[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
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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.
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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.
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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.
Additional Material Supplied for the Record
STATEMENT SUBMITTED BY ICBA
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STATEMENT SUBMITTED BY ABA
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LETTER SUBMITTED BY THE CLEARING HOUSE
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LETTER SUBMITTED BY NAFCU
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STATEMENT SUBMITTED BY BPI
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LETTER SUBMITTED BY ETA
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