great innovators here, but I have had some very disturbing
    conversations with those in the industry about trying to decide
    which jurisdiction is going to be best. And I think the work
    that you are undertaking to provide clarity, again,
    incorporating States' perspectives, we can do that. We can take
    the lead, but I also would underscore the times of the essence
    here because these markets are highly competitive.
        Ms. Liang. Yes.
        Senator Hagerty. And a tremendous amount of capital is
    moving around the globe right now trying to search for a reason
    there.
        I would like to turn my ability for just a minute, my last
    question, regarding the FSOC's ability to address designating
    financial market utilities as systemically important under
    Title VIII of the Dodd-Frank Act. If you were to take this
    market and address the utilities here as systematically
    important--the stablecoin market is much smaller than many of
    the systemically important financial market utilities--how
    would you go about making this determination, and would this be
    the first time that such a designation has been made under
    Title VIII?
        Ms. Liang. Yes. The short answer to your question about
    Title VIII for this would be yes under the payment clearing
    settlement, but FSOC----
        Senator Hagerty. It would be the first?
        Ms. Liang. Yeah. The council has a responsibility to look
    for and identify risks to financial stability. It has been
    focused on digital assets more broadly and looking, for
    example, especially at whether the extent to which leverage may
    be raising the value of the prices of crypto assets.
        On stablecoin, I think it is a little early to prejudge how
    they could use their authorities. They certainly have a
    responsibility to think about how to use their authorities, but
    it is new. And it would require--it would depend on the facts
    and circumstances of the case.
        Senator Hagerty. I am running out of time, but I would just
    encourage you to keep in close contact with us because, again,
    I want to maintain----
        Ms. Liang. Yes.
        Senator Hagerty. ----a competitive market here----
        Ms. Liang. Yes.
        Senator Hagerty. ----rather than put such heavy-handed
    regulatory perspective on this that we are going to shove this
    to another jurisdiction.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator.
        Senator Warren from Massachusetts is recognized.
        Senator Warren. Thank you, Mr. Chairman.
        And before I start, I just want to echo the Chairman in
    stressing the importance of voting on our Federal Reserve
    nominees this afternoon. This is our job, and we should not be
    playing games in order to delay this. So I hope we can get that
    vote done today.
        I want to talk about the cryptocurrencies here. Some
    cryptocurrencies like bitcoin are not backed by anything but
    hype, but stablecoins are different. They claim to be pegged to
    a fixed asset like the dollar. One stablecoin is supposedly
    backed up by one dollar or a dollar equivalent. Even though
    boosters claim that stablecoins represent the future of the
    payment system, they are not really being used to pay for real-
    world goods and services.
        Even so, stablecoins have taken off. Their market cap is
    now 35 times bigger than it was just 2 years ago, and instead
    of being used to pay for goods and services, those billions of
    dollars worth of stablecoins are used to lubricate speculation
    in the shadiest part of the crypto ecosystem where people are
    lending, trading, and leveraging with no laws and no sheriff
    anywhere.
        The President's Working Group on Financial Markets recently
    identified a long list of risks posed by stablecoins: run risk,
    payment system risk, concentrated economic power, illicit
    finance, investor protection. Or to state that in slightly less
    fancy terms, it found that stablecoins run the risk of helping
    cheaters steal people's money; financing terrorism, cyberattack
    ransoms, and the drug trade; causing a run on the financial
    system, like we saw in 2008; and allowing big stablecoin users
    to dominate market and harm consumers.
        Now, Secretary Liang, do you agree that these kinds of
    risks mean that stablecoins are not just an emerging threat to
    our financial system but a threat that could become systemic if
    this market continues to grow rapidly?
        Ms. Liang. So, Senator Warren, thank you for the question.
        So I do think there is some urgency to considering
    stablecoins and applying the appropriate regulations to reduce
    run risk and the potential for them to scale up quickly.
        Senator Warren. Let me remind you what my question is: Do
    they post the threat of becoming a systemic risk?
        Ms. Liang. Of becoming a systemic risk, yes.
        Senator Warren. Yes, they do. I agree that the stablecoin
    market poses significant risk and that Congress and our
    regulators need to contain these risks.
        And that is where you come in. You advise the Financial
    Stability Oversight Council, FSOC, and you sometimes sit in
    these meetings as Secretary Yellen's substitute. FSOC's job,
    according to Treasury's website, is, quote, ``identifying
    emerging threats to financial stability and coordinate
    regulatory actions to address them,'' end quote.
        So, Under Secretary Liang, if you believe that stablecoins
    are a serious emerging threat to our financial system, then
    have you advised FSOC to use the tools that Congress gave it
    specifically to mitigate threats before they get out of hand?
        Ms. Liang. So FSOC, as you say, has the responsibility to
    identify risk to financial stability. It is discussing these
    issues. It does convene the regulators. They have been
    discussing consumer protection and investor protection, illicit
    finance, and taking steps to assess what risks and what
    authorities regulators have.
        The PWG was recommended, which is a subset of the FSOC,
    with most tangible interests to assess whether there are
    existing regulatory gaps, however, in assessing to address the
    risks of stablecoins as a use for payments and identified some
    gaps and made some recommendations.
        Senator Warren. So you are moving at least in that
    direction? Is that what you are telling me? I want to make sure
    I just understand your technology here today.
        Ms. Liang. Yes. The PWG is making recommendations, and the
    complement the existing authorities that regulators have--the
    SEC, the CFTC--and the banking regulators are issuing guidance
    carefully about how banks----
        Senator Warren. Well, I understand about the other
    regulators. I am asking about FSOC----
        Ms. Liang. Mm-hmm.
        Senator Warren. ----because I do not want monitoring to be
    a way to just avoid doing your job.
        In your testimony before the House Financial Services last
    week, you suggested that FSOC should not and would not act
    ahead of Congress. That is something the crypto industry might
    find comforting, but it is not consistent with FSOC's mission.
    Did you misstate something last week?
        Ms. Liang. So I--what I intend to say--intended to say--I
    did see that--is FSOC has the responsibility to look at the
    tools it has----
        Senator Warren. Well, not just to look----
        Ms. Liang. ----and whether it----
        Senator Warren. ----but to use.
        Ms. Liang. ----they can apply, and the situation is
    developing very quickly. And so how different tools would
    apply, it is a big difficult to prejudge how they would be
    used, but I would----
        Senator Warren. OK. But you are willing to use them ahead
    of Congress?
        Ms. Liang. If that is the case and it is assessed that they
    are a systemic risk that needs to be addressed, and I----
        Senator Warren. Well, not that they are a systemic risk.
    Remember what it says on the website: before that risk has
    reached fruition.
        You know, I worry that you are approaching the cryptomarket
    with blinders on. You talk a lot about the benefits of the
    stablecoins, benefits that have been promised for years and
    that have still not materialized, and all the while, you are
    not talking about the risks that are flashing bright red in our
    faces here.
        Congress needs to put guardrails around crypto, and I am
    writing a bill to do just that. But there is no reason to
    delay. Pointing a finger at Congress does not give you or FSOC
    the right to ignore your current statutory responsibilities.
        Thank you. I apologize for running over, Mr. Chairman.
        Chairman Brown. Senator Lummis from Wyoming is recognized
    from her office.
        Senator Lummis. Well, thank you, Mr. Chairman, and, Under
    Secretary Liang, thank you for appearing here today.
        I want to follow on the line of questioning that Senator
    Hagerty had begun a few minutes go and ask about the
    recommendation in the President's Working Group report on
    stablecoin issuers that it should only be limited to insured
    depository institutions.
        With respect to the insurance requirement, is it the case
    that the FDIC and NCUA have found that stablecoins and their
    assets are insurable, and have these agencies committed to
    provide deposit insurance to newly chartered, de novo
    institutions that issue a stablecoin?
        Ms. Liang. Thank you for that question, Senator Lummis.
        The proposal for stablecoin issuers to be insured
    depository institutions, given the flexibility of that
    supervisory and regulatory regime, is not--does not necessarily
    mean that stablecoin need deposit insurance. I think that would
    depend on the circumstances of the backing and the
    functionality of the stablecoin that is being provided. So the
    proposal is not, and the PWG did not recommend necessarily that
    stablecoins be backed by deposit insurance.
        Senator Lummis. And what other types of backings would you
    believe adequately protects the consumer?
        Ms. Liang. So I think the consumers can be protected with
    reserve assets that are truly high quality, that will provide
    some--reduce the risk of runs by investors.
        There is also the protections provided by oversight of
    the--all the entities that go into providing supporting
    stablecoin as a payment. So the custodial wallets, the custody,
    the other ways of trans--of liquidation of the redemption of
    the stablecoin that can be provided. So I think all those go
    into protecting consumers when they want to use stablecoin for
    payments.
        Senator Lummis. So since there are alternative ways of
    bringing stablecoins inside the banking perimeter, like 100
    percent reserve bank with tailored holding company supervision,
    is that something you discussed and are willing to consider?
        Ms. Liang. Yes. I think bringing stablecoins into an IDI
    framework that is adjusted for the risks of the stablecoin
    issuer, which would include solid backing of the stablecoin,
    one for one, would certainly be an option.
        Senator Lummis. Well, I am so pleased to hear that that is
    your approach, because without it, I think the type of
    competition that Senator Hagerty wants to protect would be at
    risk if someone already has deposit insurance and can issue a
    stablecoin like JPMorgan's JPM coin. That would seem to limit
    competition in that marketplace to only the very, very largest
    banks in our country, and there may be other options that other
    institutions could explore. And it sounds like you are willing
    to discuss that with them.
        So I am going to conclude with a different question: Does
    Treasury have a timeline for issuance of the guidance on the
    definition of broker for digital assets under the
    infrastructure bill? I know we were promised some public
    guidance on this a few months ago, and we have yet to see it.
        Ms. Liang. I know Treasury is working very actively on
    that. The principle of the tax provisions is, you know, for
    those who owe taxes should pay their taxes. It is not designed
    to crimp the activities of crypto assets.
        Senator Lummis. Well, I am also very pleased to hear that
    because some of the provisions in the definition, as you know,
    included people who would not know the ultimate customer of a
    digital asset, the ultimate customer being the one who owes the
    taxes as opposed to the inventor of the software or the
    hardware.
        So thanks very much. We look forward to that guidance
    coming out as soon as possible and appreciate, again, your
    testimony today.
        Mr. Chairman, I yield back.
        Chairman Brown. Thank you, Senator Lummis.
        Senator Van Hollen of Maryland is recognized.
        Senator Van Hollen. Thank you, Mr. Chairman and Ranking
    Member Toomey.
        I know there is some discussion about moving forward on the
    vote on the Fed nominations today. I hope we will move forward
    on all five this afternoon.
        Ms. Liang, I have been monitoring some of the testimony.
    Welcome. And we do want to encourage innovation. I suppose
    that, but we also want to make sure that we protect consumers.
    You would agree?
        Ms. Liang. Absolutely.
        Senator Van Hollen. And I do want to focus on some of the
    things that could happen when things go wrong, where there are
    protections under our existing financial arrangements that do
    not apply to stablecoins, even though stablecoins are intended
    to be tied to a stable base.
        As you know, when it comes to the deposits in banks, we
    have the Federal Deposit Insurance Act that makes sure that
    consumers are protected up to some amount of their deposits,
    right? Is there any protection if the stablecoin issuer was to
    go belly up for consumers?
        Ms. Liang. There currently--the protection would be
    provided by the quality of the assets that are held in reserve
    against the stablecoin, but there is not deposit insurance. But
    it would be----
        Senator Van Hollen. But are they--let me ask you this,
    then.
        Ms. Liang. But they are not regulated.
        Senator Van Hollen. Are there any standards with respect
    to----
        Ms. Liang. There are no standards.
        Senator Van Hollen. ----what the reserves have to be?
        Ms. Liang. No. There are no standards at this point.
        Senator Van Hollen. Right. So, currently, if the issuer
    were to go belly up, in other words, if they were to go out of
    business and they did not have reserves to cover the deposits,
    the depositors--the holders of stablecoin would just be out of
    luck, right?
        Ms. Liang. That is correct.
        Senator Van Hollen. OK. There are also protections that
    apply to consumers when it comes to transactions and things
    like credit cards or debit cards, right?
        Ms. Liang. Yes.
        Senator Van Hollen. And for example, if there are payment
    errors, fraud, or unauthorized transactions, then consumers
    have existing protections when they are dealing with credit
    cards or debit cards, right?
        Ms. Liang. Correct.
        Senator Van Hollen. And when it comes to stablecoins, if
    there is some error, if there is some kind of fraud or
    unauthorized transaction or a hacking, are there any
    protections for the consumers of stablecoins?
        Ms. Liang. So stablecoins are licensed under State money
    transmitter regimes, and there are consumer protection laws in
    those. They vary by State. They may apply to stablecoins. In
    some States, they may not.
        Senator Van Hollen. So right now, it is hit or miss,
    depending on whether you are in a State that provides some
    protection and the extent of that protection. Is that right?
        Ms. Liang. As I understand it, yes.
        Senator Van Hollen. So just to pick up on the question from
    Senator Warren, in terms of the work group, the Presidential
    work group that was put together, clearly, you identified some
    of the risks that we are talking about right now. Is that
    correct?
        Ms. Liang. Correct.
        Senator Van Hollen. And do you believe that the executive
    branch currently has the authority to move forward to protect
    consumers, for example, in the two areas that I mentioned,
    right? With respect to some kind of stablecoin equivalent of
    depository insurance or national rules that protect consumers
    from errors or fraud, do you believe that the administration,
    the executive branch, has the authority to regulate in that
    area, or is that an area that would require legislation?
        Ms. Liang. I believe that is an area that would require
    legislation, that the risk of runs and the risk of payment
    system disruptions, including protections to consumers, is a
    gap in the current regulatory system.
        Senator Van Hollen. And in response to Senator Warren, you
    indicated that there may be some areas where FSOC could move.
    If not these areas, can you describe some of the areas where
    you think you may have the authority to move at the executive
    branch level?
        Ms. Liang. Yeah. I do not--I think each--you know, each
    agency will take actions consistent with their mandates, but it
    is not sufficient for the gap, for the risks of runs and
    payment system.
        FSOC has some tools, but it is not a substitute. It would
    not provide a consistent, comprehensive framework. It could
    address particular risks as they arose, depending on the facts
    that circumstances, but it is not a comprehensive, consistent
    framework that legislation could provide.
        Senator Van Hollen. And I hope you will work with those of
    us on this Committee who are interested in providing that kind
    of consumer protection regime and standards in this area.
        Ms. Liang. Absolutely. We would be very happy to work on
    it.
        Senator Van Hollen. Thank you.
        Thank you, Mr. Chairman.
        Chairman Brown. Thanks, Senator Van Hollen.
        Senator Daines from Montana is recognized.
        Senator Daines. Chairman Brown, thank you.
        As I said in our previous hearing on stablecoins, I think
    it was about 2 months ago, I do believe the stablecoin policy
    is an area where there should be, there can be, hopefully there
    will be some broad bipartisan agreement and compromise. I do
    believe that we should pursue a light-touch approach to
    regulation.
        But I also believe a bipartisan legislative framework on
    stablecoins is possible and I do believe necessary. Bipartisan
    legislation will also help provide users as well as market
    participants with the certainty they need to let innovation
    flourish without fear that regulators will overreach using
    authority in existing statutes that in no way contemplated the
    emergency of stablecoins.
        I would urge my colleagues to avoid any partisan solution
    and instead seek consensus on truly something that is
    bipartisan. There is a moment here that we need to seize.
        It would provide certainty needed for private industry to
    grow as well as to prosper. I think this will help provide the
    best pathway for this technology to grow in a way that benefits
    the folks back home in Montana, all Americans, and the global
    financial system.
        Furthering the use of stablecoins would help to increase
    the speed of payments and lower cost in the financial system,
    and I believe these are results we should all agree are worth
    pursuing.
        I turn to my questions. Under Secretary Liang, absent
    legislation from Congress, can you provide us a sense as to
    which Federal agencies would be most likely to issue
    regulations relating to stablecoins and on which statutes they
    would derive their authority?
        Ms. Liang. So, Senator Daines, thank you for the question.
        I would need to defer to the individual agencies as to
    what--how they would interpret their authorities and their
    strategies.
        I would say, currently, the SEC and CFTC are approaching
    crypto assets more broadly to prevent fraud, to prevent
    manipulation, to protect investors and consumers.
        The banking agencies are taking actions to--are taking--
    issuing guidance to advise banks about their activities in
    crypto, but currently, I do not think there is the authority
    for any agency to address the risks of stablecoins, to prevent
    runs, and to prevent disruptions in the payment system should
    stablecoins be used widely as payments.
        Senator Daines. So I think hearing you answer that
    question, it leads me to follow up in terms of your thoughts
    around the need for adopting a clear regulatory framework that
    would be established through bipartisan legislation. Might that
    be a catalyst for a more widespread adoption of digital assets?
        Ms. Liang. I think a consistent comprehensive framework
    could be a catalyst for innovation as well. I think developers
    need clarity on how they can operate, how they can develop
    their business that will be viewed as permissible in the
    marketplace, to serve customers, to protect customers as well
    as to provide a product that they think can deliver faster
    payment--faster payments, cheaper payments. So I do think more
    regulatory clarity can actually promote innovation.
        Senator Daines. And I think why we need bipartisanship here
    and, in my opinion, a lighter touch is we have an opportunity
    where we could actually put the right kind of framework in
    place that could accelerate innovation.
        Ms. Liang. Mm-hmm.
        Senator Daines. The wrong framework and, in my opinion, too
    much of a heavy hand could certainly stifle innovation. So this
    is a moment we could actually accelerate it, I believe, with
    the right regulatory framework.
        Ms. Liang. Yes, I agree. And we are seeing stablecoin
    issuers pursuing bank-like charters and talking to the banking
    regulators. So they do believe that this is an area--this is a
    path, possible path forward.
        Senator Daines. And anytime we look at a situation like
    this, an issue like this, I always come back to the question of
    global competitiveness, what this means certainly around the
    world. If the U.S. does not clearly define this landscape,
    would it be unreasonable to expect a large portion of this
    activity to perhaps migrate overseas to countries with more
    favorable and clear regulatory structures?
        Ms. Liang. I think businesses would tend to migrate where
    regulations are more clear. I would absolutely agree with that.
        There is an incentive to want to tie to the value of the
    dollar because the dollar is the global reserve currency, and
    so I think there is a pull from the strong dollar and all that
    stands behind a strong U.S. dollar. Technology can help that,
    but the dollar itself is--you know, the value of the global
    status of the dollar is supported by the rule of law and the
    governance of the country and the economic potential. But the
    technology will want to--you know, is incentivized to move to
    be backed by the dollar because of that, and it will help it, I
    think, if we can provide a good framework.
        Senator Daines. Thank you.
        Chairman Brown. Thank you, Senator Daines.
        Senator Cortez Masto from Nevada is recognized from her
    office.
        Senator Cortez Masto. Thank you, Mr. Chair.
        Under Secretary, welcome. Thank you so much for being here.
        Let me just say I agree with Senator Daines that this issue
    really is bipartisan always when it comes to the needs of the
    regulatory system, and in that spirit, that is why I look
    forward to voting for the five Federal Reserve nominees this
    afternoon. We need a full Federal Reserve Board to bring down
    prices and promote full employment and wage gains, and we
    really should be playing politics with that.
        Let me say, Mr. Chairman, thank you for this hearing. It is
    such an important issue. I also appreciate the Ranking Member
    putting--laying out these principles to talk about developing a
    legislative framework for stablecoins. It is such an important
    area, and I think it is an area we need to focus on.
        So, Under Secretary, let me start with a couple of
    questions, and I am going to follow up on Senator Daines'
    questions to you about which agencies are responsible for the
    oversight right now of stablecoins. Are there any Federal
    agencies that are responsible right now to ensure that
    stablecoin issuers are adequately backed?
        Ms. Liang. Currently, stablecoin issuers are backed by
    either State money--are regulated by State money transmitter
    licenses or State charters.
        Senator Cortez Masto. So right now, there is no Federal
    agency looking at whether they are adequately backed. It is
    State agencies; that is, if the States have some sort of regime
    for that. Is that correct?
        Ms. Liang. That is correct.
        Senator Cortez Masto. OK.
        Ms. Liang. That is correct.
        Senator Cortez Masto. Yeah. And it goes back to what
    Senator Van Hollen had said. Some States have it; some do not.
    So there is some patchwork there.
        Let me ask you this. With respect to stablecoin and
    cryptocurrency, do they always have to register as a money
    services business under FinCEN's Federal regime?
        Ms. Liang. Yes.
        Senator Cortez Masto. Yeah. And thank you, because, you
    know, the last Congress, I worked on the FinCEN Improvement
    Act. I led that bill, and it is important that we gave FinCEN
    the authority over cryptocurrencies and other technical
    reliance on financial payments for this very reason.
        Do you feel that FinCEN has a robust framework to prevent
    and sanction illicit finance when it comes to stablecoins or
    any cryptocurrency?
        Ms. Liang. Yes. Yes, FinCEN--so registering as a money
    service business under the State transmitter license triggers a
    number of FinCEN regulations: AML, BSA, AML/CFT regulations.
    They have been working on this for many years. Some of the
    initial guidance on what was called virtual assets came out in
    2014. They lead some of the international work. This is an area
    of strong focus. They understand and want to enforce stronger--
    have a stronger implementation and enforcement.
        As I understand it, some of the issues are related to
    activities abroad, exchanges abroad, and with the Financial
    Action Task Force, they are working globally to try to improve
    implementation.
        This is an area also for the administration more broadly,
    which they are working on and will be announcing more work on
    in the coming weeks.
        Senator Cortez Masto. Great. Thank you for that.
        Let me go back to the report that the working group put
    out. In some of the prudential concerns, one of the areas that
    you talked about is to address additional concerns about
    systemic risk and concentration of economic power, and then in
    there, it states supervisors should have authority to implement
    standards to promote interoperability among stablecoins. Can
    you discuss the interoperability piece of it and elaborate a
    little bit more on that?
        Ms. Liang. Yeah. So one of the three prudential risks is
    this possibility of increased concentration of economic power.
    This has to do with the network externalities of a payment
    system, where everyone--there are greater benefits if everyone
    is part of the same payment system. So, if you have large
    firms, the ability to scale up a payment system could
    potentially increase market power.
        One way to diminish or to offset some of that unwanted
    increase in market power would be to promote interoperability
    among stablecoin issues, and that just allows for consumers to
    exchange one stablecoin for another, so to speak, and allow
    them to interact with each other so you do not create a number
    of different sort of closed-loop systems.
        Senator Cortez Masto. And I know my time is up, but I would
    imagine that there is going to be issues with respect to the
    standardization of that interoperability that we would have to
    address.
        Ms. Liang. Absolutely. Absolutely. It is a complicated
    issue of which more discussion would definitely need to be
    taking place.
        Senator Cortez Masto. Thank you. Thank you very much.
        Chairman Brown. Thank you, Senator Cortez Masto.
        Senator Ossoff is recognized from his office from Georgia.
        [No response.]
        Chairman Brown. Senator Sinema from Arizona is recognized
    from her office.
        Senator Sinema. Thank you, Mr. Chairman, and thank you to
    our witnesses for being here today.
        As you know, Mr. Chairman, I cochaired the Senate's
    Financial Innovation Caucus alongside my friend, Senator Lummis
    of Wyoming. So I am very glad that we are holding this hearing
    today.
        As we discuss new financial technologies, I want to ensure
    that we balance commonsense protections for everyday Arizonans
    while creating an environment where innovation can thrive.
        Under Secretary Liang, it is great to speak with you today
    and to discuss this important topic. The President's Working
    Group report on stablecoins calls for Congress to pass a
    solution to avoid runs on stablecoins and to ensure that users
    have commonsense protections to safeguard stablecoins' stated
    value. These objectives align with some of the concerns I
    raised in our last stablecoin hearing.
        There is general agreement that this is a noble goal, but
    it is important to be thoughtful about the solution that we
    propose. I am interested in ensuring there are adequate
    consumer protections to give Arizona consumers confidence in
    the value of stablecoin, but I also want to make sure that
    regulatory requirements are not overly onerous. We do not want
    to discourage innovation or limit consumer choice.
        Can you elaborate on how the report balances these
    competing priorities?
        Ms. Liang. So thank you for that question. So I think that
    was the underlying principles of the report to balance
    innovation and competition for payment systems and while at the
    same time protecting consumers.
        So our view is that a more clear, consistent, comprehensive
    regulatory framework goes a long way to promoting innovation
    and providing choices for consumers.
        It does requirement that stablecoins actually be stable,
    and so there are some recommendations about how to achieve
    stability in a stablecoin. It requires that stablecoins be able
    to provide the payment services that it offers in a reliable
    way, and we want the payment system to be resilient. So it
    makes a number of recommendations in that space.
        Senator Sinema. Well, thank you, Under Secretary Liang.
        I am encouraged to see this discussion of decentralized
    finance and Web3 evolve. I think it has the potential to make
    everyday transactions faster, safer, simpler, and more
    affordable for everyday Arizonans.
        With any new groundbreaking technology--the internet in
    particular comes to mind--the technology itself is quite
    promising, though many of the early use cases ultimately do not
    work and do not make it. The technology, however, ensures, and
    the next group of entrepreneurs improve on or disrupt what came
    before them. So that is the nature of innovation, and I am
    committed to ensuring we have an innovation ecosystem that is a
    win-win for Arizona entrepreneurs and consumers alike.
        I see decentralized finance and Web3 in this way. Our job
    is to think through what works and what does not, what helps
    consumers and what does not, and to create commonsense rules of
    the road that provide certainty for everyone. It is important
    to me that we address some of the short-term challenges with
    these technologies while also not losing sight of the long game
    when it comes to the potential benefits of decentralized
    finance and Web3.
        Are you and the Administration aligned in that thinking on
    this issue?
        Ms. Liang. So I agree that DeFi is growing rapidly. There
    are many different range of products and services being
    offered, and the potential for benefits are there.
        Innovation is--responsible innovation is absolutely
    supported with the--alongside of making sure that investors and
    consumers are protected through actions by the market
    regulators, the Consumer Financial Protection Bureau, or the
    State regulators where appropriate, so agree with your
    assessment.
        Senator Sinema. Thank you.
        Finally, I received a letter from Assistant Secretary
    Davidson in response to a bipartisan letter I sent in December
    with Senators Portman, Warner, Crapo, Toomey, and Loomis. Our
    letter requested that the cryptocurrency provision, included in
    our bipartisan Infrastructure Investment and Jobs Act, is
    implemented in accordance with congressional intent. I am not
    encouraged by aspects of a letter we received, including but
    not limited to an acknowledgment that congressional intent is
    that cryptocurrency providers, bankers, and those solely
    engaged in the business of selling hardware or software, to
    allow individuals to control private keys. They should not be
    considered brokers for the purpose of this action.
        Providing certainty to these groups and ensuring that a
    future rulemaking aligns with congressional intent is a
    priority for me, and I believe it is possible to help close the
    tax gap while also ensuring that the rules are clear and fair
    so that innovators are not inadvertently or unintentionally
    subjected to these requirements.
        So my question of you is we submit that the Department will
    work closely with me and the other authors of the letter to
    consider development of a Notice of Proposed Rulemaking to
    ensure that the law is executed as Congress intended.
        Ms. Liang. I believe the Treasure Department's principle is
    to not to squash crypto assets but to collect taxes from those
    who owe taxes.
        Senator Sinema. So just to clarify--and I know my time has
    expired, Mr. Chairman--Under Secretary, would you be willing to
    work with the authors of our bipartisan letter to ensure that
    Congressional intent is honored?
        Ms. Liang. I am sure Treasury and my colleagues in the
    Office of Tax Policy would be very happy to work with you.
        Senator Sinema. All right. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Sinema.
        Senator Ossoff from Georgia is recognized from his office.
        Senator Ossoff. Thank you, Mr. Chairman, and thank you, Ms.
    Liang, for joining us and for your service and for the report
    that the President's Working Group has submitted.
        Could you please restate briefly what are the principal
    risks that you assess to be posed by the growth of the
    stablecoin market?
        Ms. Liang. So, briefly, stablecoins have been growing, and
    their potential to be used for payments in the ordinary world,
    the non-crypto world, has been increasing. So the risks that we
    included and identified in the PWG report are, one, the risks
    that investors could run on a stablecoin, perhaps because
    investors lose confidence in the value of the assets that are
    behind it; two, the risk of disruptions to the payment system,
    if they--the payment--the operations are not held as standards
    that ensure that payments can be made as promised; and then,
    third, the increased risk from higher market concentration if
    some stablecoins were to scale up very quickly and increase
    market share. So those are the three risks that were identified
    in the PWG report for which the report--the PWG believed
    current regulations do not address.
        Senator Ossoff. Thank you, Ms. Liang.
        The report states that stablecoins, depending on context,
    could be considered derivatives or commodities or securities.
    Why are existing regulatory authorities, in your opinion, in
    sufficient?
        Ms. Liang. So, currently, stablecoins could be--you know, I
    leave it to my colleagues at SEC and CFTC as to whether
    stablecoins are securities or commodities, but as a payments
    mechanism, to be used by households and businesses to
    facilitate payment transactions, that, I think, is a separate
    consideration, and that is what the PWG report focused on.
        Senator Ossoff. And what regulatory actions might you
    recommend be undertaken for which the Department currently
    lacks statutory authority?
        Ms. Liang. So, currently, stablecoin issuers are
    authorized--they are licensed by State money transmitter laws,
    some trust banks in some States. There is not a Federal agency.
    The principal recommendation is that stablecoin issuers
    register, be required to be insured depository institutions
    where the regulation and supervision of these institutions
    would be matched to the risks and activities of a stablecoin
    issuer, so that if it does not make loans or extend credit, it
    is not subject to the same set of rules that other traditional
    commercial banks might be.
        Senator Ossoff. What are the most common mechanisms by
    which issuers peg the value of the stablecoin to the U.S.
    dollar, and which of those mechanisms, in your view, present
    the most risk or may most require some form of prudential
    regulation at the Federal level?
        Ms. Liang. There are many different stablecoins issuers
    right now. I think the predominant is tied to the value of the
    U.S. dollar, and they do that by holding reserve assets in U.S.
    dollars that are--on redemption request would be able to be
    converted to a dollar, to one dollar. So that is the primary,
    by far, the largest stablecoin issuers.
        The issue at question is whether the issuer, the stablecoin
    issuer could actually provide a user a dollar on request, and
    the IDI framework, the insured depository institution
    framework, would be an important step to ensuring that
    stablecoins, in fact, deliver the dollar when asked.
        Senator Ossoff. And in your view and in the analysis of the
    working group and a relevant law, Ms. Liang, you do not believe
    that currently regulatory authorities have adequate statutory
    authority to, for example, impose reserve requirements or other
    prudential requirements on such issuers to ensure that they can
    maintain the peg if there is a sudden increase in demand for
    redemption?
        Ms. Liang. I do not think there is any regulation that
    requires them to do that. No.
        Senator Ossoff. Thank you for your testimony, Ms. Liang.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Ossoff.
        Thank you, Madam Under Secretary, for joining us today.
        Senators who wish to submit questions for the record, those
    questions are due 1 week from today, Tuesday, February 22nd.
    Witnesses--you, Madam Under Secretary--have 45 days to respond
    to any of those questions.
        Thank you again. The Committee is adjourned.
        [Whereupon, at 11:41 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
        Let me start by talking about the Federal Reserve.
        This afternoon at 2:15 we will be meeting in SVC-200 to markup five
    Federal Reserve nominees and one for the FHFA.
        We need a full Federal Reserve Board of Governors to bring down
    prices and put workers first.
        Ranking Member Toomey and I agreed on the dates for the hearing and
    markup over 3 weeks ago.
        Americans are depending on us to get them on the job as soon as
    possible.
        If my colleagues are as concerned about inflation as they claim to
    be, they will not slow down this process, which will only hurt workers,
    their families, and our recovery.
        If you watched the Super Bowl on Sunday, you saw ad after ad for a
    product that most Americans have heard of, but almost nobody knows what
    it is. Even many of the people who've bought it often don't really
    understand it.
        Big cryptocompanies are looking to make big profits, and are
    desperate to reach as many Americans as they can. They brought in
    celebrities and gimmicks to make crypto sound exciting and daring and
    profitable.
        But the ads left a few things out.
        They didn't mention the fraud, scams, and outright theft.
        The ads didn't point out that you can lose big in crypto's huge
    price swings. They didn't tell you about the high fees pocketed by the
    cryptocompanies.
        And they sure didn't explain that cryptomarkets lack basic investor
    protections and oversight.
        Just a few weeks ago, hackers stole more than $300 million of
    people's investments from a cryptoplatform.
        The fact that these companies felt the need to advertise at all is
    a bit of a giveaway about one of their major claims--if this were
    actually meant to be used as currency, why would you need to buy ads?
    I've never seen the Federal Reserve buy a multimillion dollar
    commercial for ``U.S. dollars.''
        That's because crypto isn't money. It's designed for speculation.
    And watching all those ads reminded a lot of us of some asset bubbles
    we've been before.
        The 2000 Super Bowl featured 21 ads from 14 different dot com
    start-ups. The internet may have been the next frontier, but those
    companies weren't--many of them were defunct within a year or two, and
    just four are still around today.
        We're here today because once again, real people's real money is at
    risk. We need to look beyond the unproven promises, and protect
    Americans and our entire financial system.
        In a hearing last July, this Committee examined the risks of
    cryptocurrencies to our economy. In December, we looked closely at the
    mechanics behind stablecoins and stablecoin companies.
        Today, we're joined by Treasury Under Secretary Liang, to look at
    the risks stablecoins pose, and how regulators and Congress can protect
    consumers.
        Last fall, the Treasury Department led a team of our financial
    regulators to conduct a report on stablecoins. The report makes it
    clear that without regulation, stablecoins can endanger our economy,
    our payments systems, our hard-earned money.
        And while stablecoins suggest they're like money, good luck trying
    to use one at the store. Their main purpose today is to make it easier
    to trade, speculate, and in some cases even hide assets in crypto and
    digital markets.
        In just a few years, stablecoins have mushroomed into a 175 billion
    dollar market. Now they're asking us to believe that what they've built
    is as good as real money, and that it works the way these start-ups say
    it does.
        Americans--and this Committee--should look carefully at those
    promises.
        The companies claim that a stablecoin is backed by real dollars,
    invested in a reserve account--that's what makes it ``stable.''
        But our regulators tested that claim by a giant stablecoin issuer.
    That issuer ended up paying nearly $60 million in fines because it lied
    about its reserves. It turns out that for over 2 years, the stablecoin
    was only really ``backed'' 28 percent of the time.
        Stablecoin companies say that you can, quote, ``redeem'' a
    stablecoin whenever you want, exchanging it back into dollars from the
    stablecoin's reserve.
        But the fine print in the agreements of some of the biggest
    companies says that ordinary consumers can't actually redeem their
    stablecoins for dollars from the company that issues them. Only
    institutions like hedge funds can. And even then, many stablecoin
    issuers can delay redemptions, or refuse them entirely.
        So if you saw a Super Bowl ad and figured you'd give this a try,
    and you change your mind and want to exchange your stablecoin for
    dollars, you might be out of luck. The website could be down. Your
    money could be trapped.
        Stablecoin issuers also promise that their product will serve
    people who have been left behind in the financial system.
        But as we've established, crypto doesn't actually function as real
    currency in any traditional sense. Allowing more people to trap their
    money in risky, speculative investments isn't the kind of financial
    inclusion we need. It's not going to do anything to help Americans
    working hourly jobs who don't put their paychecks in the bank because
    of abusive fees.
        Finally, stablecoin companies say that if you hand them your money,
    your money will be safe. They tell us that they structure their
    reserves so that people's money is protected, and that their business
    will weather any kind of crisis.
        Now, maybe the stablecoin companies are right. Maybe we should just
    close our eyes and trust that a product called ``Magic Internet
    Money''--run by an outfit called ``Abracadabra''--is a safe place for
    your money.
        But I don't think working Americans can take that risk.
        Remember in 2007 and 2008, when the banks said homes prices would
    only go up and mortgages would never be underwater?
        And then, as now, it's workers and their families whose homes and
    hard-earned savings are being used as gambling chips. They're the ones
    who will pay the price.
        I understand the appeal of crypto. Americans have burned over and
    over again by Wall Street. The 2008 crisis, abusive fees, a stock
    market that seems detached from reality--of course people don't trust
    the big banks. And they figure, how could putting my money in one of
    these new products be any worse? Maybe I'll finally get in on the kinds
    of deals that have been making investment bankers wealthy for years.
        And some of those Super Bowl ads were pretty compelling television.
    They make vague allusions to innovation and the future--and who could
    be against innovation?
        But we have ignored warnings like the report we're talking about
    today too many times before.
        Before the financial crisis, Congress and regulators ignored
    warnings about the risky bets, increasing leverage, and over-the-
    counter derivatives on Wall Street. Then the banks got a bailout, and
    working people paid the price.
        That's why I want Congress and regulators to work together to
    tackle these risks now, before it's too late.
        I urge my colleagues to listen carefully to Under Secretary Liang's
    testimony today, and to the warnings in the PWG report.
        We need a strong, proactive approach from regulators and Congress
    to limit stablecoins' risks for working Americans.
        As our economy continues to recover from COVID-19--as workers are
    finally starting to see higher wages and more bargaining power in the
    workplace--the last thing we need is for a risky new financial product
    to cause disaster.
        This isn't the first hearing this Committee has had on stablecoins,
    and it won't be the last.
                                     ______

                PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
        Thank you, Mr. Chairman. And Ms. Liang, welcome.
        Two months ago, this Committee held its first hearing on
    stablecoins. I was encouraged to hear from our witnesses about the
    essential role stablecoins play in the larger cryptocurrency trading
    ecosystem.
        It also important to note the tremendous potential stablecoins have
    to be adopted as a common medium of exchange in the broader, ordinary
    goods and services economy. Unlike cryptocurrencies that fluctuate in
    value, stablecoins are designed to maintain a 1-to-1 value relative to
    reference asset, typically a fiat currency, such as the U.S. Dollar.
    Put simply, one stablecoin is meant always to be worth one dollar.
        Because of this price stability, stablecoins have the potential to
    serve all the traditional functions of money by acting as a medium of
    exchange, unit of account, and store of value. Stablecoins can also
    improve upon traditional forms of money by increasing payment speed,
    especially cross-border transfers, reducing transaction costs, and
    helping to combat illicit finance through an immutable and transparent
    transaction record.
        Stablecoins can also be programmed to execute payments
    automatically upon the occurrence of some predesignated, verifiable
    event. This capability in particular has the potential to transform
    finance and, in time, much of our economy.
        Any regulatory regime for stablecoins will inevitably focus on
    consumer protections and systemic stability. But at least as important
    will be preserving the tremendous, unimagined benefits that will flow
    from future innovations.
        As stablecoin usage has grown significantly, regulators have
    increasingly taken interest. Last November's report from the
    President's Working Group on Financial Markets--spearheaded by Ms.
    Liang--appropriately recommended Congress pass legislation to establish
    a Federal regulatory framework for stablecoins.
        The PWG report recommends Congress address three perceived
    ``prudential concerns'': stablecoin runs, payment system risks, and
    systemic risk and concentration of economic power. The principal
    recommendation is that stablecoin issuance be limited to insured
    depository institutions (IDIs).
        While I commend their contribution to the public discussion, I
    strongly disagree with that recommendation. And I believe we can
    protect against concerns such as run risk through a less restrictive
    and more appropriately tailored approach.
        To accomplish those objectives, I released a set of guiding
    principles for stablecoin legislation. These principles recognize that
    stablecoin issuers have significantly different business models than
    banks and present different risks.
        For example, stablecoin issuers typically neither make loans nor
    take deposits. They may choose not to transform maturity or
    intermediate credit risk. As such, a stablecoin issuer using cash or
    cash equivalents to back its coin is likely safer than most existing
    financial institutions.
        Because of these differences, it would be inappropriate to subject
    stablecoin issuers to the full range of bank regulations meant to
    address risks posed by the fractional reserve, deposit, and lending
    banking system.
        I am encouraged that Ms. Liang has recognized these differences and
    sensibly agreed there should be regulatory ``flexibility'' for
    stablecoin issuers not engaged in traditional banking. But that raises
    the natural question: why require all stablecoin issuers to become
    insured depository institutions?
        My legislation will take a different approach. It will provide
    regulatory treatment that is flexible and adaptable to future
    technological innovation. It will also promote competition in the
    stablecoin market by allowing at least three types of regulated
    entities to issue stablecoins.
        First, it will preserve the regime to which the majority of
    stablecoin issuers are currently subject as State-registered money
    service businesses and money transmitters. To disrupt this regime would
    both introduce unnecessary burdens to an emerging technology and
    unwisely diminish the success of States with experience and expertise
    in this area. Rather than discard this regime, we should build on it to
    ensure the public has the right disclosures about stablecoin reserves
    to make an appropriately informed decision about whether to use any
    given stablecoin.
        Second, it will clarify that insured depository institutions are in
    fact permitted to issue stablecoins. The former head of the OCC, Brian
    Brooks, pioneered work to give banks clarity on digital asset
    activities, but the current OCC has created confusion regarding
    permissible activities.
        Finally, it will establish a new stablecoin charter with regulatory
    requirements designed specifically for stablecoin issuers. The
    requirements will address the risks identified by the PWG report, but
    will not force stablecoin issuers into a one-size-fits-all system
    created for traditional banks. Ms. Liang's recent testimony indicates
    to me that she agrees with a tailored approach for such issuers.
        Rather than rely on the ``flexibility'' of the existing framework
    for depository institutions, which leaves full discretion to bank
    regulators, it is the responsibility of Congress to design this
    approach. These three paths would allow each stablecoin issuer to
    choose the regulatory framework most appropriate for its business
    model.
        And under this legislation, each stablecoin issuer would be
    required to meet certain minimum requirements regardless of its charter
    or license. For example, all would be required to disclose the assets
    backing the stablecoin, adopt and clearly disclose redemption policies,
    and undergo third-party audits. These requirements would ensure that
    consumers have sufficient information to choose which stablecoin they
    use.
        Ms. Liang's thoughtful comments on stablecoin regulation lead me to
    believe there are many issues on which we can find common ground. I
    look forward to developing legislation with my Senate colleagues and
    working with the Administration to establish a regulatory framework for
    stablecoins that addresses potential risks while also encouraging
    innovation and competition.
                                     ______

                    PREPARED STATEMENT OF JEAN NELLIE LIANG
        Under Secretary for Domestic Finance, Department of the Treasury
                               February 15, 2022
        Chairman Brown, Ranking Member Toomey, and other Members of the
    Committee, thank you for the opportunity to testify this morning on
    stablecoins.
        Stablecoins are part of an emerging set of digital assets,
    activities, and services that could have profound implications for the
    U.S. financial system and economy. Treasury supports responsible
    innovation that helps meet the evolving needs of users and the
    financial system. But stablecoins also raise policy concerns, including
    those related to illicit finance, user protection, and systemic risk.
    To mitigate these risks while supporting the potential benefits from
    innovation, Treasury believes that regulation of stablecoins should be
    clear and consistent.
        In November, the President's Working Group on Financial Markets,
    along with the Federal Deposit Insurance Corporation and the Office of
    the Comptroller of the Currency, took an important step in this
    direction with the publication of a stablecoin report (PWG Report). The
    PWG was formed by Executive order in response to the 1987 stock market
    crash. The group is chaired by the Secretary of the Treasury and
    composed of Federal financial regulators. The PWG regularly produces
    reports on financial markets issues for the President, which may
    include recommended legislative changes.
        As described in the PWG Report, stablecoins are a type of digital
    asset designed to maintain a stable value relative to the U.S. dollar
    or other reference asset. Today, stablecoins are used primarily to
    facilitate trading in digital assets. But, because stablecoins are
    designed to maintain a stable value, they could potentially be used
    more widely as a means of payment by households, businesses, and
    financial firms. There are no standards regarding the composition of
    assets used to support the value of stablecoins (reserve assets), and
    information made publicly available regarding stablecoin reserve assets
    is not consistent across stablecoin arrangements in either its content
    or the frequency of its release.
        Stablecoins are growing and developing rapidly and are not subject
    to a statutory or regulatory framework that mitigates the risks they
    present in a consistent and comprehensive manner. Currently, regulators
    have authorities that can be used to address illicit finance and
    investor protection concerns in the context of stablecoins. However, as
    described in the PWG Report, regulatory gaps exist regarding certain
    prudential risks. The PWG Report recommends legislation to ensure that
    stablecoins are subject to appropriate Federal prudential oversight.
    Such legislation would complement existing authorities with respect to
    market integrity, investor and consumer protection, and illicit
    finance. The PWG's specific recommendations included: limiting issuance
    of stablecoins to insured depository institutions (IDI); giving
    supervisors of stablecoin issuers authority to set risk management
    standards for critical activities related to use of stablecoin as a
    means of payment; and certain measures to reduce concerns related to
    concentration of economic power.
        As mentioned, stablecoins are part of the much larger and quickly
    evolving market for digital assets. The Biden administration continues
    to work across the agencies to develop a comprehensive strategy for all
    digital assets, with the goals of ensuring that cryptocurrency is not
    used for illicit finance; addressing risks related to financial
    stability and consumer and investor protection; and furthering
    financial inclusion and our continued leadership of the global
    financial system.
    Prudential Risks of Stablecoins
        Given their potential to be used as a means of payment, as well as
    the design mechanisms that they rely on to maintain a stable value,
    stablecoins present risks that are similar to some of the prudential
    risks traditionally associated with bank deposits and other forms of
    private money. History has shown that, without adequate safeguards,
    bank deposits and other forms of private money have the potential to
    pose risks to consumers and the financial system. These prudential
    risks include the risk of stablecoin runs; payment system risks related
    to the mechanisms that are used to store or transfer stablecoins; and
    broader concerns related to concentration of economic power.
        ``Run risk'' refers to the potential for a scenario in which a loss
    of confidence in a stablecoin sets off a wave of stablecoin
    redemptions, which could then be followed by distressed sales of the
    stablecoin's reserve assets. Such distressed sales of assets could
    negatively affect critical funding markets and broader financial
    conditions. Runs could also spread contagiously from one stablecoin to
    another, or to other types of financial institutions that are viewed as
    having a similar risk profile. The dynamics of a run, as well as the
    harm that runs can inflict on the broader system, are amply
    demonstrated by the history of runs on banks and shadow banks--
    including those that occurred in 2007-2008 and, more recently, at the
    start of the COVID-19 pandemic in March 2020. The first stablecoin run
    is believed to have occurred in June 2021, when a sharp drop in the
    price of the assets used to back the stablecoin set off a negative
    feedback loop of stablecoin redemptions and further price declines.
        ``Payment system risks'' refer to a disruption in the mechanisms
    used to store or transfer value, which could interfere with the ability
    of users to make or settle payments. Payment system risks distinguish
    stablecoins from certain investment products that are not designed to
    serve as a means of payment. Custodial wallet providers--meaning wallet
    providers that hold stablecoins on behalf of users--are one locus of
    payment system risk, as the failure or disruption of such a wallet
    provider could deprive users of access to their stablecoins. More
    generally, use of stablecoins depends on a range of activities that are
    often distributed across multiple entities within a stablecoin
    arrangement. \1\ Depending on the particular design of a stablecoin,
    these activities include: governance of the stablecoin arrangement;
    stablecoin issuance and redemption; management and custody of
    stablecoin reserve assets; distributed ledger operation, validation,
    and settlement; and interfacing with stablecoin holders. Even if a
    stablecoin itself is adequately protected against run risk, problems
    related to the activities or entities that support the stablecoin could
    still interfere with its use as a means of payment, harming stablecoin
    users and resulting in a loss of payments efficiency.
    ---------------------------------------------------------------------------
         \1\ The term ``stablecoin arrangement'' refers to a stablecoin
    together with the functions and activities that allow the stablecoin to
    be used as a means of payment.
    ---------------------------------------------------------------------------
        Finally, I would highlight two concerns related to concentration of
    economic power. First, connections between a stablecoin (or stablecoin
    wallet provider), on one hand, and a commercial company, on the other,
    could be used to give the commercial company an unfair competitive
    advantage. These policy concerns are analogous to those traditionally
    associated with the mixing of banking and commerce, such as advantages
    in accessing credit or using data to market or restrict access to
    products. Second, the issuer of a stablecoin that becomes sufficiently
    widely adopted as a means of payment could become a dominant provider
    of payment services. Market power with respect to payments could reduce
    incentives for further investment in payments innovations or lead to
    higher prices for payment services.
    Regulatory Gaps
        Current statutory and regulatory frameworks do not provide
    consistent and comprehensive standards for the risks of stablecoins as
    a new type of payment product. Certain regulatory schemes may have the
    flexibility to address some issues presented by stablecoins, such as
    illicit finance. However, stablecoins are not subject to standards to
    address concerns about run risk, payment system risk, or concentration
    of economic power. Some of the largest stablecoin issuers operate with
    limited regulatory oversight, raising significant questions about
    whether these stablecoins are adequately backed and other aspects of
    their operations. The regulatory frameworks that apply to stablecoin
    issuers and service providers are inconsistent, creating opportunities
    for regulatory arbitrage and uncertainty among stablecoin users. Even
    where the issuer of a given stablecoin is subject to oversight, the
    number of different key parties that may be involved in an arrangement,
    and the operational complexity of these arrangements, may pose
    substantial challenges for supervisors. The exponential growth of
    stablecoins--from a market capitalization of roughly $5 billion at the
    start of 2020 to approximately $175 billion today--increases the
    urgency of ensuring that an appropriate regulatory framework is in
    place.
        Having described the regulatory gaps at a high level, I would like
    to discuss in more detail several frameworks that have featured
    prominently in discussions of stablecoins: State money transmitter
    laws, securities laws, and commodities laws. While Treasury and the PWG
    fully support efforts by State and Federal agencies to use existing
    authorities in support of their statutory mandates, we do not believe
    existing authorities provide a sufficient basis for comprehensive and
    consistent oversight of stablecoins.
    Money Transmitter Requirements
        In many States, stablecoin operators are licensed or registered as
    money transmitters and money services businesses, and are subject to
    standards that include minimum net worth requirements, surety bond and
    other security requirements, and restrictions on permissible
    investments. These standards are generally designed to address consumer
    protection concerns. They are not meant to address the financial
    stability and payment system concerns that would arise if stablecoins
    become widely adopted by households, corporations, and financial
    institutions as a means of payment.
    Securities Regulation
        Some have suggested that stablecoins could be regulated either as
    securities or as money market mutual funds (MMFs). Certain legal
    academics have raised a threshold question as to whether stablecoins
    qualify as securities or MMFs under existing laws. Assuming that
    stablecoins satisfy the definition of securities or MMFs, there is a
    further question as to whether these regimes would effectively address
    the prudential risks of stablecoins. Requirements that apply generally
    to issuers of public securities are not designed to address concerns
    about run risk, payment system risk, or concentration of economic
    power. MMF regulations do not focus on payment system risks or concerns
    about concentration of economic power.
    Commodities Regulation
        Under the Commodity Exchange Act, the CFTC has the authority to
    police fraud and manipulation in commodities spot markets, which the
    CFTC has indicated include digital assets. \2\ In addition, derivatives
    products on commodities and leveraged retail transactions are subject
    to jurisdiction of the CFTC. These are important tools for ensuring the
    integrity of these markets and protecting investors, but they are not
    intended to address prudential risks.
    ---------------------------------------------------------------------------
         \2\ https://www.cftc.gov/media/4636/
    VirtualCurrencyMonitoringReportFY2020/download
    ---------------------------------------------------------------------------
    Recommendation Regarding Stablecoin Issuers
        The PWG Report recommends requiring stablecoin issuers to be IDIs
    because IDIs are subject to a regulatory and supervisory framework that
    would help to mitigate the prudential risks the report identifies. Run
    risk would be reduced by features including capital, liquidity, and
    other prudential standards, as well as access to the Federal Reserve as
    lender-of-last resort. Payment system risk would be mitigated through
    the establishment of risk-management standards for entities that
    conduct critical activities within stablecoin arrangements. Concerns
    about concentration of economic power would be addressed by prohibiting
    stablecoin issuers from conducting commercial activities, or
    affiliating with commercial companies, and by allowing supervisors to
    establish interoperability standards. In short, IDI regulation provides
    a tested regulatory model that would protect against the prudential
    risks of stablecoins and help to support confidence of stablecoin
    users.
        In developing this recommendation, the PWG relied upon the
    flexibility that the banking agencies would have to calibrate
    supervision and regulation of stablecoins based on risk. Banking
    agencies currently use existing authorities to adjust supervision and
    regulation in the context of overseeing IDIs with a diverse range of
    business models (e.g., commercial banks, trading banks, custody banks)
    and systemic risk footprints (e.g., community banks, mid-size banks,
    regional banks, large banks). The fact that some prominent stablecoin
    issuers are already seeking IDI charters provides additional reason to
    think that IDI regulation is a feasible regulatory model for stablecoin
    issuance.
        Since the publication of the PWG Report, some have asked whether
    stablecoins issued by an IDI would be covered by FDIC insurance, or its
    equivalent. The PWG Report does not take a position on this issue.
    While insuring stablecoins would protect users against the risk of
    loss, it would also introduce certain policy and technical challenges.
    For this reason, Congress (or the banking agencies) might want to
    consider alternative measures to protect stablecoin users. \3\
    ---------------------------------------------------------------------------
         \3\ For example, there could be a requirement for stablecoins
    issued by an IDI to be fully backed by safe assets--consistent with how
    many stablecoins currently purport to be backed.
    ---------------------------------------------------------------------------
        Finally, the Financial Stability Oversight Council (FSOC) continues
    to evaluate potential systemic risks related to stablecoins and other
    digital assets, and the steps that may be available to the FSOC to
    mitigate such risks. These may include designation of certain
    activities conducted within a stablecoin arrangement as, or as likely
    to become, systemically important payment activities.
    Digital Assets and Distributed Ledger Technology
        As I stated at the beginning of my testimony, Treasury supports
    responsible innovations that meet the needs of users, the financial
    system, and the economy. The Administration continues to evaluate the
    broader set of issues and opportunities posed by digital assets and
    distributed ledger technology, and welcomes the opportunity to continue
    to work with Congress.
        To date, much of the public policy discussion of digital assets has
    focused on regulatory questions about digital assets themselves. I
    would identify two additional sets of issues that merit focus as policy
    is developed in this area:
        The first relates to the regulation of intermediaries that
    participate in digital asset markets. Some of these intermediaries are
    banks, investment companies, and other traditional financial actors
    that are increasingly expanding into digital assets. Other
    intermediaries--such as stablecoin issuers, custodial wallet providers,
    and digital asset exchanges--are native to the digital asset ecosystem,
    but provide financial services similar (and sometimes identical) to
    those provided by traditional financial services providers. For both
    traditional and digital native intermediaries, it is critical to ensure
    that regulatory frameworks are in place that appropriately address
    risks to businesses, consumers, and investors, as well as the broader
    financial system. The banking agencies' recent ``crypto sprint,'' the
    Securities and Exchange Commission and Commodity Futures Trading
    Commission's assessment of authorities over digital exchanges, and the
    PWG's work on stablecoins are important steps in this direction. But
    clearly, much work remains to be done.
        The second set of issues relates to potential for systemic risk
    that could result from the build-up of leverage against digital assets.
    As we saw in the 2007-2008 financial crisis (and most that preceded
    it), leverage can play a key role in catalyzing and accelerating
    financial instability. To address these risks, the Administration is
    building its knowledge and understanding of the role that leverage
    plays in digital asset markets and of the implications of that leverage
    for the rest of the financial system. We would be pleased to discuss
    this set of issues further with the Committee as our understanding
    deepens.
    Conclusion
        I want to thank the Committee for its leadership on these important
    issues and for inviting me here to testify today. I am happy to answer
    any questions from the Committee. I also look forward to additional
    conversations regarding broader issues raised by digital assets and
    distributed ledger technology.
            RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
                         FROM JEAN NELLIE LIANG

    Q.1. Stablecoin issuers claim that stablecoins can be used for
    payments and can promote financial inclusion. Please discuss
    whether, at present, stablecoins play a meaningful role in
    retail payments or in expanding financial inclusion, including
    as compared to their use in facilitating speculation in digital
    asset markets. What risks do retail consumers face in
    attempting to use stablecoins for payments?

    A.1. Today, stablecoins are used primarily to facilitate
    trading in digital assets, and, because stablecoins are
    intended to maintain a stable value, they have the potential to
    be used as a means of payment by households, businesses, and
    financial firms. This transition to a broader use for payment
    could occur rapidly due to network effects or relationships
    between stablecoins and existing user bases or platforms.
    Currently, because stablecoins are not subject to prudential
    regulation and supervision on a consistent or comprehensive
    basis, consumers that use stablecoins may be put at risk.
    Consumer risks could include an unexpected risk of loss due to
    significant and unexpected declines, for instance due to a
    decline in the value of the assets backing their stablecoins or
    as a result of failure in mechanisms for storage or transfer of
    their stablecoins.

    Q.2. Your testimony discussed the use of stablecoins in buying
    and trading crypto assets, including complex cryptoderivatives.
    It also mentioned the risk of increasing leverage in digital
    assets. Experts believe stablecoins make it easier for leverage
    to build up in cryptomarkets. What are the risks of leverage
    accumulating in the crypto ecosystem, and how could those risks
    affect traditional financial markets outside the digital asset
    space?

    A.2. As we saw in the 2007-2008 financial crisis (and many
    preceding examples of financial crises), leverage can play a
    key role in catalyzing and accelerating financial instability.
    Treasury is concerned that similar dynamics may increase the
    likelihood that stress in digital assets affects other
    financial markets and is actively working with the
    Administration and interagency partners to build its knowledge
    of the role that leverage plays in digital asset markets and of
    the implications of that leverage for the rest of the financial
    system. The potential for spillovers into traditional financial
    markets would likely depend on a range of factors, including
    the amount of leverage involved, the sorts of assets being used
    as collateral, as well as the duration and other features of
    the arrangements used to take on leverage.

    Q.3. 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, doesn't the stablecoin
    business model then rely on generating 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.3. There are several potential business models that could
    support the issuance of stablecoins. These include generating
    revenue from (a) the spread between interest received on
    reserve assets and that paid to stablecoin holders; (b)
    transaction or other kinds of fees, as you note; (c) data from
    transactions involving the stablecoin; and (d) cross-selling of
    stablecoins with other products. Consistent with the emphasis
    in the Digital Assets EO, this Administration is committed to
    protecting consumers and the broader financial system by
    implementing appropriate guardrails for digital assets. That,
    of course, applies here: Treasury, in its capacity, is
    committed to ensuring that whatever business model a stablecoin
    issuer pursues, it is consistent with protection of consumers
    and the broader financial system.

    Q.4. Digital asset ``wallets'' play a key role in the crypto
    ecosystem by allowing consumers to store their stablecoins.
    Please identify the major consumer protection or other risks
    associated with stablecoin wallets. Are any significant
    consumer protection rules currently applicable to stablecoin
    wallets? In your view, what would be the most important
    elements of a consumer protection framework for wallets?

    A.4. As you observe, many customers rely on third parties,
    including custodial wallets, to store and facilitate the
    transfer of their stablecoins and other digital assets. In so
    doing, custodial wallets may be critical to the functioning of
    a stablecoin as a means of payment.
        Relying on a third-party to hold or transfer stablecoins
    may improve functioning and customer experience, but it also
    can put customers at risk of loss or theft if the custodial
    wallet fails or misuses customer assets. In some cases,
    custodial wallets may be taking risks with customer assets--for
    example, by lending or borrowing them in an inappropriate or
    high-risk manner. Today, custodial wallets are not subject to
    consistent and comprehensive standards to protect against these
    risks. By comparison, other intermediaries that hold or
    transfer customer financial assets are subject to
    requirements--often at the Federal level--aimed to protect
    consumers. These requirements often include segregation of
    customer and firm assets, limits on certain activities or
    investments, supervision, financial resource requirements,
    protections against conflicts of interest, and disclosure of
    potential liquidity risks depending on the type of underlying
    assets.

    Q.5. Please describe the risks that you believe are presented
    by smart contracts. How could smart contracts create systemic
    risks? As compared with traditional contracts, are smart
    contracts useful in consumer or small business contexts, and
    what risks do they pose?

    A.5. A ``smart contract'' is a self-executing contract with the
    terms of the contract written into code, typically supported by
    distributed ledger technology. Like other financial
    innovations, smart contracts have both potential benefits and
    potential risks. When well-designed, smart contracts could be
    highly transparent and reduce risks of manipulation and
    arbitrary intervention. But, smart contracts without
    appropriate controls and protections also face risks, including
    execution risk, operational risk, illicit finance risks, and
    dependencies on crypto assets or platforms that may be
    susceptible to failure.

    Q.6. 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
    major crypto 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.6. Currently, many stablecoin users do rely on the ability to
    convert stablecoins into cash by trading the stablecoins on an
    exchange. Where stablecoin users do not have right to redeem
    their stablecoins directly, exchange outages may prevent users
    from converting their stablecoins into cash. An important
    benefit of extending key tools like prudential oversight and
    clear disclosures to stablecoin issuers is that it would give
    supervisors and regulators the ability to ensure that user
    redemption rights are well-defined and that stablecoin issuers
    have the financial means to meet redemption requests.

    Q.7. In Senator Toomey's proposed stablecoin framework, he
    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 what you perceive to be the risks
    of a State-based approach to stablecoin regulation as compared
    to a Federal approach.

    A.7. State money transmitter rules do not provide an adequate
    framework for regulation of stablecoins. These regimes do not
    adequately address the financial stability risks, payment
    system risks, and concerns about concentration of economic
    power that would arise if stablecoins become a widely used
    means of payment. There is also considerable variation among
    money transmitter rules across States, with money transmitter
    rules in certain States not applying to stablecoins (or other
    digital assets) at all. In States where money transmitter rules
    do apply to stablecoin issuers, financial resource requirements
    are often significantly lower than for other prudentially
    regulated entities.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                SENATOR MENENDEZ FROM JEAN NELLIE LIANG

    Q.1. White supremacy is an existential threat for our country.
    According to the Department of Homeland Security, domestic
    violent extremism is now the greatest terrorism threat to the
    U.S., and cryptocurrency is increasingly funding these domestic
    terrorists. The data analytics firm Chainalysis found certain
    alt-right groups that participated in the January 6th
    insurrection received over $500,000 in Bitcoin from a single
    donor a month prior. According to other reporting, the founder
    of a neo-Nazi website has taken in at least 112 Bitcoin since
    January 2017--worth over $4.7 million today. According to the
    Southern Poverty Law Center, it is more difficult now to track
    these hate groups and domestic terrorists because of their use
    of virtual money.
        Does Treasury have the tools and resources it needs to
    track domestic terrorists' use of virtual currencies?

    A.1. Tracking and disrupting the flow of funds to terrorists is
    an integral part of Treasury's counterterrorism efforts. In
    some instances, foreign-based racially or ethnically motivated
    violent extremist (RMVE) groups and some domestic violent
    extremists (DVEs) have sought to solicit or transfer funds in
    virtual assets or expressed interest in using virtual assets to
    move funds pseudonymously or through anonymity-enhancing
    technologies. For some groups, the use of virtual assets
    represents an opportunity to evade transparency compared to
    other financial services. For others it is an alternative to
    online payment platforms that will no longer permit them to use
    their services. Additionally, some of these groups make
    extensive use of social media and encrypted applications to
    reach potential supporters and rely largely on online
    solicitations. As virtual asset penetration in the overall
    economy increases, we assess the usage by terrorists is also
    likely to increase.
        Identifying and disrupting financial facilitators of DVEs
    has already been a priority in Treasury's work to ensure
    financial institutions meet their anti-money laundering/
    countering the financing of terrorism (AML/CFT) obligations.
    For example, in 2020 Treasury assessed a $60 million civil
    money penalty against the virtual asset mixing service Helix.
    Among Treasury's findings, which are publicly available on its
    website, was that Helix failed to implement policies,
    procedures, and internal controls to prevent the service from
    being exploited by White nationalist/neo-Nazi groups. \1\
    ---------------------------------------------------------------------------
         \1\ See, ``Harmon Helix-Assessment and Statement of Facts''
    (fincen.gov).
    ---------------------------------------------------------------------------
        Existing laws and regulations sufficiently support Treasury
    efforts to address this threat, although we will continue to
    reassess our authorities in light of its evolving nature. The
    additional resources requested in the President's FY 2023
    Budget to hire staff and provide technical training would
    enhance our capabilities in this area.
        Treasury, alongside interagency partners, is currently
    addressing vulnerabilities posed by virtual assets in several
    ways:

        Treasury is encouraging and supporting foreign
            jurisdictions in addressing significant weaknesses in
            implementing international standards on AML/CFT
            regulation and supervision for virtual assets and
            related service providers.

        Treasury is also working to ensure foreign-located
            virtual asset service providers (VASPs) doing business
            in whole or substantial part in the United States
            register with the Financial Crimes Enforcement Network
            (FinCEN) and implement AML/CFT requirements.

        Investigators and regulators have significant
            visibility into financial transactions involving
            virtual assets, such as cryptocurrency, due to the
            frequent use of assets operating on transparent
            blockchains. The United States continues to invest in
            technology and training to help investigators,
            analysts, and regulators benefit from the transparency
            of public blockchains for AML/CFT purposes.

        Treasury also continues to engage with the domestic
            and international private sector to enhance their
            understanding of existing obligations. At this time of
            rapid growth in the virtual asset sector, it is
            imperative that the United States lead on establishing
            the global model for supervision, examination, and
            private sector compliance with existing regulatory
            obligations.

        Working through the Financial Action Task Force
            (FATF) and its global network, Treasury has assisted
            financial institutions and authorities in identifying
            terrorist use of virtual assets. This includes
            producing several reports that examine specific aspects
            of how terrorist groups and individuals raise, move,
            and use funds. The FATF also drafted and recently
            updated a set of risk indicators that financial
            institutions and authorities can use to identify
            terrorist financing activity through virtual assets.
                                    ------

           RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                         FROM JEAN NELLIE LIANG

    Q.1. Under Secretary Liang, with regard to communities that are
    traditionally underserved by banking institutions, including
    low- and moderate-income households, communities, and color,
    and rural communities, what has been the adoption and use
    patterns of stablecoins?

    A.1. While data in this area is sometimes difficult to come by
    or verify, some survey data suggests that Black Americans and
    Hispanic Americans may be more likely to own cryptocurrencies
    than White Americans.
        We know that today's financial system does not work for
    many Americans, particularly Americans of color and low-income
    Americans, who are disproportionately likely to lack access to
    bank accounts and other financial tools. Innovations like
    stablecoins, and other digital assets, may have the potential
    to increase the inclusion of these people in the financial
    system. But digital assets are not subject to consistent
    regulatory safeguards--meaning they pose an elevated risk to
    consumers and investors, and might even raise risks to
    financial stability.
        These are issues that we are following closely, including
    by launching a new working group as part of the interagency
    Financial Literacy and Education Commission, which will assess
    the risks and benefits that adoption could present for
    communities that have traditionally not been well served by
    banking institutions, and produce resources for consumers and
    investors to more fully understand this set of products.

    Q.2. Is it accurate to say that the expanded use of digital
    currencies like stablecoins would help these underserved
    communities, or would it exacerbate existing disparities in
    access to financial products?

    A.2. Treasury supports responsible innovations that could
    contribute to a more efficient, resilient, and inclusive
    payments system. It is possible that well-designed and
    appropriately regulated stablecoins could serve as a useful
    means of payment for some unbanked and under-banked
    individuals. At the same time, we should be mindful that lack
    of access to technology, as well as other factors that now keep
    people out of the financial system, could also be barriers in
    the context of stablecoins.

    Q.3. Would prudential oversight over stablecoins issuance and
    custodial wallet providers reduce the run risk of stablecoins?

    A.3. Yes. Requiring issuers to be insured depository
    institutions reduces these risks. Failure of stablecoins to
    maintain a stable value could harm stablecoin users and lead to
    stablecoin runs that could damage financial stability. The
    status quo is simply not adequate to address the prudential
    risks posed by stablecoins, and the best way to address these
    risks is through legislation. In the PWG report, we recommended
    to the President a legislative solution that would
    comprehensively address all of the prudential risks identified
    in the report, which are risk of runs, payment system risks,
    and risks of concentration of economic power.

    Q.4. When examining systemic risks for stablecoins, how much
    exposure currently lies with low- and moderate-income
    households who may be invested in stablecoins?

    A.4. Please see my answer to Question 1.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                         FROM JEAN NELLIE LIANG

    Q.1. The New York Fed recently published a blog post entitled,
    ``The Future of Payments is Not Stablecoins''. The authors note
    that bank-issued stablecoins--backed by cash or similar
    reserves and issued by a bank--``necessarily'' tie up liquidity
    at the bank, presumably money that could be deployed in
    communities in South Carolina and around the country.
        Are there other methods, such as the use of tokenized
    deposits, which are not stablecoins, that could be used by
    banks to increase transaction speed and security, without
    freezing capital that could otherwise be lent to deserving
    borrowers?

    A.1. As described in the blog post by staff of the Federal
    Reserve Bank of New York, the basic distinction between
    stablecoins and tokenized deposits is that whereas stablecoins
    would be backed 1:1 by high-quality liquid assets, tokenized
    deposits could be backed by loans and other bank assets. As
    discussed in the blog post, there are important considerations
    that inform adoption of stablecoins relative to other existing
    or future payments products. Currently, stablecoins are growing
    rapidly and, as discussed in the PWG Report, are not subject to
    a consistent and comprehensive regulatory framework to address
    the risks that they present.
                                    ------

           RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY
                         FROM JEAN NELLIE LIANG

    Q.1. Undersecretary, during your testimony before the
    Committee, you made some blanket statements in response to
    questions about the lack of regulatory oversight on reserves of
    stablecoins. In particular, when asked if market participants
    are able to verify portfolio holdings backing stablecoins, you
    stated that ``some issuers, perhaps under pressure from
    investors and regulators, are providing self-audited statements
    on their holdings but regulators are not in place to confirm
    those or set those standards for them.''
        You further stated, in response to a question about the
    disclosures of risks to customers, ``they are not required to
    by any regulators because they are not regulated''.
        Is this true of issuers that are regulated as State-
    chartered trust companies?

    A.1. Today, information regarding stablecoin reserves is
    inconsistent. Some issuers provide this information on a
    voluntary basis, but these disclosures are not uniform or at
    regular intervals across issuers. It is also important to note
    that, while disclosure is an important tool, it is not alone
    sufficient to address the risks identified by the PWG. In
    particular, these risks include (1) risk of destabilizing runs,
    (2) risk due to disruptions in payments, and (3) risks of
    concentration of economic power.

    Q.2. During the hearing, you and I had an exchange about
    existing State regulatory structures and not foreclosing their
    use.
        Isn't it true that there are stablecoin issuers that are
    trust banks and that do, in fact, have regulators in place to
    confirm and set standards for reserves and have primary
    prudential regulation over those companies?

    A.2. Typically, State-chartered limited-purpose trust companies
    are permitted to act as fiduciaries, trustees, grantees and
    provide other safekeeping and custody services. State
    chartering and oversight of trust companies is designed for
    these purposes.

    Q.3. Such statements certainly feed into the findings and
    recommendations of the PWG report that all stablecoins should
    be issued by insured depository institutions, but they do not
    tell the whole story.

    A.3. See response to Question 4.

    Q.4. Would you please explain why the PWG report as well as
    your testimony fails to properly acknowledge that there are
    State and Federal regulatory structures that exist that do
    provide oversight over reserves and business activities and
    that at least some companies have chosen to organize themselves
    under those structures that provide the very oversight you
    claim is needed in the market?

    A.4. As part of the development of the PWG report and its
    recommendations, the PWG engaged with a broad range of
    stakeholders, including with some State regulators. We
    appreciate the experience of State regulators in supervising
    and regulating digital assets and digital asset intermediaries
    and look forward to continued discussions with them. The PWG
    recommendations seek to establish clear, consistent, and
    comprehensive rules for stablecoin wallet providers and
    stablecoin issuers. As discussed in the report, these rules can
    and do build on State-based regulation and Federal frameworks.
    For example, ``insured depository institutions'' include both
    State-chartered and federally chartered banks and thrifts.

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