[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






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                               ______
                                 

                 U.S. GOVERNMENT PUBLISHING OFFICE

52-882 PDF                WASHINGTON : 2023














            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                 Dan Sullivan, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                        Pat Lally, Hearing Clerk

                                  (ii)










                            C O N T E N T S

                              ----------                              

                       TUESDAY, FEBRUARY 15, 2022

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

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

                                WITNESS

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

              Additional Material Supplied for the Record

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

                                 (iii)












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

                              ----------                              


                       TUESDAY, FEBRUARY 15, 2022

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

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

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

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

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

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

    Ms. Liang. Chairman Brown, Ranking Member Toomey, and other 
Members of the Committee, thank you for the opportunity to 
testify this morning on stablecoin report by the President's 
Working Group on Financial Markets.
    The PWG is chaired by the Secretary of the Treasury and 
composed of the Federal Reserve Board, the SEC, and the CFTC. 
It was formed by a Presidential Executive Order in response to 
the 1987 stock market crash and regularly produces reports on 
financial market issues for the President, which may include 
recommended legislative changes. For the stablecoin report, the 
PWG was joined by the FDIC and the OCC.
    Stablecoins are part of an emerging set of digital assets, 
activities, and services that could have profound implications 
for the U.S. financial system and economy. The distinguishing 
feature of stablecoins as compared to other digital assets is 
that they are designed to maintain a stable value relative to a 
reference asset, often the U.S. dollar.
    Stablecoins have grown rapidly from a market capitalization 
of roughly $5 billion at the start of 2020 to approximately 
$175 billion today.
    The PWG report focused on stablecoins because the offer of 
a stable value means they have the potential to be used widely 
as a means of payment by households, businesses, and financial 
firms. This potential use could create significant benefits for 
stablecoin users and payment transactions, but it could also 
pose risks.
    The PWG report focused on three prudential risks associated 
with the use of stablecoins for payments: first, run risk, a 
scenario in which loss of confidence in a stablecoin triggers a 
wave of redemptions, which could have spillover effects for the 
broader financial system; second, payment risk, including 
operational issues that could interfere with the ability of 
users to store stablecoins or use them to make payments; and 
third, concerns related to concentration of economic power, for 
example, if a stablecoin provider scaled up quickly and gained 
market power as a provider of payment services.
    The PWG report found significant gaps and authorities that 
would address these prudential risks. Some of the largest 
stablecoin issues operate with limited regulatory oversight, 
raising significant questions about whether their stablecoins 
are adequately backed. Even where a stablecoin issuer is 
subject to oversight, supervisors may not have sufficient 
visibility into the broader operations that support the use of 
stablecoins, which may be distributed across multiple entities.
    Neither State money transmitter nor securities law 
requirements were designed to address the financial stability 
payment system risks for a payment instrument based on new 
distributed ledger technology. To fill this regulatory gap, the 
PWG report recommended legislation to ensure that stablecoins 
are subject to a consistent and comprehensive framework that is 
proportionate to the risks posed. Such legislation would 
complement existing authorities with respect to market 
integrity, investor and consumer protection, and illicit 
finance.
    Specifically, the report recommended limiting issuance of 
stablecoins to ensure depository institutions, giving 
supervisors of stablecoin issuers visibility into the broader 
stablecoin arrangements and authority to set risk management 
standards for critical activities related to the use of 
stablecoins for payment, and certain measures to reduce 
concerns related to concentration of economic power.
    In developing the recommendation for stablecoin issuers to 
be insured depository institutions, the PWG report relied upon 
the flexibility that banking agencies would have to adjust for 
differences between stablecoin issuers and traditional 
commercial banks and to adjust to new products and structures 
that may emerge over time.
    As noted at the beginning of my testimony, stablecoins are 
a subset of the large and quickly evolving digital assets 
market. The Treasury Department supports responsible innovation 
from digital assets but is also committed to protecting against 
risk to users, the financial system, and the broader economy.
    The Biden administration continues to work across the 
agencies to develop a comprehensive strategy for all digital 
assets with the goals of ensuring that cryptocurrency is not 
used for illicit finance, addressing risk related to financial 
stability in consumer and investor protection, and furthering 
financial inclusion and our continued leadership of the global 
financial system.
    We look forward to working with Congress on these critical 
issues as we make progress and appreciate the Committee's 
leadership in this area.
    Thank you for the opportunity to testify this morning. I 
would be happy to answer your questions.
    Chairman Brown. Thank you, Madam Under Secretary.
    Stablecoins are, as we know, only a few years old. We know 
most Americans have never bought one. Commercials in Silicon 
Valley just tell us stablecoins are an innovation.
    I want to be clear, though, Madam Under Secretary, about 
the stakes here. How important is it we act now to regulate 
stablecoins before they can hurt our economy? How could 
stablecoins hurt working families if Congress and regulars do 
not reign in the risks of these products?
    Ms. Liang. Thank you for your question, Senator Brown.
    As I mentioned, the crypto, the digital asset market is 
growing very rapidly. The fundamental change is this new 
innovation that can allow for new provision of financial 
services and could radically change the way financial services 
are provided. This provides a lot of benefits, could bring 
efficiencies, especially to the payment system when we are 
speaking of cryptocurrencies.
    It also raises some of the concerns, of course, that you 
raised earlier on illicit finance, tax evasion, and fraud. So 
it is important to address those issues.
    My view is, given these risks and the growth of the market, 
it is for our regulators and policymakers to take some actions 
to protect users and ensure the resilience of the financial 
system.
    Stablecoins are a subset of this digital asset space. The 
prospect of stable value gives them the potential to be used 
for payment transactions, a store value, a medium of exchange. 
That raises a different set of risks. They have the ability to 
provide payments on 24/7, to reduce the costs of payments in a 
substantive way. I think it has the potential to be part of the 
future payment system.
    So I think it is important to assess the stability of 
stablecoins. Are they stable? Can they provide the services 
that they offer themselves to? The Secretary of the Treasury 
convened the PWG to evaluate whether they can be stable and to 
address whether this new product has an adequate regulatory 
framework, and the PWG report recommended that there should be 
additional authorities provided to regulators for this product.
    Chairman Brown. Thank you.
    The stablecoin companies assure us they are transparent. 
They tell us they follow the law. They even say they like to 
say they are built on trust, but of course, they say that. They 
want to suggest if you buy stablecoins with dollars, your 
dollars will be safe, that you will be able to exchange 
stablecoins back for dollars without a problem.
    Madam Under Secretary, is there any risk that people with 
stablecoins will not always be able to exchange stablecoins for 
dollars? If so, do these companies make that clear to 
consumers?
    Ms. Liang. There is risk that stablecoins cannot deliver a 
dollar. This is the--they ought--they say they are stablecoins. 
The assets backing the stablecoins may not be able to deliver a 
dollar under stress periods, and in fact, if you look at 
stablecoins, they do fluctuate.
    In addition, there are issues around redemption as well as 
there could be fees that may not be disclosed. So I do think 
there are features of stablecoins that create run risk, which 
is the first risk that the PWG report identified.
    Chairman Brown. Are those companies informing potential 
purchasers of stablecoin that there is that risk?
    Ms. Liang. They are not required to by any regulators 
because they are not regulated.
    Chairman Brown. I understand that, but are they doing that, 
in your experience?
    Ms. Liang. So there are probably 50 or 60 different 
stablecoins at this point in time. I imagine the practices vary 
quite a bit.
    Chairman Brown. I think it is more worth knowing that the 
answer to that are most of them If there are 50 or 60, do they 
disclose the risk at all? I am not asking right now--I am 
asking right now, but I think it is something important to 
know.
    Last question. For a long time in this country, we have 
prevented commercial companies from partnering with financial 
companies. In some ways, we built a wall between the two.
    There have been reports that companies like Walmart think 
about issuing a stablecoin. Is anything right now stopping 
Amazon or Walmart or another big company from starting their 
own stablecoin, and if so, what are the risks if they do that?
    Ms. Liang. So, currently, I do not believe--because 
stablecoin issues are licensed by State money transmitter 
responsibilities, there is nothing that stops a commercial 
company from wanting to issue a stablecoin.
    The PWG proposal for an IDI for the issuer would preclude a 
commercial company from being an issuer. The PWG 
recommendations also are to consider whether--for Congress to 
consider whether the custodial wallet providers or other 
service providers related to the stablecoin arrangement could 
be commercial or should be limited to financial, but this is an 
issue that Congress--the separation of banking and commerce has 
been a long--has been an issue that Congress has grappled with 
over many times in different periods, and this is another area 
where it should issue--it is an area for them to consider 
carefully.
    Chairman Brown. Thank you, Madam Under Secretary.
    Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman.
    Ms. Liang, so, as I said, I appreciate the work that the 
PWG has done. I disagree with some of the conclusions, but it 
was a constructive addition to this ongoing public discussion.
    One of my criticisms is I do not think that the PWG report 
took sufficient account of the existing state-based regulatory 
framework, and as you just pointed out, stablecoin issuers do 
operate as State-based money transmitters, also trust 
companies. And it occurs to me that a stablecoin issued by a 
trust company, if it is backed solely by cash and cash 
equivalents, could very well be safer than many existing 
financial institutions, including many banks.
    It seems that it would be sensible for a trust company that 
issued such a safe, fully backed stablecoin ought to be subject 
to a different regulatory regime than a traditional bank 
because its business model is so different.
    So my question for you, if Congress were to authorize a 
well-defined charter that was specific to stablecoins for, let 
us say, this type of institution, a trust company that issues a 
stablecoin fully backed, do you think that that could be 
designed in a manner that is consistent with safety and 
soundness?
    Ms. Liang. Thank you for the question.
    So I believe that the regulation for stablecoin should be 
flexible, should reflect the risks of the stablecoin activity, 
and stablecoin issuers that issue only stablecoins do not 
extend credit, should not need to be subject to the sort of 
full set of banking regulations that relate to credit 
provision. So flexibility, I agree, is very important.
    The trust charters--and this may vary across States--are 
designed more for--have been developed for fiduciary 
responsibilities. They may not be as currently structured, have 
the authority to reach in and see how the whole stablecoin 
arrangement that is needed to be a payment service is 
conducted, and so I think, as we have talked to State 
supervisors--and we have learned a lot from the experience they 
are building--they have less insight into the overall 
arrangement than at times they might like.
    Senator Toomey. Yeah. And I guess that goes to the point 
that I was trying to make. I am not suggesting that the 
existing State-based regime is perfect and we are finished and 
there is no work to be done here, but I am suggesting that it 
might serve as a part of a regulatory framework, an option that 
would be available, with the overlay that would address some of 
the concerns that you just raised.
    Now, I appreciate you just, once again, reiterated a point 
that I think you have made before that the full set of bank 
regulations really should not need to apply if the issuer is 
not engaged in the full range of traditional banking. I think 
that is a really important distinction.
    And I think one of the things that we ought to consider is 
creating--some people call it ``narrow bank,'' you know, a 
narrowly defined charter that would be well suited for 
stablecoin issuers. Do you think a narrow bank could be 
consistent with the goals of the PWG report?
    Ms. Liang. On a specific type of charter, I guess I could 
be more comfortable with the issues it is trying to address. So 
I think staying flexible within an IDI framework, which I 
believe is flexible, to better match the activities and risks 
with the regulation, it does not need--the PWG report did not 
necessarily recommend deposit insurance, for example. So that 
would be consistent with a narrow bank, but it did require--it 
would like financial firms to be issuers. And for other parts 
of the stablecoin arrangement, it could be commercial, but that 
would be something for Congress to consider.
    So I think in terms of a narrow bank, that can be defined 
separately. I think it is within the IDI charter with lots of 
flexibility to match the risks of the activities.
    Senator Toomey. So where I think there is common ground 
here is a recognition that we both have that the nature of 
stablecoins and their issuers is very distinct from traditional 
banking, and therefore, a different regulatory approach makes 
sense.
    Where we might have--I am not sure, but we might have 
somewhat different views is how clearly Congress should 
prescribe what that looks like. My own preference is not--I 
acknowledge there is a lot of regulatory discretion. I do not 
think that is the optimal way to proceed. I think it is better 
for Congress to provide some guide points.
    I want to make one last point, and I see I am out of time. 
This is not a criticism of you. This is not an observation 
about Ms. Liang at all, but it is a general observation that 
Congress and regulators should remember our mission is not to 
make it impossible for a financial institution to fail. It is 
not to make it impossible for an investor to lose money. It is, 
in my view, to ensure that investors are well informed about 
the risks that they choose to take and to make sure that if 
there is a financial institution that fails, it does not have 
catastrophic, systemic consequences. I hope we will keep that 
in mind as we go down this road.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    Senator Menendez from New Jersey is recognized from his 
office, I believe.
    [No response.]
    Chairman Brown. Senator Warner is recognized from Virginia 
from his office.
    [No response.]
    Senator Warner. Thank you, Mr. Chairman. You got me a 
little bit quicker there.
    Chairman Brown. Sorry. Let me just allow a second or two.
    Senator Warner. I appreciate again you having this hearing, 
Mr. Chairman. This is an issue I think we all need to learn a 
little more about.
    I have got a twofold question. One is I want to reiterate. 
I think maybe you and the Ranking Member already raised this. 
Can we check on a real-time basis that there is sufficient 
backing on these stablecoins? And let us assume for a moment 
there is, but I would like to get a reiteration of that from 
the Under Secretary.
    But the bigger question I had is, assuming there is this 
backing and you have got, in a sense, potentially billions and 
billions of assets having that one-to-one backing, how is there 
a viable business model here for these stablecoins unless they 
are charging exorbitant amount of fees and other add-on costs?
    I know the idea behind oftentimes stablecoins is that there 
is less friction. You can transfer these resources from dollars 
here to currencies that may be unstable in second- and third-
world Nations, but still, if you have got a one-to-one backing 
and that kind of capital basically set aside, other than large 
transaction fees, how do these entities make any money? Under 
Secretary Liang?
    Ms. Liang. Sure. Thank you for your question.
    So, in terms of real-time backing, some of the----
    Senator Warner. I have got no volume, Mr. Chairman, here. I 
do not hear the----
    Ms. Liang. Yeah. I seemed to have lost the camera.
    Senator Warner. All right.
    Ms. Liang. I am not sure if you can hear me. Some 
stablecoins do provide audits of their assets and post them. 
They are not--there are no regulations, and there is no 
regulator to confirm those statements.
    In terms of the stablecoin business model, it strikes me as 
there is probably several, and they probably vary. One is the 
backing for the stablecoin of a dollar. Those assets could be 
invested in, say, longer-term securities, even safe securities, 
and there would be some spread. But I think as you point out, 
certainly, there are fees that are charged to help to provide 
some revenue.
    It is an area that is changing very rapidly. New products 
are being introduced every day. So I think the business model 
will evolve over time.
    Senator Warner. Madam Under Secretary, one thing I had 
reported to me from an expert in this field is if we look at 
these tokens on a bigger basis, not just in terms of 
stablecoins, we have got about 7,000 publicly traded stocks in 
this country with the attendant regulations that are in place. 
If you look at the crypto exchanges, there are about 17,000 
tokens that are being traded on these crypto exchanges with, 
again, varying levels of backing, many of them not even 
claiming to be stablecoins.
    An area that I know the Ranking Member and I have 
discussed--and we have got some legislation to make sure that 
people are not unfairly penalized, but in the world if DeFi, 
decentralized finance, there have been estimates. And I do not 
think there is an accurate number yet, but there could be 
upwards, literally, of a million different coins or different 
tokens out in that field, all of them potentially moving to 
some of these cryptocurrency exchanges. Should we be concerned 
about this and the lack of transparency and the volume simply 
of these items that are being traded?
    Ms. Liang. Yeah. So I think what you are referring to is 
the rapid increase in the digital assets market and new 
products and new services that are being provided, and there 
are concerns about lack of transparency, fraud, potential for 
manipulation, misleading advertising. Those are areas that are 
of great concern to regulators and believe that there needs to 
be important investor and consumer protections put in place for 
that, and that is an area that SEC and the CFTC are working 
actively in that space.
    Stablecoins, just again to emphasize, are a subset, a small 
subset of that smaller space of digital assets, and they 
purport to have stable value. Their prices are not nearly as 
volatile as the prices of digital assets more broadly, but it 
is because of that promise of stable value, they become the 
possibility used for payments on a wide basis in the non-crypto 
world. So, in that sense, it raises a whole different set of 
risks, these potential risks that the PWG report highlighted: 
the run risk, the payment system risk, and concentration of 
economic power.
    Senator Warner. Well, Mr. Chairman, I appreciate you 
holding the hearing, and I think there is great potential in 
digital assets, but, boy, I think we have got a lot of 
education to go on.
    Thank you.
    Chairman Brown. Senator Rounds from South Dakota is 
recognized.
    Senator Rounds. Thank you, Mr. Chairman, and I think this 
is an excellent time to have this particular hearing as well.
    Under Secretary Liang, I am just curious. In South Dakota, 
we have a number of different licensed cryptocustodians. They 
have been licensed through the State of South Dakota and, in 
some cases, federally.
    Just to give you an example, we have Anchorage. This 
company received their charter from South Dakota Division of 
Banking in July of 2019. Anchorage Trust Company received its 
OCC charter in early 2021, becoming the first federally charter 
digital asset bank in history, and although a bank, it does not 
offer deposit or lending services.
    BitGo. In September of 2018, BitGo was approved by the 
South Dakota Division of Banking to act as a qualified 
custodian for digital assets and created the BitGo trust 
company, Kingdom Trust. Kingdom Trust serves as an independent 
qualified custodian for the assets of clients of registered 
investment advisors, broker-dealers, and investment sponsors, 
as well as their individual retirement accounts, nonqualified 
plans, and qualified defined contribution 401(k) plans. Kingdom 
Trust platform was the first to allow self-directed retirement 
accounts holding digital currency investments directly.
    Now, in each of these cases, these are custodians. They do 
not issue a stablecoin, but they act as a custodian for digital 
assets. Stablecoins, as you indicated, were just a small part 
of what could be used out there in terms of different cryptos--
or cryptocurrencies.
    I am just curious. I think that stablecoins definitely have 
a future, and I am concerned that if we do not put in 
appropriate but measured regulatory--a system in place here 
that we may very well fall behind other Nations that do. If we 
want to continue to be the reserve currency of choice, I think 
we have to allow options for very efficient ways in which to 
make payments.
    I think stablecoins can fit into that. If they are a viable 
payment mechanism, then it means that a regulatory environment 
that promotes that. And just the fact that all of these have 
occurred in just the last few years means that there is 
probably a lot more innovation to come in the future, and we 
most certainly do not want that innovation to be unnecessarily 
stymied by a one-size-fits-all regulatory environment here in 
the United States.
    Do you believe--after your review, do you believe that 
stablecoins have this capability of assisting and competing on 
an international basis if we put in a limited regulatory 
environment here in the United States?
    Ms. Liang. Thank you, Senator Rounds.
    So the PWG recommendations were designed to promote 
innovation that is responsible and protects users and the 
economy at the same time while addressing some of the risks 
that it can pose as stablecoins is used for payments, so agree 
with the principles and believe that a stable stablecoin would 
go far in preserving the global reserve currency. The dollar is 
the global reserve currency. I think there is no conflict 
there. I think it is actually important.
    It is part of, in my view, the future of the payment 
system. It serves a purpose. It may not be the only payment 
mechanism or the only payment option, but it could be an 
important part.
    Senator Rounds. Thank you.
    Can the development of both a central bank digital currency 
and private stablecoins coexist?
    Ms. Liang. I see no reason why they could not coexist.
    Senator Rounds. In looking at the report in its entirety, 
where do you believe that the regulatory framework should exist 
after reviewing it? Where should it exist within the Federal 
Government?
    Ms. Liang. So the PWG report came down on the view that a 
consistent, less fragmented regulatory framework is preferable 
to one that is inconsistent, that less fragmentation will spur 
innovation more than a very fragment system.
    When we reached out when developing the report, we were 
hearing from firms, developers that they would like more 
regulatory clarity. Currently, States do issue charters. They 
are learning a lot from this experience, but they do differ 
across States. State money transmitter licenses are across 49 
different States. They vary quite a bit in terms of what they 
cover. They usually address consumer protection, but they are 
not designed for modern payment systems.
    The PWG came out on the side of a less fragmented, more 
consistent, more comprehensive framework.
    Senator Rounds. My time has expired. Thank you, Mr. 
Chairman.
    Chairman Brown. Thank you, Senator Rounds.
    Senator Menendez, I believe, is now with us from New Jersey 
from his office.
    Senator Menendez. Thank you, Mr. Chairman.
    The defining feature of stablecoins versus other types of 
cryptocurrencies is that they claim to be backed by reference 
assets such as the dollar and other currency. However, without 
proper transparency, this only provides the illusion of 
stability for stablecoin investors.
    Madam Under Secretary, are market participants able to 
verify the portfolio of holdings backing what stablecoins they 
invest in?
    Ms. Liang. Stablecoin issuers, perhaps under pressure from 
investors and regulators, are providing self-audited 
statements. Some of the major ones are providing self-audited 
statements on their holdings, but regulators are not in place 
to confirm those or to set the standards for them.
    Senator Menendez. Well, I look at Tether, which is the 
world's largest stablecoin, which was created with a promise of 
a one-to-one backing with the dollar, and instead, a reporting 
from Bloomberg found that many Tether stablecoins are backed by 
risky loans to Chinese real estate companies.
    So it seems to me that transparency is a cornerstone of our 
economy. Consumers and investors make the best decisions when 
they have the necessary information, and that is why I have 
always advocated for robust disclosure rules in different areas 
of the financial system.
    How does the Treasury intend to--do you propose to increase 
transparency to ensure market participants properly disclose 
the value of the assets backing stablecoins so that investors 
can have a true understanding of the risks associated with such 
assets?
    Ms. Liang. Yes. The PWG report would--is in favor of 
transparency of the assets. I think that is an important 
element in reducing run risk.
    I would highlight--I would mention, however, that 
transparency and disclosure are not sufficient to address run 
risk, that there still needs to be a certain about the backing 
and the ability to actually deliver to an investor if they 
redeem their stablecoin. So it probably requires more than 
disclosure and transparency.
    Senator Menendez. OK. I am for that.
    As stablecoins become more broadly used both as a payment 
method and as an investment vehicle, Congress and the financial 
regulators need to address their more illicit uses, including 
money laundering, fraud, and sanctions evasion.
    As the working group noted in its report, criminals often 
use the most common and liquid forms of value. So stablecoins 
could be a particularly attractive vehicle for money laundering 
and terrorist financing. And that report also noted that 
effective international implementations of AML standards is 
critical.
    So the Financial Action Task Force published updated 
guidance on virtual currencies in October. What is your 
understanding of the level of effective implementation by our 
global partners? Who is doing well, and who is not?
    Ms. Liang. Yeah. The illicit finance issues are of serious 
concern to Treasury. Treasury has been leading the work in the 
Financial Action Task Force, as you mentioned. They issued a 
report. They are continuing to work on this.
    As I understand, implementation of standards is not even 
across jurisdictions. There are concerns about lack of 
implementation, consistency in some, and they are working on 
that, those issues specifically.
    I think, certainly, my colleagues in FinCEN would be happy 
to follow up with you if you had additional questions.
    Senator Menendez. Well, I would like to.
    What are Treasury's priorities over the next 6 months with 
reference to increase that implementation?
    Ms. Liang. So, as I mentioned, they are leading the 
Financial Action Task Force and focus specifically on 
implementation, especially exchanges that are operating in some 
foreign jurisdictions.
    I would mention the broader administration effort on 
digital assets is ongoing, and I understand there will be some 
more details announced in the next few weeks. So that can also 
provide some additional information, and again, we would be 
happy to follow up with you on that.
    Senator Menendez. Well, let me close by saying, you know, 
as Chairman of the Foreign Relations Committee, I am 
particularly concerned that countries like Venezuela, Russia, 
Iran will continue to use digital currencies to evade 
sanctions, which would weaken one of our most effective policy 
tools in terms of foreign policy. The anonymity touted as a 
major benefit of stablecoins and other cryptocurrencies is 
inherently very useful for facilitating all kinds of illegal 
activity, and it is imperative that Treasury prioritize 
achieving concrete progress on this issue in the near term as 
the technology becomes a key part of the financial system. And 
we look forward to working with you on that.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Menendez.
    Senator Hagerty of Tennessee is recognized.
    Senator Hagerty. Chairman Brown, thank you, and Ranking 
Member Toomey. I appreciate you holding this hearing.
    Before I get to questions, I would just like to reflect the 
fact that I also serve on the Foreign Relations Committee with 
Senator Menendez, and I share the concerns that he raised in 
terms of illicit activity, and I very much appreciate the 
ongoing work and your keeping us posted as to how you address 
that.
    At the same time that many of us are concerned about 
illicit activity, though, we see great promise in this 
industry, and some of the comments that you mentioned have 
raised some concerns with me, your interchange with Senator 
Rounds, for example, talking about how the President's Working 
Group report has interpreted integrating States' rights and 
States' regulatory authorities in the grand scheme of things.
    I have approved of the innovation that occurs at a State 
level, and I would be very interested in your view on how you 
would intend to incorporate State perspectives, or is this 
going to be a heavy-handed, one-size-fits-all approach?
    Ms. Liang. So I think the recommendations of the PWG report 
are building on the State frameworks that currently exist. The 
first recommendation that stablecoin issuers be an IDI, an 
insured depository institution, given the flexibility within 
that framework is still that the IDI can be a State or Federal 
charter.
    Senator Hagerty. Mm-hmm.
    Ms. Liang. Second, it is building on the State money 
transmitter licenses. It was not a recommendation to replace. I 
do think some of the State money transmitter licenses 
requirements probably need to be updated for digital assets, 
for example, and they were not designed for the kind of new 
emerging modern payment system. But it would--the 
recommendation is that you be able to require some higher risk 
management standards but not to replace the existing framework.
    Senator Hagerty. I appreciate your desire not to replace 
it.
    I hail from Tennessee. We have a wonderful State system 
there and I think one that is agile and capable of 
incorporating recommendations but, at the same time, solving in 
an agile way for new innovation. So I encourage that you 
continue to incorporate the State's perspective.
    I would also like to touch on another notion that you 
discussed with Senator Menendez regarding the risk of runs on a 
given stablecoin, and here, just on a theoretical level, would 
a fully reserve stablecoin pose a substantial risk of 
experiencing a run, or would that risk be higher or lower than, 
say, a fractional reserve bank, the risk of a run on a 
fractional reserve bank?
    Ms. Liang. The fractional reserve bank is backed by either 
deposit insurance or lender of last resort, discount window 
facilities that can--with regulation of the assets and the 
fractional reserve can prevent runs.
    Fully reserved, for example, a money market fund fully 
reserves, 100 percent, high-quality assets have limited 
reserve--run, but for payment--so the difference between 
stablecoin and, say, a money market fund is that a money market 
fund, in my view, is purchased for the purpose of earning 
yield. You purchase a stablecoin to be able to use it as a 
payment mechanism. So they are slightly different. So I think 
the redemption features will distinguish a stablecoin from, 
say, a money market fund, a Government money market fund.
    Senator Hagerty. I think as we look at this, we should be 
just particularly careful to accommodate the great potential 
that this shows, to recognize that we want to keep America a 
competitive market, that that is the interest of our economy 
security.
    We also need to take our national security interest into 
account, but I hope that we do so in a way that it continues to 
make America a desired jurisdiction to do this, rather than 
pushing this activity, which is very jurisdictionally movable. 
We would rather do it here than push it to another market where 
we would have much less control and visibility on it.
    Ms. Liang. So I would agree with your comment. Stablecoins 
that are stable, stablecoins that are tied to the U.S. dollar 
that are stable, I think, would be an important component of 
preserving a global reserve currency.
    Senator Hagerty. Yeah. I think we should work together to 
make certain that our vital concerns, our vital national 
security concerns are addressed as we try to make this market 
the leader, and I think we have every potential to do so. We 
have great innovators here, but I have had some very disturbing 
conversations with those in the industry about trying to decide 
which jurisdiction is going to be best. And I think the work 
that you are undertaking to provide clarity, again, 
incorporating States' perspectives, we can do that. We can take 
the lead, but I also would underscore the times of the essence 
here because these markets are highly competitive.
    Ms. Liang. Yes.
    Senator Hagerty. And a tremendous amount of capital is 
moving around the globe right now trying to search for a reason 
there.
    I would like to turn my ability for just a minute, my last 
question, regarding the FSOC's ability to address designating 
financial market utilities as systemically important under 
Title VIII of the Dodd-Frank Act. If you were to take this 
market and address the utilities here as systematically 
important--the stablecoin market is much smaller than many of 
the systemically important financial market utilities--how 
would you go about making this determination, and would this be 
the first time that such a designation has been made under 
Title VIII?
    Ms. Liang. Yes. The short answer to your question about 
Title VIII for this would be yes under the payment clearing 
settlement, but FSOC----
    Senator Hagerty. It would be the first?
    Ms. Liang. Yeah. The council has a responsibility to look 
for and identify risks to financial stability. It has been 
focused on digital assets more broadly and looking, for 
example, especially at whether the extent to which leverage may 
be raising the value of the prices of crypto assets.
    On stablecoin, I think it is a little early to prejudge how 
they could use their authorities. They certainly have a 
responsibility to think about how to use their authorities, but 
it is new. And it would require--it would depend on the facts 
and circumstances of the case.
    Senator Hagerty. I am running out of time, but I would just 
encourage you to keep in close contact with us because, again, 
I want to maintain----
    Ms. Liang. Yes.
    Senator Hagerty. ----a competitive market here----
    Ms. Liang. Yes.
    Senator Hagerty. ----rather than put such heavy-handed 
regulatory perspective on this that we are going to shove this 
to another jurisdiction.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator.
    Senator Warren from Massachusetts is recognized.
    Senator Warren. Thank you, Mr. Chairman.
    And before I start, I just want to echo the Chairman in 
stressing the importance of voting on our Federal Reserve 
nominees this afternoon. This is our job, and we should not be 
playing games in order to delay this. So I hope we can get that 
vote done today.
    I want to talk about the cryptocurrencies here. Some 
cryptocurrencies like bitcoin are not backed by anything but 
hype, but stablecoins are different. They claim to be pegged to 
a fixed asset like the dollar. One stablecoin is supposedly 
backed up by one dollar or a dollar equivalent. Even though 
boosters claim that stablecoins represent the future of the 
payment system, they are not really being used to pay for real-
world goods and services.
    Even so, stablecoins have taken off. Their market cap is 
now 35 times bigger than it was just 2 years ago, and instead 
of being used to pay for goods and services, those billions of 
dollars worth of stablecoins are used to lubricate speculation 
in the shadiest part of the crypto ecosystem where people are 
lending, trading, and leveraging with no laws and no sheriff 
anywhere.
    The President's Working Group on Financial Markets recently 
identified a long list of risks posed by stablecoins: run risk, 
payment system risk, concentrated economic power, illicit 
finance, investor protection. Or to state that in slightly less 
fancy terms, it found that stablecoins run the risk of helping 
cheaters steal people's money; financing terrorism, cyberattack 
ransoms, and the drug trade; causing a run on the financial 
system, like we saw in 2008; and allowing big stablecoin users 
to dominate market and harm consumers.
    Now, Secretary Liang, do you agree that these kinds of 
risks mean that stablecoins are not just an emerging threat to 
our financial system but a threat that could become systemic if 
this market continues to grow rapidly?
    Ms. Liang. So, Senator Warren, thank you for the question.
    So I do think there is some urgency to considering 
stablecoins and applying the appropriate regulations to reduce 
run risk and the potential for them to scale up quickly.
    Senator Warren. Let me remind you what my question is: Do 
they post the threat of becoming a systemic risk?
    Ms. Liang. Of becoming a systemic risk, yes.
    Senator Warren. Yes, they do. I agree that the stablecoin 
market poses significant risk and that Congress and our 
regulators need to contain these risks.
    And that is where you come in. You advise the Financial 
Stability Oversight Council, FSOC, and you sometimes sit in 
these meetings as Secretary Yellen's substitute. FSOC's job, 
according to Treasury's website, is, quote, ``identifying 
emerging threats to financial stability and coordinate 
regulatory actions to address them,'' end quote.
    So, Under Secretary Liang, if you believe that stablecoins 
are a serious emerging threat to our financial system, then 
have you advised FSOC to use the tools that Congress gave it 
specifically to mitigate threats before they get out of hand?
    Ms. Liang. So FSOC, as you say, has the responsibility to 
identify risk to financial stability. It is discussing these 
issues. It does convene the regulators. They have been 
discussing consumer protection and investor protection, illicit 
finance, and taking steps to assess what risks and what 
authorities regulators have.
    The PWG was recommended, which is a subset of the FSOC, 
with most tangible interests to assess whether there are 
existing regulatory gaps, however, in assessing to address the 
risks of stablecoins as a use for payments and identified some 
gaps and made some recommendations.
    Senator Warren. So you are moving at least in that 
direction? Is that what you are telling me? I want to make sure 
I just understand your technology here today.
    Ms. Liang. Yes. The PWG is making recommendations, and the 
complement the existing authorities that regulators have--the 
SEC, the CFTC--and the banking regulators are issuing guidance 
carefully about how banks----
    Senator Warren. Well, I understand about the other 
regulators. I am asking about FSOC----
    Ms. Liang. Mm-hmm.
    Senator Warren. ----because I do not want monitoring to be 
a way to just avoid doing your job.
    In your testimony before the House Financial Services last 
week, you suggested that FSOC should not and would not act 
ahead of Congress. That is something the crypto industry might 
find comforting, but it is not consistent with FSOC's mission. 
Did you misstate something last week?
    Ms. Liang. So I--what I intend to say--intended to say--I 
did see that--is FSOC has the responsibility to look at the 
tools it has----
    Senator Warren. Well, not just to look----
    Ms. Liang. ----and whether it----
    Senator Warren. ----but to use.
    Ms. Liang. ----they can apply, and the situation is 
developing very quickly. And so how different tools would 
apply, it is a big difficult to prejudge how they would be 
used, but I would----
    Senator Warren. OK. But you are willing to use them ahead 
of Congress?
    Ms. Liang. If that is the case and it is assessed that they 
are a systemic risk that needs to be addressed, and I----
    Senator Warren. Well, not that they are a systemic risk. 
Remember what it says on the website: before that risk has 
reached fruition.
    You know, I worry that you are approaching the cryptomarket 
with blinders on. You talk a lot about the benefits of the 
stablecoins, benefits that have been promised for years and 
that have still not materialized, and all the while, you are 
not talking about the risks that are flashing bright red in our 
faces here.
    Congress needs to put guardrails around crypto, and I am 
writing a bill to do just that. But there is no reason to 
delay. Pointing a finger at Congress does not give you or FSOC 
the right to ignore your current statutory responsibilities.
    Thank you. I apologize for running over, Mr. Chairman.
    Chairman Brown. Senator Lummis from Wyoming is recognized 
from her office.
    Senator Lummis. Well, thank you, Mr. Chairman, and, Under 
Secretary Liang, thank you for appearing here today.
    I want to follow on the line of questioning that Senator 
Hagerty had begun a few minutes go and ask about the 
recommendation in the President's Working Group report on 
stablecoin issuers that it should only be limited to insured 
depository institutions.
    With respect to the insurance requirement, is it the case 
that the FDIC and NCUA have found that stablecoins and their 
assets are insurable, and have these agencies committed to 
provide deposit insurance to newly chartered, de novo 
institutions that issue a stablecoin?
    Ms. Liang. Thank you for that question, Senator Lummis.
    The proposal for stablecoin issuers to be insured 
depository institutions, given the flexibility of that 
supervisory and regulatory regime, is not--does not necessarily 
mean that stablecoin need deposit insurance. I think that would 
depend on the circumstances of the backing and the 
functionality of the stablecoin that is being provided. So the 
proposal is not, and the PWG did not recommend necessarily that 
stablecoins be backed by deposit insurance.
    Senator Lummis. And what other types of backings would you 
believe adequately protects the consumer?
    Ms. Liang. So I think the consumers can be protected with 
reserve assets that are truly high quality, that will provide 
some--reduce the risk of runs by investors.
    There is also the protections provided by oversight of 
the--all the entities that go into providing supporting 
stablecoin as a payment. So the custodial wallets, the custody, 
the other ways of trans--of liquidation of the redemption of 
the stablecoin that can be provided. So I think all those go 
into protecting consumers when they want to use stablecoin for 
payments.
    Senator Lummis. So since there are alternative ways of 
bringing stablecoins inside the banking perimeter, like 100 
percent reserve bank with tailored holding company supervision, 
is that something you discussed and are willing to consider?
    Ms. Liang. Yes. I think bringing stablecoins into an IDI 
framework that is adjusted for the risks of the stablecoin 
issuer, which would include solid backing of the stablecoin, 
one for one, would certainly be an option.
    Senator Lummis. Well, I am so pleased to hear that that is 
your approach, because without it, I think the type of 
competition that Senator Hagerty wants to protect would be at 
risk if someone already has deposit insurance and can issue a 
stablecoin like JPMorgan's JPM coin. That would seem to limit 
competition in that marketplace to only the very, very largest 
banks in our country, and there may be other options that other 
institutions could explore. And it sounds like you are willing 
to discuss that with them.
    So I am going to conclude with a different question: Does 
Treasury have a timeline for issuance of the guidance on the 
definition of broker for digital assets under the 
infrastructure bill? I know we were promised some public 
guidance on this a few months ago, and we have yet to see it.
    Ms. Liang. I know Treasury is working very actively on 
that. The principle of the tax provisions is, you know, for 
those who owe taxes should pay their taxes. It is not designed 
to crimp the activities of crypto assets.
    Senator Lummis. Well, I am also very pleased to hear that 
because some of the provisions in the definition, as you know, 
included people who would not know the ultimate customer of a 
digital asset, the ultimate customer being the one who owes the 
taxes as opposed to the inventor of the software or the 
hardware.
    So thanks very much. We look forward to that guidance 
coming out as soon as possible and appreciate, again, your 
testimony today.
    Mr. Chairman, I yield back.
    Chairman Brown. Thank you, Senator Lummis.
    Senator Van Hollen of Maryland is recognized.
    Senator Van Hollen. Thank you, Mr. Chairman and Ranking 
Member Toomey.
    I know there is some discussion about moving forward on the 
vote on the Fed nominations today. I hope we will move forward 
on all five this afternoon.
    Ms. Liang, I have been monitoring some of the testimony. 
Welcome. And we do want to encourage innovation. I suppose 
that, but we also want to make sure that we protect consumers. 
You would agree?
    Ms. Liang. Absolutely.
    Senator Van Hollen. And I do want to focus on some of the 
things that could happen when things go wrong, where there are 
protections under our existing financial arrangements that do 
not apply to stablecoins, even though stablecoins are intended 
to be tied to a stable base.
    As you know, when it comes to the deposits in banks, we 
have the Federal Deposit Insurance Act that makes sure that 
consumers are protected up to some amount of their deposits, 
right? Is there any protection if the stablecoin issuer was to 
go belly up for consumers?
    Ms. Liang. There currently--the protection would be 
provided by the quality of the assets that are held in reserve 
against the stablecoin, but there is not deposit insurance. But 
it would be----
    Senator Van Hollen. But are they--let me ask you this, 
then.
    Ms. Liang. But they are not regulated.
    Senator Van Hollen. Are there any standards with respect 
to----
    Ms. Liang. There are no standards.
    Senator Van Hollen. ----what the reserves have to be?
    Ms. Liang. No. There are no standards at this point.
    Senator Van Hollen. Right. So, currently, if the issuer 
were to go belly up, in other words, if they were to go out of 
business and they did not have reserves to cover the deposits, 
the depositors--the holders of stablecoin would just be out of 
luck, right?
    Ms. Liang. That is correct.
    Senator Van Hollen. OK. There are also protections that 
apply to consumers when it comes to transactions and things 
like credit cards or debit cards, right?
    Ms. Liang. Yes.
    Senator Van Hollen. And for example, if there are payment 
errors, fraud, or unauthorized transactions, then consumers 
have existing protections when they are dealing with credit 
cards or debit cards, right?
    Ms. Liang. Correct.
    Senator Van Hollen. And when it comes to stablecoins, if 
there is some error, if there is some kind of fraud or 
unauthorized transaction or a hacking, are there any 
protections for the consumers of stablecoins?
    Ms. Liang. So stablecoins are licensed under State money 
transmitter regimes, and there are consumer protection laws in 
those. They vary by State. They may apply to stablecoins. In 
some States, they may not.
    Senator Van Hollen. So right now, it is hit or miss, 
depending on whether you are in a State that provides some 
protection and the extent of that protection. Is that right?
    Ms. Liang. As I understand it, yes.
    Senator Van Hollen. So just to pick up on the question from 
Senator Warren, in terms of the work group, the Presidential 
work group that was put together, clearly, you identified some 
of the risks that we are talking about right now. Is that 
correct?
    Ms. Liang. Correct.
    Senator Van Hollen. And do you believe that the executive 
branch currently has the authority to move forward to protect 
consumers, for example, in the two areas that I mentioned, 
right? With respect to some kind of stablecoin equivalent of 
depository insurance or national rules that protect consumers 
from errors or fraud, do you believe that the administration, 
the executive branch, has the authority to regulate in that 
area, or is that an area that would require legislation?
    Ms. Liang. I believe that is an area that would require 
legislation, that the risk of runs and the risk of payment 
system disruptions, including protections to consumers, is a 
gap in the current regulatory system.
    Senator Van Hollen. And in response to Senator Warren, you 
indicated that there may be some areas where FSOC could move. 
If not these areas, can you describe some of the areas where 
you think you may have the authority to move at the executive 
branch level?
    Ms. Liang. Yeah. I do not--I think each--you know, each 
agency will take actions consistent with their mandates, but it 
is not sufficient for the gap, for the risks of runs and 
payment system.
    FSOC has some tools, but it is not a substitute. It would 
not provide a consistent, comprehensive framework. It could 
address particular risks as they arose, depending on the facts 
that circumstances, but it is not a comprehensive, consistent 
framework that legislation could provide.
    Senator Van Hollen. And I hope you will work with those of 
us on this Committee who are interested in providing that kind 
of consumer protection regime and standards in this area.
    Ms. Liang. Absolutely. We would be very happy to work on 
it.
    Senator Van Hollen. Thank you.
    Thank you, Mr. Chairman.
    Chairman Brown. Thanks, Senator Van Hollen.
    Senator Daines from Montana is recognized.
    Senator Daines. Chairman Brown, thank you.
    As I said in our previous hearing on stablecoins, I think 
it was about 2 months ago, I do believe the stablecoin policy 
is an area where there should be, there can be, hopefully there 
will be some broad bipartisan agreement and compromise. I do 
believe that we should pursue a light-touch approach to 
regulation.
    But I also believe a bipartisan legislative framework on 
stablecoins is possible and I do believe necessary. Bipartisan 
legislation will also help provide users as well as market 
participants with the certainty they need to let innovation 
flourish without fear that regulators will overreach using 
authority in existing statutes that in no way contemplated the 
emergency of stablecoins.
    I would urge my colleagues to avoid any partisan solution 
and instead seek consensus on truly something that is 
bipartisan. There is a moment here that we need to seize.
    It would provide certainty needed for private industry to 
grow as well as to prosper. I think this will help provide the 
best pathway for this technology to grow in a way that benefits 
the folks back home in Montana, all Americans, and the global 
financial system.
    Furthering the use of stablecoins would help to increase 
the speed of payments and lower cost in the financial system, 
and I believe these are results we should all agree are worth 
pursuing.
    I turn to my questions. Under Secretary Liang, absent 
legislation from Congress, can you provide us a sense as to 
which Federal agencies would be most likely to issue 
regulations relating to stablecoins and on which statutes they 
would derive their authority?
    Ms. Liang. So, Senator Daines, thank you for the question.
    I would need to defer to the individual agencies as to 
what--how they would interpret their authorities and their 
strategies.
    I would say, currently, the SEC and CFTC are approaching 
crypto assets more broadly to prevent fraud, to prevent 
manipulation, to protect investors and consumers.
    The banking agencies are taking actions to--are taking--
issuing guidance to advise banks about their activities in 
crypto, but currently, I do not think there is the authority 
for any agency to address the risks of stablecoins, to prevent 
runs, and to prevent disruptions in the payment system should 
stablecoins be used widely as payments.
    Senator Daines. So I think hearing you answer that 
question, it leads me to follow up in terms of your thoughts 
around the need for adopting a clear regulatory framework that 
would be established through bipartisan legislation. Might that 
be a catalyst for a more widespread adoption of digital assets?
    Ms. Liang. I think a consistent comprehensive framework 
could be a catalyst for innovation as well. I think developers 
need clarity on how they can operate, how they can develop 
their business that will be viewed as permissible in the 
marketplace, to serve customers, to protect customers as well 
as to provide a product that they think can deliver faster 
payment--faster payments, cheaper payments. So I do think more 
regulatory clarity can actually promote innovation.
    Senator Daines. And I think why we need bipartisanship here 
and, in my opinion, a lighter touch is we have an opportunity 
where we could actually put the right kind of framework in 
place that could accelerate innovation.
    Ms. Liang. Mm-hmm.
    Senator Daines. The wrong framework and, in my opinion, too 
much of a heavy hand could certainly stifle innovation. So this 
is a moment we could actually accelerate it, I believe, with 
the right regulatory framework.
    Ms. Liang. Yes, I agree. And we are seeing stablecoin 
issuers pursuing bank-like charters and talking to the banking 
regulators. So they do believe that this is an area--this is a 
path, possible path forward.
    Senator Daines. And anytime we look at a situation like 
this, an issue like this, I always come back to the question of 
global competitiveness, what this means certainly around the 
world. If the U.S. does not clearly define this landscape, 
would it be unreasonable to expect a large portion of this 
activity to perhaps migrate overseas to countries with more 
favorable and clear regulatory structures?
    Ms. Liang. I think businesses would tend to migrate where 
regulations are more clear. I would absolutely agree with that.
    There is an incentive to want to tie to the value of the 
dollar because the dollar is the global reserve currency, and 
so I think there is a pull from the strong dollar and all that 
stands behind a strong U.S. dollar. Technology can help that, 
but the dollar itself is--you know, the value of the global 
status of the dollar is supported by the rule of law and the 
governance of the country and the economic potential. But the 
technology will want to--you know, is incentivized to move to 
be backed by the dollar because of that, and it will help it, I 
think, if we can provide a good framework.
    Senator Daines. Thank you.
    Chairman Brown. Thank you, Senator Daines.
    Senator Cortez Masto from Nevada is recognized from her 
office.
    Senator Cortez Masto. Thank you, Mr. Chair.
    Under Secretary, welcome. Thank you so much for being here.
    Let me just say I agree with Senator Daines that this issue 
really is bipartisan always when it comes to the needs of the 
regulatory system, and in that spirit, that is why I look 
forward to voting for the five Federal Reserve nominees this 
afternoon. We need a full Federal Reserve Board to bring down 
prices and promote full employment and wage gains, and we 
really should be playing politics with that.
    Let me say, Mr. Chairman, thank you for this hearing. It is 
such an important issue. I also appreciate the Ranking Member 
putting--laying out these principles to talk about developing a 
legislative framework for stablecoins. It is such an important 
area, and I think it is an area we need to focus on.
    So, Under Secretary, let me start with a couple of 
questions, and I am going to follow up on Senator Daines' 
questions to you about which agencies are responsible for the 
oversight right now of stablecoins. Are there any Federal 
agencies that are responsible right now to ensure that 
stablecoin issuers are adequately backed?
    Ms. Liang. Currently, stablecoin issuers are backed by 
either State money--are regulated by State money transmitter 
licenses or State charters.
    Senator Cortez Masto. So right now, there is no Federal 
agency looking at whether they are adequately backed. It is 
State agencies; that is, if the States have some sort of regime 
for that. Is that correct?
    Ms. Liang. That is correct.
    Senator Cortez Masto. OK.
    Ms. Liang. That is correct.
    Senator Cortez Masto. Yeah. And it goes back to what 
Senator Van Hollen had said. Some States have it; some do not. 
So there is some patchwork there.
    Let me ask you this. With respect to stablecoin and 
cryptocurrency, do they always have to register as a money 
services business under FinCEN's Federal regime?
    Ms. Liang. Yes.
    Senator Cortez Masto. Yeah. And thank you, because, you 
know, the last Congress, I worked on the FinCEN Improvement 
Act. I led that bill, and it is important that we gave FinCEN 
the authority over cryptocurrencies and other technical 
reliance on financial payments for this very reason.
    Do you feel that FinCEN has a robust framework to prevent 
and sanction illicit finance when it comes to stablecoins or 
any cryptocurrency?
    Ms. Liang. Yes. Yes, FinCEN--so registering as a money 
service business under the State transmitter license triggers a 
number of FinCEN regulations: AML, BSA, AML/CFT regulations. 
They have been working on this for many years. Some of the 
initial guidance on what was called virtual assets came out in 
2014. They lead some of the international work. This is an area 
of strong focus. They understand and want to enforce stronger--
have a stronger implementation and enforcement.
    As I understand it, some of the issues are related to 
activities abroad, exchanges abroad, and with the Financial 
Action Task Force, they are working globally to try to improve 
implementation.
    This is an area also for the administration more broadly, 
which they are working on and will be announcing more work on 
in the coming weeks.
    Senator Cortez Masto. Great. Thank you for that.
    Let me go back to the report that the working group put 
out. In some of the prudential concerns, one of the areas that 
you talked about is to address additional concerns about 
systemic risk and concentration of economic power, and then in 
there, it states supervisors should have authority to implement 
standards to promote interoperability among stablecoins. Can 
you discuss the interoperability piece of it and elaborate a 
little bit more on that?
    Ms. Liang. Yeah. So one of the three prudential risks is 
this possibility of increased concentration of economic power. 
This has to do with the network externalities of a payment 
system, where everyone--there are greater benefits if everyone 
is part of the same payment system. So, if you have large 
firms, the ability to scale up a payment system could 
potentially increase market power.
    One way to diminish or to offset some of that unwanted 
increase in market power would be to promote interoperability 
among stablecoin issues, and that just allows for consumers to 
exchange one stablecoin for another, so to speak, and allow 
them to interact with each other so you do not create a number 
of different sort of closed-loop systems.
    Senator Cortez Masto. And I know my time is up, but I would 
imagine that there is going to be issues with respect to the 
standardization of that interoperability that we would have to 
address.
    Ms. Liang. Absolutely. Absolutely. It is a complicated 
issue of which more discussion would definitely need to be 
taking place.
    Senator Cortez Masto. Thank you. Thank you very much.
    Chairman Brown. Thank you, Senator Cortez Masto.
    Senator Ossoff is recognized from his office from Georgia.
    [No response.]
    Chairman Brown. Senator Sinema from Arizona is recognized 
from her office.
    Senator Sinema. Thank you, Mr. Chairman, and thank you to 
our witnesses for being here today.
    As you know, Mr. Chairman, I cochaired the Senate's 
Financial Innovation Caucus alongside my friend, Senator Lummis 
of Wyoming. So I am very glad that we are holding this hearing 
today.
    As we discuss new financial technologies, I want to ensure 
that we balance commonsense protections for everyday Arizonans 
while creating an environment where innovation can thrive.
    Under Secretary Liang, it is great to speak with you today 
and to discuss this important topic. The President's Working 
Group report on stablecoins calls for Congress to pass a 
solution to avoid runs on stablecoins and to ensure that users 
have commonsense protections to safeguard stablecoins' stated 
value. These objectives align with some of the concerns I 
raised in our last stablecoin hearing.
    There is general agreement that this is a noble goal, but 
it is important to be thoughtful about the solution that we 
propose. I am interested in ensuring there are adequate 
consumer protections to give Arizona consumers confidence in 
the value of stablecoin, but I also want to make sure that 
regulatory requirements are not overly onerous. We do not want 
to discourage innovation or limit consumer choice.
    Can you elaborate on how the report balances these 
competing priorities?
    Ms. Liang. So thank you for that question. So I think that 
was the underlying principles of the report to balance 
innovation and competition for payment systems and while at the 
same time protecting consumers.
    So our view is that a more clear, consistent, comprehensive 
regulatory framework goes a long way to promoting innovation 
and providing choices for consumers.
    It does requirement that stablecoins actually be stable, 
and so there are some recommendations about how to achieve 
stability in a stablecoin. It requires that stablecoins be able 
to provide the payment services that it offers in a reliable 
way, and we want the payment system to be resilient. So it 
makes a number of recommendations in that space.
    Senator Sinema. Well, thank you, Under Secretary Liang.
    I am encouraged to see this discussion of decentralized 
finance and Web3 evolve. I think it has the potential to make 
everyday transactions faster, safer, simpler, and more 
affordable for everyday Arizonans.
    With any new groundbreaking technology--the internet in 
particular comes to mind--the technology itself is quite 
promising, though many of the early use cases ultimately do not 
work and do not make it. The technology, however, ensures, and 
the next group of entrepreneurs improve on or disrupt what came 
before them. So that is the nature of innovation, and I am 
committed to ensuring we have an innovation ecosystem that is a 
win-win for Arizona entrepreneurs and consumers alike.
    I see decentralized finance and Web3 in this way. Our job 
is to think through what works and what does not, what helps 
consumers and what does not, and to create commonsense rules of 
the road that provide certainty for everyone. It is important 
to me that we address some of the short-term challenges with 
these technologies while also not losing sight of the long game 
when it comes to the potential benefits of decentralized 
finance and Web3.
    Are you and the Administration aligned in that thinking on 
this issue?
    Ms. Liang. So I agree that DeFi is growing rapidly. There 
are many different range of products and services being 
offered, and the potential for benefits are there.
    Innovation is--responsible innovation is absolutely 
supported with the--alongside of making sure that investors and 
consumers are protected through actions by the market 
regulators, the Consumer Financial Protection Bureau, or the 
State regulators where appropriate, so agree with your 
assessment.
    Senator Sinema. Thank you.
    Finally, I received a letter from Assistant Secretary 
Davidson in response to a bipartisan letter I sent in December 
with Senators Portman, Warner, Crapo, Toomey, and Loomis. Our 
letter requested that the cryptocurrency provision, included in 
our bipartisan Infrastructure Investment and Jobs Act, is 
implemented in accordance with congressional intent. I am not 
encouraged by aspects of a letter we received, including but 
not limited to an acknowledgment that congressional intent is 
that cryptocurrency providers, bankers, and those solely 
engaged in the business of selling hardware or software, to 
allow individuals to control private keys. They should not be 
considered brokers for the purpose of this action.
    Providing certainty to these groups and ensuring that a 
future rulemaking aligns with congressional intent is a 
priority for me, and I believe it is possible to help close the 
tax gap while also ensuring that the rules are clear and fair 
so that innovators are not inadvertently or unintentionally 
subjected to these requirements.
    So my question of you is we submit that the Department will 
work closely with me and the other authors of the letter to 
consider development of a Notice of Proposed Rulemaking to 
ensure that the law is executed as Congress intended.
    Ms. Liang. I believe the Treasure Department's principle is 
to not to squash crypto assets but to collect taxes from those 
who owe taxes.
    Senator Sinema. So just to clarify--and I know my time has 
expired, Mr. Chairman--Under Secretary, would you be willing to 
work with the authors of our bipartisan letter to ensure that 
Congressional intent is honored?
    Ms. Liang. I am sure Treasury and my colleagues in the 
Office of Tax Policy would be very happy to work with you.
    Senator Sinema. All right. Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Sinema.
    Senator Ossoff from Georgia is recognized from his office.
    Senator Ossoff. Thank you, Mr. Chairman, and thank you, Ms. 
Liang, for joining us and for your service and for the report 
that the President's Working Group has submitted.
    Could you please restate briefly what are the principal 
risks that you assess to be posed by the growth of the 
stablecoin market?
    Ms. Liang. So, briefly, stablecoins have been growing, and 
their potential to be used for payments in the ordinary world, 
the non-crypto world, has been increasing. So the risks that we 
included and identified in the PWG report are, one, the risks 
that investors could run on a stablecoin, perhaps because 
investors lose confidence in the value of the assets that are 
behind it; two, the risk of disruptions to the payment system, 
if they--the payment--the operations are not held as standards 
that ensure that payments can be made as promised; and then, 
third, the increased risk from higher market concentration if 
some stablecoins were to scale up very quickly and increase 
market share. So those are the three risks that were identified 
in the PWG report for which the report--the PWG believed 
current regulations do not address.
    Senator Ossoff. Thank you, Ms. Liang.
    The report states that stablecoins, depending on context, 
could be considered derivatives or commodities or securities. 
Why are existing regulatory authorities, in your opinion, in 
sufficient?
    Ms. Liang. So, currently, stablecoins could be--you know, I 
leave it to my colleagues at SEC and CFTC as to whether 
stablecoins are securities or commodities, but as a payments 
mechanism, to be used by households and businesses to 
facilitate payment transactions, that, I think, is a separate 
consideration, and that is what the PWG report focused on.
    Senator Ossoff. And what regulatory actions might you 
recommend be undertaken for which the Department currently 
lacks statutory authority?
    Ms. Liang. So, currently, stablecoin issuers are 
authorized--they are licensed by State money transmitter laws, 
some trust banks in some States. There is not a Federal agency. 
The principal recommendation is that stablecoin issuers 
register, be required to be insured depository institutions 
where the regulation and supervision of these institutions 
would be matched to the risks and activities of a stablecoin 
issuer, so that if it does not make loans or extend credit, it 
is not subject to the same set of rules that other traditional 
commercial banks might be.
    Senator Ossoff. What are the most common mechanisms by 
which issuers peg the value of the stablecoin to the U.S. 
dollar, and which of those mechanisms, in your view, present 
the most risk or may most require some form of prudential 
regulation at the Federal level?
    Ms. Liang. There are many different stablecoins issuers 
right now. I think the predominant is tied to the value of the 
U.S. dollar, and they do that by holding reserve assets in U.S. 
dollars that are--on redemption request would be able to be 
converted to a dollar, to one dollar. So that is the primary, 
by far, the largest stablecoin issuers.
    The issue at question is whether the issuer, the stablecoin 
issuer could actually provide a user a dollar on request, and 
the IDI framework, the insured depository institution 
framework, would be an important step to ensuring that 
stablecoins, in fact, deliver the dollar when asked.
    Senator Ossoff. And in your view and in the analysis of the 
working group and a relevant law, Ms. Liang, you do not believe 
that currently regulatory authorities have adequate statutory 
authority to, for example, impose reserve requirements or other 
prudential requirements on such issuers to ensure that they can 
maintain the peg if there is a sudden increase in demand for 
redemption?
    Ms. Liang. I do not think there is any regulation that 
requires them to do that. No.
    Senator Ossoff. Thank you for your testimony, Ms. Liang.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Ossoff.
    Thank you, Madam Under Secretary, for joining us today.
    Senators who wish to submit questions for the record, those 
questions are due 1 week from today, Tuesday, February 22nd. 
Witnesses--you, Madam Under Secretary--have 45 days to respond 
to any of those questions.
    Thank you again. The Committee is adjourned.
    [Whereupon, at 11:41 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    Let me start by talking about the Federal Reserve.
    This afternoon at 2:15 we will be meeting in SVC-200 to markup five 
Federal Reserve nominees and one for the FHFA.
    We need a full Federal Reserve Board of Governors to bring down 
prices and put workers first.
    Ranking Member Toomey and I agreed on the dates for the hearing and 
markup over 3 weeks ago.
    Americans are depending on us to get them on the job as soon as 
possible.
    If my colleagues are as concerned about inflation as they claim to 
be, they will not slow down this process, which will only hurt workers, 
their families, and our recovery.
    If you watched the Super Bowl on Sunday, you saw ad after ad for a 
product that most Americans have heard of, but almost nobody knows what 
it is. Even many of the people who've bought it often don't really 
understand it.
    Big cryptocompanies are looking to make big profits, and are 
desperate to reach as many Americans as they can. They brought in 
celebrities and gimmicks to make crypto sound exciting and daring and 
profitable.
    But the ads left a few things out.
    They didn't mention the fraud, scams, and outright theft.
    The ads didn't point out that you can lose big in crypto's huge 
price swings. They didn't tell you about the high fees pocketed by the 
cryptocompanies.
    And they sure didn't explain that cryptomarkets lack basic investor 
protections and oversight.
    Just a few weeks ago, hackers stole more than $300 million of 
people's investments from a cryptoplatform.
    The fact that these companies felt the need to advertise at all is 
a bit of a giveaway about one of their major claims--if this were 
actually meant to be used as currency, why would you need to buy ads? 
I've never seen the Federal Reserve buy a multimillion dollar 
commercial for ``U.S. dollars.''
    That's because crypto isn't money. It's designed for speculation. 
And watching all those ads reminded a lot of us of some asset bubbles 
we've been before.
    The 2000 Super Bowl featured 21 ads from 14 different dot com 
start-ups. The internet may have been the next frontier, but those 
companies weren't--many of them were defunct within a year or two, and 
just four are still around today.
    We're here today because once again, real people's real money is at 
risk. We need to look beyond the unproven promises, and protect 
Americans and our entire financial system.
    In a hearing last July, this Committee examined the risks of 
cryptocurrencies to our economy. In December, we looked closely at the 
mechanics behind stablecoins and stablecoin companies.
    Today, we're joined by Treasury Under Secretary Liang, to look at 
the risks stablecoins pose, and how regulators and Congress can protect 
consumers.
    Last fall, the Treasury Department led a team of our financial 
regulators to conduct a report on stablecoins. The report makes it 
clear that without regulation, stablecoins can endanger our economy, 
our payments systems, our hard-earned money.
    And while stablecoins suggest they're like money, good luck trying 
to use one at the store. Their main purpose today is to make it easier 
to trade, speculate, and in some cases even hide assets in crypto and 
digital markets.
    In just a few years, stablecoins have mushroomed into a 175 billion 
dollar market. Now they're asking us to believe that what they've built 
is as good as real money, and that it works the way these start-ups say 
it does.
    Americans--and this Committee--should look carefully at those 
promises.
    The companies claim that a stablecoin is backed by real dollars, 
invested in a reserve account--that's what makes it ``stable.''
    But our regulators tested that claim by a giant stablecoin issuer. 
That issuer ended up paying nearly $60 million in fines because it lied 
about its reserves. It turns out that for over 2 years, the stablecoin 
was only really ``backed'' 28 percent of the time.
    Stablecoin companies say that you can, quote, ``redeem'' a 
stablecoin whenever you want, exchanging it back into dollars from the 
stablecoin's reserve.
    But the fine print in the agreements of some of the biggest 
companies says that ordinary consumers can't actually redeem their 
stablecoins for dollars from the company that issues them. Only 
institutions like hedge funds can. And even then, many stablecoin 
issuers can delay redemptions, or refuse them entirely.
    So if you saw a Super Bowl ad and figured you'd give this a try, 
and you change your mind and want to exchange your stablecoin for 
dollars, you might be out of luck. The website could be down. Your 
money could be trapped.
    Stablecoin issuers also promise that their product will serve 
people who have been left behind in the financial system.
    But as we've established, crypto doesn't actually function as real 
currency in any traditional sense. Allowing more people to trap their 
money in risky, speculative investments isn't the kind of financial 
inclusion we need. It's not going to do anything to help Americans 
working hourly jobs who don't put their paychecks in the bank because 
of abusive fees.
    Finally, stablecoin companies say that if you hand them your money, 
your money will be safe. They tell us that they structure their 
reserves so that people's money is protected, and that their business 
will weather any kind of crisis.
    Now, maybe the stablecoin companies are right. Maybe we should just 
close our eyes and trust that a product called ``Magic Internet 
Money''--run by an outfit called ``Abracadabra''--is a safe place for 
your money.
    But I don't think working Americans can take that risk.
    Remember in 2007 and 2008, when the banks said homes prices would 
only go up and mortgages would never be underwater?
    And then, as now, it's workers and their families whose homes and 
hard-earned savings are being used as gambling chips. They're the ones 
who will pay the price.
    I understand the appeal of crypto. Americans have burned over and 
over again by Wall Street. The 2008 crisis, abusive fees, a stock 
market that seems detached from reality--of course people don't trust 
the big banks. And they figure, how could putting my money in one of 
these new products be any worse? Maybe I'll finally get in on the kinds 
of deals that have been making investment bankers wealthy for years.
    And some of those Super Bowl ads were pretty compelling television. 
They make vague allusions to innovation and the future--and who could 
be against innovation?
    But we have ignored warnings like the report we're talking about 
today too many times before.
    Before the financial crisis, Congress and regulators ignored 
warnings about the risky bets, increasing leverage, and over-the-
counter derivatives on Wall Street. Then the banks got a bailout, and 
working people paid the price.
    That's why I want Congress and regulators to work together to 
tackle these risks now, before it's too late.
    I urge my colleagues to listen carefully to Under Secretary Liang's 
testimony today, and to the warnings in the PWG report.
    We need a strong, proactive approach from regulators and Congress 
to limit stablecoins' risks for working Americans.
    As our economy continues to recover from COVID-19--as workers are 
finally starting to see higher wages and more bargaining power in the 
workplace--the last thing we need is for a risky new financial product 
to cause disaster.
    This isn't the first hearing this Committee has had on stablecoins, 
and it won't be the last.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Thank you, Mr. Chairman. And Ms. Liang, welcome.
    Two months ago, this Committee held its first hearing on 
stablecoins. I was encouraged to hear from our witnesses about the 
essential role stablecoins play in the larger cryptocurrency trading 
ecosystem.
    It also important to note the tremendous potential stablecoins have 
to be adopted as a common medium of exchange in the broader, ordinary 
goods and services economy. Unlike cryptocurrencies that fluctuate in 
value, stablecoins are designed to maintain a 1-to-1 value relative to 
reference asset, typically a fiat currency, such as the U.S. Dollar. 
Put simply, one stablecoin is meant always to be worth one dollar.
    Because of this price stability, stablecoins have the potential to 
serve all the traditional functions of money by acting as a medium of 
exchange, unit of account, and store of value. Stablecoins can also 
improve upon traditional forms of money by increasing payment speed, 
especially cross-border transfers, reducing transaction costs, and 
helping to combat illicit finance through an immutable and transparent 
transaction record.
    Stablecoins can also be programmed to execute payments 
automatically upon the occurrence of some predesignated, verifiable 
event. This capability in particular has the potential to transform 
finance and, in time, much of our economy.
    Any regulatory regime for stablecoins will inevitably focus on 
consumer protections and systemic stability. But at least as important 
will be preserving the tremendous, unimagined benefits that will flow 
from future innovations.
    As stablecoin usage has grown significantly, regulators have 
increasingly taken interest. Last November's report from the 
President's Working Group on Financial Markets--spearheaded by Ms. 
Liang--appropriately recommended Congress pass legislation to establish 
a Federal regulatory framework for stablecoins.
    The PWG report recommends Congress address three perceived 
``prudential concerns'': stablecoin runs, payment system risks, and 
systemic risk and concentration of economic power. The principal 
recommendation is that stablecoin issuance be limited to insured 
depository institutions (IDIs).
    While I commend their contribution to the public discussion, I 
strongly disagree with that recommendation. And I believe we can 
protect against concerns such as run risk through a less restrictive 
and more appropriately tailored approach.
    To accomplish those objectives, I released a set of guiding 
principles for stablecoin legislation. These principles recognize that 
stablecoin issuers have significantly different business models than 
banks and present different risks.
    For example, stablecoin issuers typically neither make loans nor 
take deposits. They may choose not to transform maturity or 
intermediate credit risk. As such, a stablecoin issuer using cash or 
cash equivalents to back its coin is likely safer than most existing 
financial institutions.
    Because of these differences, it would be inappropriate to subject 
stablecoin issuers to the full range of bank regulations meant to 
address risks posed by the fractional reserve, deposit, and lending 
banking system.
    I am encouraged that Ms. Liang has recognized these differences and 
sensibly agreed there should be regulatory ``flexibility'' for 
stablecoin issuers not engaged in traditional banking. But that raises 
the natural question: why require all stablecoin issuers to become 
insured depository institutions?
    My legislation will take a different approach. It will provide 
regulatory treatment that is flexible and adaptable to future 
technological innovation. It will also promote competition in the 
stablecoin market by allowing at least three types of regulated 
entities to issue stablecoins.
    First, it will preserve the regime to which the majority of 
stablecoin issuers are currently subject as State-registered money 
service businesses and money transmitters. To disrupt this regime would 
both introduce unnecessary burdens to an emerging technology and 
unwisely diminish the success of States with experience and expertise 
in this area. Rather than discard this regime, we should build on it to 
ensure the public has the right disclosures about stablecoin reserves 
to make an appropriately informed decision about whether to use any 
given stablecoin.
    Second, it will clarify that insured depository institutions are in 
fact permitted to issue stablecoins. The former head of the OCC, Brian 
Brooks, pioneered work to give banks clarity on digital asset 
activities, but the current OCC has created confusion regarding 
permissible activities.
    Finally, it will establish a new stablecoin charter with regulatory 
requirements designed specifically for stablecoin issuers. The 
requirements will address the risks identified by the PWG report, but 
will not force stablecoin issuers into a one-size-fits-all system 
created for traditional banks. Ms. Liang's recent testimony indicates 
to me that she agrees with a tailored approach for such issuers.
    Rather than rely on the ``flexibility'' of the existing framework 
for depository institutions, which leaves full discretion to bank 
regulators, it is the responsibility of Congress to design this 
approach. These three paths would allow each stablecoin issuer to 
choose the regulatory framework most appropriate for its business 
model.
    And under this legislation, each stablecoin issuer would be 
required to meet certain minimum requirements regardless of its charter 
or license. For example, all would be required to disclose the assets 
backing the stablecoin, adopt and clearly disclose redemption policies, 
and undergo third-party audits. These requirements would ensure that 
consumers have sufficient information to choose which stablecoin they 
use.
    Ms. Liang's thoughtful comments on stablecoin regulation lead me to 
believe there are many issues on which we can find common ground. I 
look forward to developing legislation with my Senate colleagues and 
working with the Administration to establish a regulatory framework for 
stablecoins that addresses potential risks while also encouraging 
innovation and competition.
                                 ______
                                 
                PREPARED STATEMENT OF JEAN NELLIE LIANG
    Under Secretary for Domestic Finance, Department of the Treasury
                           February 15, 2022
    Chairman Brown, Ranking Member Toomey, and other Members of the 
Committee, thank you for the opportunity to testify this morning on 
stablecoins.
    Stablecoins are part of an emerging set of digital assets, 
activities, and services that could have profound implications for the 
U.S. financial system and economy. Treasury supports responsible 
innovation that helps meet the evolving needs of users and the 
financial system. But stablecoins also raise policy concerns, including 
those related to illicit finance, user protection, and systemic risk. 
To mitigate these risks while supporting the potential benefits from 
innovation, Treasury believes that regulation of stablecoins should be 
clear and consistent.
    In November, the President's Working Group on Financial Markets, 
along with the Federal Deposit Insurance Corporation and the Office of 
the Comptroller of the Currency, took an important step in this 
direction with the publication of a stablecoin report (PWG Report). The 
PWG was formed by Executive order in response to the 1987 stock market 
crash. The group is chaired by the Secretary of the Treasury and 
composed of Federal financial regulators. The PWG regularly produces 
reports on financial markets issues for the President, which may 
include recommended legislative changes.
    As described in the PWG Report, stablecoins are a type of digital 
asset designed to maintain a stable value relative to the U.S. dollar 
or other reference asset. Today, stablecoins are used primarily to 
facilitate trading in digital assets. But, because stablecoins are 
designed to maintain a stable value, they could potentially be used 
more widely as a means of payment by households, businesses, and 
financial firms. There are no standards regarding the composition of 
assets used to support the value of stablecoins (reserve assets), and 
information made publicly available regarding stablecoin reserve assets 
is not consistent across stablecoin arrangements in either its content 
or the frequency of its release.
    Stablecoins are growing and developing rapidly and are not subject 
to a statutory or regulatory framework that mitigates the risks they 
present in a consistent and comprehensive manner. Currently, regulators 
have authorities that can be used to address illicit finance and 
investor protection concerns in the context of stablecoins. However, as 
described in the PWG Report, regulatory gaps exist regarding certain 
prudential risks. The PWG Report recommends legislation to ensure that 
stablecoins are subject to appropriate Federal prudential oversight. 
Such legislation would complement existing authorities with respect to 
market integrity, investor and consumer protection, and illicit 
finance. The PWG's specific recommendations included: limiting issuance 
of stablecoins to insured depository institutions (IDI); giving 
supervisors of stablecoin issuers authority to set risk management 
standards for critical activities related to use of stablecoin as a 
means of payment; and certain measures to reduce concerns related to 
concentration of economic power.
    As mentioned, stablecoins are part of the much larger and quickly 
evolving market for digital assets. The Biden administration continues 
to work across the agencies to develop a comprehensive strategy for all 
digital assets, with the goals of ensuring that cryptocurrency is not 
used for illicit finance; addressing risks related to financial 
stability and consumer and investor protection; and furthering 
financial inclusion and our continued leadership of the global 
financial system.
Prudential Risks of Stablecoins
    Given their potential to be used as a means of payment, as well as 
the design mechanisms that they rely on to maintain a stable value, 
stablecoins present risks that are similar to some of the prudential 
risks traditionally associated with bank deposits and other forms of 
private money. History has shown that, without adequate safeguards, 
bank deposits and other forms of private money have the potential to 
pose risks to consumers and the financial system. These prudential 
risks include the risk of stablecoin runs; payment system risks related 
to the mechanisms that are used to store or transfer stablecoins; and 
broader concerns related to concentration of economic power.
    ``Run risk'' refers to the potential for a scenario in which a loss 
of confidence in a stablecoin sets off a wave of stablecoin 
redemptions, which could then be followed by distressed sales of the 
stablecoin's reserve assets. Such distressed sales of assets could 
negatively affect critical funding markets and broader financial 
conditions. Runs could also spread contagiously from one stablecoin to 
another, or to other types of financial institutions that are viewed as 
having a similar risk profile. The dynamics of a run, as well as the 
harm that runs can inflict on the broader system, are amply 
demonstrated by the history of runs on banks and shadow banks--
including those that occurred in 2007-2008 and, more recently, at the 
start of the COVID-19 pandemic in March 2020. The first stablecoin run 
is believed to have occurred in June 2021, when a sharp drop in the 
price of the assets used to back the stablecoin set off a negative 
feedback loop of stablecoin redemptions and further price declines.
    ``Payment system risks'' refer to a disruption in the mechanisms 
used to store or transfer value, which could interfere with the ability 
of users to make or settle payments. Payment system risks distinguish 
stablecoins from certain investment products that are not designed to 
serve as a means of payment. Custodial wallet providers--meaning wallet 
providers that hold stablecoins on behalf of users--are one locus of 
payment system risk, as the failure or disruption of such a wallet 
provider could deprive users of access to their stablecoins. More 
generally, use of stablecoins depends on a range of activities that are 
often distributed across multiple entities within a stablecoin 
arrangement. \1\ Depending on the particular design of a stablecoin, 
these activities include: governance of the stablecoin arrangement; 
stablecoin issuance and redemption; management and custody of 
stablecoin reserve assets; distributed ledger operation, validation, 
and settlement; and interfacing with stablecoin holders. Even if a 
stablecoin itself is adequately protected against run risk, problems 
related to the activities or entities that support the stablecoin could 
still interfere with its use as a means of payment, harming stablecoin 
users and resulting in a loss of payments efficiency.
---------------------------------------------------------------------------
     \1\ The term ``stablecoin arrangement'' refers to a stablecoin 
together with the functions and activities that allow the stablecoin to 
be used as a means of payment.
---------------------------------------------------------------------------
    Finally, I would highlight two concerns related to concentration of 
economic power. First, connections between a stablecoin (or stablecoin 
wallet provider), on one hand, and a commercial company, on the other, 
could be used to give the commercial company an unfair competitive 
advantage. These policy concerns are analogous to those traditionally 
associated with the mixing of banking and commerce, such as advantages 
in accessing credit or using data to market or restrict access to 
products. Second, the issuer of a stablecoin that becomes sufficiently 
widely adopted as a means of payment could become a dominant provider 
of payment services. Market power with respect to payments could reduce 
incentives for further investment in payments innovations or lead to 
higher prices for payment services.
Regulatory Gaps
    Current statutory and regulatory frameworks do not provide 
consistent and comprehensive standards for the risks of stablecoins as 
a new type of payment product. Certain regulatory schemes may have the 
flexibility to address some issues presented by stablecoins, such as 
illicit finance. However, stablecoins are not subject to standards to 
address concerns about run risk, payment system risk, or concentration 
of economic power. Some of the largest stablecoin issuers operate with 
limited regulatory oversight, raising significant questions about 
whether these stablecoins are adequately backed and other aspects of 
their operations. The regulatory frameworks that apply to stablecoin 
issuers and service providers are inconsistent, creating opportunities 
for regulatory arbitrage and uncertainty among stablecoin users. Even 
where the issuer of a given stablecoin is subject to oversight, the 
number of different key parties that may be involved in an arrangement, 
and the operational complexity of these arrangements, may pose 
substantial challenges for supervisors. The exponential growth of 
stablecoins--from a market capitalization of roughly $5 billion at the 
start of 2020 to approximately $175 billion today--increases the 
urgency of ensuring that an appropriate regulatory framework is in 
place.
    Having described the regulatory gaps at a high level, I would like 
to discuss in more detail several frameworks that have featured 
prominently in discussions of stablecoins: State money transmitter 
laws, securities laws, and commodities laws. While Treasury and the PWG 
fully support efforts by State and Federal agencies to use existing 
authorities in support of their statutory mandates, we do not believe 
existing authorities provide a sufficient basis for comprehensive and 
consistent oversight of stablecoins.
Money Transmitter Requirements
    In many States, stablecoin operators are licensed or registered as 
money transmitters and money services businesses, and are subject to 
standards that include minimum net worth requirements, surety bond and 
other security requirements, and restrictions on permissible 
investments. These standards are generally designed to address consumer 
protection concerns. They are not meant to address the financial 
stability and payment system concerns that would arise if stablecoins 
become widely adopted by households, corporations, and financial 
institutions as a means of payment.
Securities Regulation
    Some have suggested that stablecoins could be regulated either as 
securities or as money market mutual funds (MMFs). Certain legal 
academics have raised a threshold question as to whether stablecoins 
qualify as securities or MMFs under existing laws. Assuming that 
stablecoins satisfy the definition of securities or MMFs, there is a 
further question as to whether these regimes would effectively address 
the prudential risks of stablecoins. Requirements that apply generally 
to issuers of public securities are not designed to address concerns 
about run risk, payment system risk, or concentration of economic 
power. MMF regulations do not focus on payment system risks or concerns 
about concentration of economic power.
Commodities Regulation
    Under the Commodity Exchange Act, the CFTC has the authority to 
police fraud and manipulation in commodities spot markets, which the 
CFTC has indicated include digital assets. \2\ In addition, derivatives 
products on commodities and leveraged retail transactions are subject 
to jurisdiction of the CFTC. These are important tools for ensuring the 
integrity of these markets and protecting investors, but they are not 
intended to address prudential risks.
---------------------------------------------------------------------------
     \2\ https://www.cftc.gov/media/4636/
VirtualCurrencyMonitoringReportFY2020/download
---------------------------------------------------------------------------
Recommendation Regarding Stablecoin Issuers
    The PWG Report recommends requiring stablecoin issuers to be IDIs 
because IDIs are subject to a regulatory and supervisory framework that 
would help to mitigate the prudential risks the report identifies. Run 
risk would be reduced by features including capital, liquidity, and 
other prudential standards, as well as access to the Federal Reserve as 
lender-of-last resort. Payment system risk would be mitigated through 
the establishment of risk-management standards for entities that 
conduct critical activities within stablecoin arrangements. Concerns 
about concentration of economic power would be addressed by prohibiting 
stablecoin issuers from conducting commercial activities, or 
affiliating with commercial companies, and by allowing supervisors to 
establish interoperability standards. In short, IDI regulation provides 
a tested regulatory model that would protect against the prudential 
risks of stablecoins and help to support confidence of stablecoin 
users.
    In developing this recommendation, the PWG relied upon the 
flexibility that the banking agencies would have to calibrate 
supervision and regulation of stablecoins based on risk. Banking 
agencies currently use existing authorities to adjust supervision and 
regulation in the context of overseeing IDIs with a diverse range of 
business models (e.g., commercial banks, trading banks, custody banks) 
and systemic risk footprints (e.g., community banks, mid-size banks, 
regional banks, large banks). The fact that some prominent stablecoin 
issuers are already seeking IDI charters provides additional reason to 
think that IDI regulation is a feasible regulatory model for stablecoin 
issuance.
    Since the publication of the PWG Report, some have asked whether 
stablecoins issued by an IDI would be covered by FDIC insurance, or its 
equivalent. The PWG Report does not take a position on this issue. 
While insuring stablecoins would protect users against the risk of 
loss, it would also introduce certain policy and technical challenges. 
For this reason, Congress (or the banking agencies) might want to 
consider alternative measures to protect stablecoin users. \3\
---------------------------------------------------------------------------
     \3\ For example, there could be a requirement for stablecoins 
issued by an IDI to be fully backed by safe assets--consistent with how 
many stablecoins currently purport to be backed.
---------------------------------------------------------------------------
    Finally, the Financial Stability Oversight Council (FSOC) continues 
to evaluate potential systemic risks related to stablecoins and other 
digital assets, and the steps that may be available to the FSOC to 
mitigate such risks. These may include designation of certain 
activities conducted within a stablecoin arrangement as, or as likely 
to become, systemically important payment activities.
Digital Assets and Distributed Ledger Technology
    As I stated at the beginning of my testimony, Treasury supports 
responsible innovations that meet the needs of users, the financial 
system, and the economy. The Administration continues to evaluate the 
broader set of issues and opportunities posed by digital assets and 
distributed ledger technology, and welcomes the opportunity to continue 
to work with Congress.
    To date, much of the public policy discussion of digital assets has 
focused on regulatory questions about digital assets themselves. I 
would identify two additional sets of issues that merit focus as policy 
is developed in this area:
    The first relates to the regulation of intermediaries that 
participate in digital asset markets. Some of these intermediaries are 
banks, investment companies, and other traditional financial actors 
that are increasingly expanding into digital assets. Other 
intermediaries--such as stablecoin issuers, custodial wallet providers, 
and digital asset exchanges--are native to the digital asset ecosystem, 
but provide financial services similar (and sometimes identical) to 
those provided by traditional financial services providers. For both 
traditional and digital native intermediaries, it is critical to ensure 
that regulatory frameworks are in place that appropriately address 
risks to businesses, consumers, and investors, as well as the broader 
financial system. The banking agencies' recent ``crypto sprint,'' the 
Securities and Exchange Commission and Commodity Futures Trading 
Commission's assessment of authorities over digital exchanges, and the 
PWG's work on stablecoins are important steps in this direction. But 
clearly, much work remains to be done.
    The second set of issues relates to potential for systemic risk 
that could result from the build-up of leverage against digital assets. 
As we saw in the 2007-2008 financial crisis (and most that preceded 
it), leverage can play a key role in catalyzing and accelerating 
financial instability. To address these risks, the Administration is 
building its knowledge and understanding of the role that leverage 
plays in digital asset markets and of the implications of that leverage 
for the rest of the financial system. We would be pleased to discuss 
this set of issues further with the Committee as our understanding 
deepens.
Conclusion
    I want to thank the Committee for its leadership on these important 
issues and for inviting me here to testify today. I am happy to answer 
any questions from the Committee. I also look forward to additional 
conversations regarding broader issues raised by digital assets and 
distributed ledger technology.
        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
                     FROM JEAN NELLIE LIANG

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

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

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

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

Q.3. Stablecoin companies frequently claim that their products 
are safe because reserves are invested in low-risk, highly 
liquid assets, such as bank deposits. Very low-risk assets, 
however, have low or even nominal returns. If stablecoin 
reserves are invested in these assets, doesn't the stablecoin 
business model then rely on generating revenue from stablecoin 
users in other ways, such as by cross-selling DeFi investments 
or charging transaction fees? Is there evidence in the market 
so far that firms face these incentives?

A.3. There are several potential business models that could 
support the issuance of stablecoins. These include generating 
revenue from (a) the spread between interest received on 
reserve assets and that paid to stablecoin holders; (b) 
transaction or other kinds of fees, as you note; (c) data from 
transactions involving the stablecoin; and (d) cross-selling of 
stablecoins with other products. Consistent with the emphasis 
in the Digital Assets EO, this Administration is committed to 
protecting consumers and the broader financial system by 
implementing appropriate guardrails for digital assets. That, 
of course, applies here: Treasury, in its capacity, is 
committed to ensuring that whatever business model a stablecoin 
issuer pursues, it is consistent with protection of consumers 
and the broader financial system.

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

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

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

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

Q.6. When stablecoin issuers preclude retail users from 
redeeming directly, consumers can convert stablecoins into fiat 
currency by selling the tokens for dollars on exchanges. But 
major crypto exchanges have been prone to outages and 
malfunction. Please discuss how exchange outages or errors can 
affect stablecoin markets and stablecoin holders. Are there 
scenarios involving exchange failures that give rise to 
particular concern?

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

Q.7. In Senator Toomey's proposed stablecoin framework, he 
suggested that some stablecoin issuers could, ``based on their 
business models,'' choose to be regulated by ``[r]egister[ing] 
as a money transmitter under the existing State regime and as a 
money services business under FinCEN's Federal regime.'' Are 
State money transmitter and Federal MSB rules adequate for 
managing the risks to consumers and the economy created by 
stablecoins? Please describe what you perceive to be the risks 
of a State-based approach to stablecoin regulation as compared 
to a Federal approach.

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


               RESPONSES TO WRITTEN QUESTIONS OF
            SENATOR MENENDEZ FROM JEAN NELLIE LIANG

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

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

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

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

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

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

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


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                     FROM JEAN NELLIE LIANG

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

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

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

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

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

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

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

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


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                     FROM JEAN NELLIE LIANG

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

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


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY
                     FROM JEAN NELLIE LIANG

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

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

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

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

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

A.3. See response to Question 4.

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

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

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