[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


               PUTTING THE ``STABLE'' IN ``STABLECOINS'':
                 HOW LEGISLATION WILL HELP STABLECOINS
                         ACHIEVE THEIR PROMISE

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON DIGITAL ASSETS,
                         FINANCIAL TECHNOLOGY,
                             AND INCLUSION

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 18, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-25
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
52-937 PDF                 WASHINGTON : 2023                    
          
-----------------------------------------------------------------------------------     

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                    SUBCOMMITTEE ON DIGITAL ASSETS, 
                  FINANCIAL TECHNOLOGY, AND INCLUSION

                    FRENCH HILL, Arkansas, Chairman

FRANK D. LUCAS, Oklahoma             STEPHEN F. LYNCH, Massachusetts, 
TOM EMMER, Minnesota                     Ranking Member
WARREN DAVIDSON, Ohio                BILL FOSTER, Illinois
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               RITCHIE TORRES, New York
WILLIAM TIMMONS, South Carolina      BRAD SHERMAN, California
BYRON DONALDS, Florida               AL GREEN, Texas
MIKE FLOOD, Nebraska                 SEAN CASTEN, Illinois
ERIN HOUCHIN, Indiana                WILEY NICKEL, North Carolina
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 18, 2023.................................................     1
Appendix:
    May 18, 2023.................................................    35

                               WITNESSES
                         Thursday, May 18, 2023

Hand, Delicia Reynolds, Director, Financial Fairness, Consumer 
  Reports........................................................    11
Homer, Matthew, Managing Member, the Department of XYZ, and 
  former Executive Deputy Superintendent for Research & 
  Innovation, New York State Department of Financial Services 
  (NYDFS)........................................................     4
Morgan, Robert, CEO, USDF Consortium.............................     6
Portilla, David L., Partner, Davis Polk & Wardwell LLP...........     8
Wang, Fennie, Founder and CEO, Humanity Cash.....................    10

                                APPENDIX

Prepared statements:
    Hand, Delicia Reynolds.......................................    36
    Homer, Matthew...............................................    41
    Morgan, Robert...............................................    49
    Portilla, David L............................................    59
    Wang, Fennie.................................................    67

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Written statement of Americans for Financial Reform..........    77
    Better Market Fact Sheet: ``Un'' Stablecoins and Risks to 
      Investors, Consumers, and Economic Productivity............    84
    Written statement of the National Association of Federally-
      Insured Credit Unions (NAFCU)..............................    94
    Written responses to questions for the record submitted to 
      Fennie Wang................................................    96
    Written responses to questions for the record submitted to 
      Matthew Homer..............................................    97
    Written responses to questions for the record submitted to 
      David L. Portilla..........................................    98
    Written responses to questions for the record submitted to 
      Robert Morgan..............................................    99
    Written responses to questions for the record submitted to 
      Delicia Reynolds Hand......................................   100
    Written statement of Steven L. Schwarcz, the Stanley A. Star 
      Distinguished Professor of Law & Business, Duke University 
      School of Law..............................................   101

 
                       PUTTING THE ``STABLE'' IN
                          ``STABLECOINS'': HOW
                         LEGISLATION WILL HELP
                         STABLECOINS ACHIEVE
                             THEIR PROMISE

                              ----------                              


                         Thursday, May 18, 2023

             U.S. House of Representatives,
                    Subcommittee on Digital Assets,
                              Financial Technology,
                                     and Inclusion,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. French Hill 
[chairman of the subcommittee] presiding.
    Members present: Representatives Hill, Davidson, Rose, 
Steil, Timmons, Flood, Houchin; Lynch, Foster, Gottheimer, 
Torres, Sherman, Green, Casten, and Nickel.
    Ex officio present: Representative Waters.
    Chairman  Hill. The Subcommittee on Digital Assets, 
Financial Technology, and Inclusion will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Putting the `Stable' in 
`Stablecoins': How Legislation Will Help Stablecoins Achieve 
Their Purpose.''
    The Chair notes that votes are expected at 10:10, and it is 
only one vote, so we will adjourn for that vote, and then come 
back and continue our work.
    I will now recognize myself for 4 minutes to give an 
opening statement.
    I want to thank all of you for joining our second 
stablecoin hearing in the new Subcommittee on Digital Assets, 
Financial Technology, and Inclusion. And although this is only 
the second stablecoin hearing for the subcommittee, Member-
level conversations have been going on since 2021, and the 
committee has worked significantly with our Members on both 
sides of the aisle and with the President's Working Group on 
Financial Markets' report on stablecoins. Both sides of the 
aisle have discussed key guideposts for an effective regulatory 
framework for payment stablecoins, which were incorporated into 
the stablecoin proposal in the last Congress, and into the two 
proposals that were noticed for today's hearing.
    For example, Treasury Under Secretary Liang made it clear 
that any regulatory framework for stablecoins must have strict 
requirements in place around reserves and capital to guard 
against potential runs, so we included those requirements in 
both of the proposals. The Under Secretary also made it clear 
that disclosures and attestations are critical for creating 
enhanced transparency among stablecoin issuers, and those were 
included as well. To echo the Under Secretary, and the title of 
today's hearing, we want stablecoins to be used as a payment 
mechanism, which they really are not today. And also, the only 
way we can do that is by passing the appropriate regulatory 
framework legislation.
    In 2022, we made extensive progress on bipartisan 
stablecoin legislation, and we have continued to build on those 
efforts by taking feedback from members and stakeholders, and 
the legislation noticed today reflects that feedback. There are 
clearly many areas where Members have different views, and you 
can see that from the two proposals. But from my seat as 
chairman of this subcommittee, I remain convinced that Members 
on both sides of the aisle are actively working in good faith 
to find agreement on these key points. We also agree on the 
basic protections that must be included in any stablecoin 
legislation--consumer investor protection--which is at the 
heart of our bill.
    So, I want to be clear that while we notice two different 
legislative proposals today, we are not starting from scratch. 
To do so would have ignored all of the effort that has been 
made and the common ground that was found during the 
negotiations on the previous proposal. In fact, Ranking Member 
Waters' proposal is substantially similar to the September 
draft that we noticed at the April hearing, apart from three 
key changes. Not only that, but Republicans made the exact same 
change in our proposal as well for one of those. So, while 
there is still work to be done, and we should use today's 
hearing to discuss those key areas, I want to emphasize that 
the similarities between the two proposals are strong, and that 
we are not that far apart.
    Without action from Congress, however, offshore and opaque 
projects will continue to thrive, and stablecoin issuers will 
not feel confident to seek opportunities in the United States, 
and to echo the hearing title, stablecoins will not be stable. 
Thus, opposing legislation is not a vote in favor of consumer 
protection. Rather it is a vote for putting consumers at risk 
by allowing a regulatory environment that pushes stablecoins 
further away from appropriate U.S. regulatory oversight. We 
have the power to reverse this trend and cement the U.S. as the 
leading place for safe payments innovation.
    I look forward to the discussion today. I look forward to 
hearing our witnesses' views on the two proposals, and to 
ultimately bringing legal clarity and consumer protection to 
the stablecoin ecosystem.
    And with that, I now recognize the ranking member of the 
subcommittee, Mr. Lynch of Massachusetts, for 4 minutes.
    Mr.  Lynch. Thank you, Mr. Chairman, for holding this 
hearing as we consider legislative options for regulating 
stablecoins. I want to welcome all of the witnesses, and thank 
you for attending to help this subcommittee with its work.
    Last Congress, this committee came close to reaching a 
bipartisan agreement led by then-Chair Waters. While the bill 
was far from perfect, we had come to an agreement on some key 
issues on stablecoins. Since then, however, much of the digital 
assets space--including many stablecoin companies--has 
collapsed. The recent bank failures have also taught us some 
important lessons. It is clear that we need to ensure that 
future legislation addresses the cracks that have deepened.
    It appears that we have shifted further apart from a 
bipartisan agreement and are now considering two different 
pieces of proposed legislation. One is led by the Chair of the 
Subcommittee, Chairman Hill, and the other by Ranking Member 
Waters of the full Financial Services Committee. Ranking Member 
Waters' bill and Mr. Hill's bill each address different issues 
with stablecoins, taking various approaches. My hope is that we 
can use this hearing to further discussion and to find some 
alignment.
    My concern with stablecoins remains the same as the last 
time we held the hearing on this topic: stablecoin issuers 
claiming their products are pegged to reserve assets and used 
for the purpose of payments when we know that is not correct. 
Eighty percent of stablecoin volume is dedicated to 
facilitating the trading of cryptocurrencies and are instead 
used as speculative instruments. I also continue to worry that 
the stablecoins contain structural fragilities that make them 
vulnerable to runs and pose risks to monetary policy, national 
security, and financial stability. As we consider the recent 
bank failures and threats to economic stability, we need to 
ensure that any proposal provides adequate safeguards to our 
financial system.
    I do acknowledge and appreciate that my Republican 
colleagues have attempted to address some of those issues that 
we raised last time, such as disallowing non-bank issuer access 
to Federal Reserve services, including master accounts and 
access to the discount window. However, I still have concerns 
about custody, the lack of acknowledgement of the SEC as 
primary regulator, a lack of adequate consumer protection, and 
the removal of exploration of a central bank digital currency 
(CBDC).
    Ranking Member Waters' bill gets us a step closer to 
addressing some of those newer issues that have emerged. For 
example, Ms. Waters' bill includes specific rules that require 
issuers to protect assets they hold in custody from customers 
and restricts the commingling of customer and company assets.
    There are still a number of outstanding questions and 
issues I would like to address. We need to reach an agreement 
on the role of the States and of Federal regulators. I have 
concerns about giving sole authority to States, because it 
risks the possibility of States engaging in a race to the 
bottom, and crypto companies seeking out jurisdictions with the 
weakest regulation, which has been their practice.
    I am going to take all 5 minutes, Mr. Chairman.
    Chairman  Hill. Sure.
    Mr.  Lynch. Yes. This also creates a moral hazard for 
States wishing to attract crypto businesses. I believe it is 
also important that all regulators weigh in and have a specific 
role. We should ensure that there is alignment between the 
Administration and financial regulators, and there needs to be 
a specific role for the SEC and for the Consumer Financial 
Protection Bureau (CFPB). While I understand there is some 
agreement to allow non-bank companies to issue stablecoins, I 
continue to have major concerns about access to deposit 
insurance.
    We must consider the lessons we have learned in recent 
months regarding bank runs and losses. I must also reiterate 
the need to separate digital assets from our banking system to 
avoid the risk of exposure to our banking core. I am confident 
that through discussions and input from regulators, advocates, 
and banking experts, we can find alignment to address many of 
the issues I have mentioned. Mr. Chairman, I yield back the 
balance of my time.
    Chairman  Hill. The ranking member yields back.
    We now welcome the testimony of our witnesses. First, Mr. 
Matt Homer. Mr. Homer is the managing member of The Department 
of XYZ, an early-stage venture capital firm focusing on 
blockchain. He is also the former executive deputy 
superintendent for research and innovation at the New York 
State Department of Financial Services.
    Second, Mr. Robert Morgan. Mr. Morgan is the CEO of the 
USDF Consortium, an association of insured depository 
institutions working to build a blockchain network to support 
interoperable bank minute tokenized deposits.
    Third, Mr. David Portilla. Mr. Portilla is a partner at 
Davis Polk & Wardwell, where he specializes in a range of 
policy matters related to financial institutions.
    Fourth, Ms. Fennie Wang. Ms. Wang is the founder and CEO of 
Humanity Cash, which helped launch the community stablecoin in 
Berkshire County, Massachusetts.
    And finally, Ms. Delicia Reynolds Hand. Ms. Hand is the 
director of financial fairness at Consumer Reports.
    We thank each of you for taking the time to join us today. 
Each of you will be recognized for 5 minutes to give an oral 
presentation of your testimony. And without objection, each of 
your written statements will be made a part of the record.
    Mr. Homer, you are now recognized for 5 minutes.

STATEMENT OF MATTHEW HOMER, MANAGING MEMBER, THE DEPARTMENT OF 
XYZ, AND FORMER EXECUTIVE DEPUTY SUPERINTENDENT FOR RESEARCH & 
  INNOVATION, NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES 
                            (NYDFS)

    Mr.  Homer. Good morning, Subcommittee Chairman Hill, 
Subcommittee Ranking Member Lynch, and members of the 
subcommittee, and thank you for the opportunity to participate 
in this hearing. My name is Matt Homer. I was previously the 
executive deputy superintendent for research and innovation at 
the New York State Department of Financial Services (NYDFS), 
where my responsibilities included overseeing the Department's 
licensing supervision and examination of digital asset-related 
companies. Earlier in my career, I was a Federal bank regulator 
in the FDIC's Division of Depositor and Consumer Protection. 
And today, I am an investor advisor to startup companies, and 
the managing member of The Department of XYZ, a venture capital 
firm that invests in early-stage companies building the next 
generation of financial systems.
    I first became familiar with stablecoins through my 
experience regulating these products at the NYDFS. As this 
committee is aware from prior testimony, New York State was one 
of the first jurisdictions in the world to regulate the digital 
asset space generally, as well as stablecoins specifically. My 
experience as a regulator taught me that fiat-backed 
stablecoins represent an important but incremental improvement 
in the concept of money. In some ways, stablecoins are not so 
different from the stored-value products many people already 
use and are familiar with, such as gift cards or prepaid cards.
    The question of how to effectively regulate stablecoins has 
a more clear and straightforward answer than one may find in 
considering how to regulate other parts of the digital asset 
ecosystem. New York's experience shows that it is possible to 
effectively regulate stablecoins using common sense and time-
tested regulatory practices.
    For example, New York's regulatory framework for 
stablecoins includes three major prongs: first, reserve 
requirements to ensure the assets backing stablecoins are held 
on a segregated basis on behalf of customers, are fully 
reserved on a one-to-one basis, and are comprised of cash 
deposits or other cash equivalents; second, redemption rights, 
ensuring that stablecoin users have the right to redeem their 
stablecoins on a one-to-one basis for U.S. dollars in a timely 
manner; and third, public transparency requirements, including 
monthly attestations from independent CPAs. The stablecoin 
issuers covered by these standards are also subject to robust 
supervision and examinations.
    I believe there are eight important principles that should 
guide legislation on this topic and help payment stablecoins 
achieve their promise. I will discuss three of these for which 
my background offers unique insight.
    First, stablecoin legislation and implementing regulation 
should recognize the dual banking system as an inherent feature 
of the American economy that benefits consumers, innovators, 
and markets. The parallel system of State and Federal 
regulations supports economic growth by providing innovators 
and founders optionality that can reduce barriers to launching 
new products on a small scale, before rolling them out at a 
national scale. It benefits consumers by providing access to 
financial services tailored to local needs, and protects them 
because States are able to move more quickly to fill regulatory 
gaps.
    Finally, it benefits markets by encouraging healthy 
competition. The legislative drafts I have seen preserve this 
dynamic. It would establish a Federal floor in the form of a 
national standard, but would allow States to license and 
supervise stablecoin issuers and set even tougher rules within 
their own jurisdictions.
    Second, stablecoin legislation should promote competition 
and the competitiveness of the U.S. system. The stablecoin 
market so far has trended toward oligopoly. Today, two issuers 
alone make up over 80 percent of the market for U.S. dollar-
denominated stablecoins. Legislation should promote competition 
by providing pathways for new players to enter the space and 
challenge incumbents. One idea would be to create a safe harbor 
for new entrants to test new products or services at limited 
scale, and with limited customers, before requiring 
comprehensive regulation, in order to expand to the general 
public at greater scale.
    I would also like to touch on competitiveness as a distinct 
concept from competition. It is in the American interest to 
ensure that issuers of U.S. dollar-backed stablecoins remain in 
the U.S. so that we can regulate stablecoins on our own terms. 
One way to promote this objective would be to add 
competitiveness to the official mandates of Federal regulators 
and to the set of criteria to be used by Federal regulators 
when considering whether to license a stablecoin issuer.
    Third, regulatory capabilities need to keep pace with 
developments in the market. One of the aspects of regulating 
digital assets that most intrigued me when I was at NYDFS is 
the possibility of supervising the space more effectively using 
digital tools and technologies. For example, I previously 
mentioned monthly attestations of stablecoin reserves, but we 
could conceivably move towards more real-time or near real-time 
dashboards that provide insight into the backing assets of a 
stablecoin, or even into the financial condition of the entire 
issuing firm at any given moment in time.
    I want to thank you again for the opportunity to be here, 
and I look forward to your questions.
    [The prepared statement of Mr. Homer can be found on page 
41 of the appendix.]
    Chairman  Hill. The gentleman yields back.
    Mr. Morgan, you are now recognized for 5 minutes.

        STATEMENT OF ROBERT MORGAN, CEO, USDF CONSORTIUM

    Mr.  Morgan. Chairman Hill, Ranking Member Lynch, and 
members of the subcommittee, thank you for the opportunity to 
join you to represent the USDF Consortium and our member banks. 
My name is Rob Morgan, and I am the CEO of the USDF Consortium, 
which represents a group of community, mid-sized, and regional 
banks that have come together to build blockchain 
infrastructure for the responsible delivery of traditional 
banking services.
    Today's hearing comes at a critical moment. Distributed 
ledgers hold tremendous promise to improve financial services 
by offering faster, cheaper, and more-efficient products that 
can help promote financial inclusion, drive growth in our 
communities, and support the role of the U.S. dollar as the 
global reserve currency. To date, most blockchain innovation 
has occurred outside of the regulated banking sector, in novel 
cryptocurrency markets. These markets have provided testing 
grounds that have proven the efficiency and stability that 
blockchain technology can deliver.
    However, financial services only deliver value when they 
facilitate real-world activity, such as helping small 
businesses invest and grow, or helping families purchase a 
home. To leverage blockchain for real-world transactions, you 
first need a trusted form of digital money that exists natively 
on blockchain. This is what led to the rise of stablecoins and 
has driven the policy discussion around the creation of a 
central bank digital currency (CBDC). The debate on how to 
digitize the dollar is too often pitched as a binary choice 
between these two options. We believe there is a third path 
that leverages the way money already exists in our economy.
    The U.S. dollar is already largely digital and exists 
primarily in the form of bank deposits. Today, bank deposits 
represent 73 percent of money in our economy. At its core, 
blockchain is a ledger technology. Banks have long relied on 
ledgers to record value and facilitate transactions. Over the 
years, this technology has evolved from paper-based ledgers, to 
on-premise servers, and now the cloud. We believe that 
blockchain is the next evolution in ledger technology. By 
recording a traditional bank deposit on blockchain, we can 
bring many of the benefits of stablecoins to the real economy 
while maintaining the numerous benefits and protections that 
our two-tier banking system provides today.
    Unlike stablecoins, tokenized deposits are not designed to 
connect the broader crypto ecosystem to the real world. 
Tokenized deposits are backend technology designed to improve 
the delivery of traditional banking services. They will not 
trade on exchanges, and in many cases will not be held directly 
by the public. Like all bank deposits, they are a liability of 
an insured depository institution.
    Bank deposits are a cornerstone of our monetary and 
financial systems that support the dominance of the U.S. dollar 
around the world. They play a critical role in supporting a 
bank's ability to lend into the communities they serve, driving 
economic growth, and promoting social mobility. The value of 
bank deposits is supported by stringent regulation and 
proactive oversight, which includes capital and liquidity 
requirements as well as technology risk management designed to 
control for the risks associated with deposit taking.
    Tokenizing deposits facilitates the creation of a real-time 
blockchain-based payments infrastructure that can significantly 
improve the delivery of banking services. It can facilitate 
faster, cheaper payments, programmable payments, and atomic 
settlement. We can only realize these benefits when innovation 
is delivered responsibly and regulatory guidelines are clear, 
certain, and consistently applied.
    Legislation like that being discussed today is an important 
step to ensuring stablecoins are delivered responsibly and that 
consumers remain protected. It is important that these efforts 
do not inhibit the adoption of blockchain for other 
applications like tokenized deposits. To that end, we were 
pleased to see that the draft legislation makes the critical 
distinction between stablecoins and tokenized deposits, and 
that it affirms a bank's ability to leverage blockchain for 
traditional banking applications.
    Unfortunately, there is not currently a clear regulatory 
path for banks to adopt blockchain. Today, banks require formal 
regulatory approval for any such project. We would encourage 
Congress to work with the banking agencies to ensure there is a 
clear and credible path for banks to adopt blockchain 
technology. Competition breeds innovation, and we believe there 
is a role for many forms of money, both novel and traditional. 
We look forward to working with Congress to ensure there is an 
appropriate regulatory framework for novel assets like 
stablecoins, and to ensure there is regulatory clarity for 
banks to adopt new technologies that benefit the customers and 
communities that they serve.
    Thank you for the opportunity to testify today. I would be 
happy to answer any questions you may have.
    [The prepared statement of Mr. Morgan can be found on page 
49 of the appendix.]
    Chairman  Hill. Thank you, sir.
    Mr. Portilla, you are now recognized for 5 minutes for your 
oral presentation.

STATEMENT OF DAVID L. PORTILLA, PARTNER, DAVIS POLK & WARDWELL 
                              LLP

    Mr.  Portilla. Thank you, Chairman Hill, Ranking Member 
Lynch, and members of the subcommittee. It is a pleasure to 
have the opportunity to speak before you today. I commend all 
of your diligent efforts and the progress that has been made to 
develop stablecoin legislation. I believe a bipartisan 
substantive consensus should be achievable.
    These types of financial products are special because they 
pose well-known risks, such as the risk of a run, that is, 
request for redemption and loss that cannot be met due to a 
mismatch in the liquidity of reserve assets. We can and should 
proactively mitigate these risks by establishing a regulatory 
framework now before the risks grow larger and scale makes that 
change more difficult.
    I cannot say with certainty whether stablecoins represent a 
part of the future of payments, yet I feel quite confident that 
the current legal framework is ill-suited to comprehensively 
regulate payment stablecoins. Correspondingly, legislation that 
enables fit-for-purpose regulation would help foster an 
environment where this technology can develop and scale.
    Some of the potential that payment stablecoins offer 
include the programmability of money and additional means for 
mobile-based, real-time payments for consumers, and the 
creation of an additional payments infrastructure in which 
further innovation can occur. If realized, all of these 
developments may amplify the potential for building a more 
efficient, competitive, and resilient payment system.
    Legislation should establish privileges and 
responsibilities along a spectrum. Greater privileges from the 
government should be coupled with more-stringent regulatory 
oversight; a more-tailored regulatory approach, on the other 
hand, should be coupled with appropriately-calibrated 
privileges from the government.
    The remainder of my remarks will focus on what I believe 
are the key outstanding issues that should be addressed in any 
legislation.
    One, who should be permitted to issue payment stablecoins? 
Nonbanks should be permitted to issue payment stablecoins. 
Within a banking organization, it makes the most sense for a 
stablecoin to be issued by a non-bank entity within the 
corporate group. The reason is that the common conception of a 
payment stablecoin business, the issuance and redemption of an 
instrument backed by a discrete pool of high-quality liquid 
assets, is distinct from the traditional banking business 
model.
    Two, who should regulate payment stablecoins? Federal 
regulation of stablecoin issuers would offer more uniform, 
consistent rules, where a State regulation could promote more 
diversity and innovation in regulation and supervision. The 
answer to this question need not be binary. Many of the 
legislative proposals released by Members of Congress to date 
have followed the model of our dual banking system. that is, 
they would establish a framework in which stablecoin issuers 
could be regulated either directly at the Federal level, or 
primarily at the State level with an overlay of Federal 
oversight. There are many options, including providing Federal 
regulation as a backup to State regulation, or an approach that 
toggles based on the scale of an issuer.
    Three, should non-bank payments stablecoin issuers be 
provided access to the Federal Reserve's payment system or 
discount window? Granting non-bank payment stablecoin issuers 
access to master accounts could help them provide more-
efficient services to their customers. Perhaps legislation 
could grant non-bank stablecoin issuers access to Federal 
Reserve Bank services, but limiting those services in both 
scale and scope, or access to Federal Reserve Bank services 
could be available as an option or based on the scale of an 
issuer.
    Four, to what extent, if at all, should payment stablecoins 
be subject to, ``deposit insurance?'' Whether some form of 
insurance is ultimately needed for stablecoins may turn on the 
nature of the reserves that backed them, and relatedly, the 
degree to which consumers expect their stablecoins to be 
redeemable on demand at par.
    Five, what insolvency standard should be applicable to 
payment stablecoins? To the extent payment stablecoins are 
designed or perceived to be effectively free of credit risk, it 
would be prudent to provide stablecoin holders with structural 
priority over an issuer's other creditors. In addition, 
customers should know that the companies that help them hold 
stablecoins do so in a safe way. Existing Federal and State 
laws provide standards for custodians and should be useful in 
this context.
    Six, what other legal regimes should apply to payment 
stablecoins and related products and services? Well, I focused 
primarily on prudential issues. Payment stablecoins and related 
products also present other common regulatory concerns such as 
those related to consumer protection and illicit finance. All 
of these considerations should be thoughtfully explored, but 
this does not mean that the securities laws should apply to 
payment stablecoins nor does it mean that we should be vexed to 
paralysis in trying to answer questions that, frankly, permeate 
traditional finance, such as how to regulate any service 
provider that is adjacent to a regulated firm. Ultimately, 
consumers in our financial system more broadly will be best-
served by focusing on the issues I outlined, where I believe we 
can find common ground.
    Thank you.
    [The prepared statement of Mr. Portilla can be found on 
page 59 of the appendix.]
    Chairman  Hill. Thank you, sir.
    Ms. Wang, you are recognized for 5 minutes for your oral 
presentation.

    STATEMENT OF FENNIE WANG, FOUNDER AND CEO, HUMANITY CASH

    Ms.  Wang. Good morning. Thank you, Chairman McHenry, 
Chairman Hill, and Ranking Members Lynch and Waters for giving 
me this opportunity to testify.
    People like me rarely have this opportunity. I do not 
represent a large corporation or an industry organization. I am 
an independent lawyer and entrepreneur working with grassroots 
organizations. While in my past life, I have worked for a Wall 
Street bank and Wall Street law firms, the work I do now is a 
labor of love, working with community organizations to design 
local currencies that make money work harder for local 
communities. Indeed, my company is called, ``Humanity Cash,'' 
because we want to make money personal again.
    During the pandemic, I studied the history of community 
currencies, which are not legal tender, but they complement 
national currencies as a local medium of exchange to ensure 
more money circulates and stays within local communities. In 
the United States, where we enjoy the world's reserve currency, 
one downside is that the U.S. dollar sometimes works minimally 
for local communities, with most of that money benefiting big 
banks and large corporations. Therefore, the goal of a local 
currency may be to promote patronage of small businesses and 
local banks, which recirculate deposits back into the local 
economy in the form of productive loans, creating a money 
multiplier effect. This is the model of a local currency in The 
Berkshires, Massachusetts.
    During the pandemic, small businesses were under and 
continue to be under pressure. The pandemic also accelerated 
the shift towards contactless payments, which means that more 
money is leaking out of local economies. Even if you shop 
locally, if you pay with a credit card, the local economy loses 
out on the money multiplier effect of that dollar being put to 
work by local banks, as well as the 3- to 4-percent transaction 
fees that are taken off the top. I saw this as an opportunity 
to address a real-world problem for which blockchain was 
suited. By digitizing a local currency, we can better compete 
with credit cards, and reduce transaction fees, while ensuring 
that the underlying dollar reserves remain deposited and, 
therefore, invested in the local economy via local banks.
    During the process of designing and launching additional 
local currency, I interviewed small business owners, community 
bankers, and ordinary citizens, whether in The Berkshires or 
across the United States, from Puerto Rico to Hawaii to 
Indiana. The people I have met are not interested in crypto as 
a speculative investment, and neither is anyone in this room. 
We are all deeply passionate about making money work for our 
communities--that, ``we,'' includes a concrete mixer driver, a 
retired accountant, community organizers who support Black-
owned businesses, and a small business owner who produces 
Massachusetts-made ukuleles.
    As grassroots entrepreneurs and community innovators, we 
need risk-appropriate regulations that will not be cost-
prohibitive, while providing guardrails to protect us from bad 
actors. Chairman McHenry's stablecoin proposal strikes a good 
balance between these two needs. Importantly, it provides space 
for local initiatives in innovation through State regulators in 
a clear roadmap for implementation. This proposal also provides 
the groundwork for community financial institutions as well as 
non-bank institutions, such as Economic Development 
Organizations, to staunch the flight of deposits from local 
communities.
    Payment stablecoins enable higher-quality deposits, as we 
can transact amongst each other without needing to withdraw the 
underlying dollars. The urgency of keeping deposits local is 
more important than ever in light of the regional banking 
crisis. The community banks we work with in Massachusetts 
recirculate 70 cents of every dollar back into the local 
economy, compared to just 20 cents for large banks.
    Long term, blockchain technology can replace outdated 
banking and payments infrastructure, which is currently 
limiting the ability of smaller banks to innovate and compete 
effectively against big banks and fintechs. With the right 
policies, starting with the stablecoin proposals, we can enable 
our financial system to be more competitive and more responsive 
to local economies, a benefit that ordinary Americans deeply 
desire. Thank you.
    [The prepared statement of Ms. Wang can be found on page 67 
of the appendix.]
    Chairman  Hill. Ms. Reynolds Hand, you are now recognized 
for 5 minutes for your oral presentation.

    STATEMENT OF DELICIA REYNOLDS HAND, DIRECTOR, FINANCIAL 
                   FAIRNESS, CONSUMER REPORTS

    Ms. Hand. Thank you. Good morning, Chairman McHenry, 
Ranking Member Waters, Subcommittee Chairman Hill, Subcommittee 
Ranking Member Lynch, and members of the subcommittee, and 
thank you for this invitation to testify. My name is Delicia 
Reynolds Hand, and I serve as the director of financial 
fairness at Consumer Reports, where I lead the organization's 
work in digital finance. At Consumer Reports, we examine what 
fintech products and services actually do for consumers and how 
they rate alongside each other. Do they actually live up to 
what they promise?
    As I testified recently, the convergence of new 
technologies and new forms of assets have made cryptocurrencies 
particularly appealing for consumers whom traditional finance 
has never appropriately served. In a volatile and stressed 
economic environment, consumers and investors are at an even 
greater risk in the absence of rules and noncompliance with 
regulations to protect them and prevent the misuse or 
exploitation of these assets. Since the last conversation on 
stablecoins, Europe has succeeded in bringing crypto assets, 
crypto asset issuers, and crypto assets service providers under 
a regulatory framework, and today, we have two bills under 
consideration. I hope we can land in a good place for 
consumers.
    Consumer Reports urges this committee to work together to 
achieve effective and comprehensive regulation of stablecoins. 
This is especially important for responsible innovation, 
financial stability, and financial inclusion. Appropriate 
regulation, supervision, and oversight needs to be implemented 
before stablecoins become a greater risk to financial 
stability, safety, and soundness, and the smooth functioning of 
payment system.
    To be clear, this space will be regulated, and new 
frameworks will be developed. The question is, whether the 
development will be driven by crisis or collaboration? We 
support updates to the committee draft which include Federal 
regulatory review to ensure the safety and soundness of 
stablecoin issuers. And we encourage the adoption of provisions 
in the bill granting the Federal Reserve Board authority to 
reject State licenses. Not including these provisions creates 
regulatory arbitrage, which could drive a race to the bottom 
instead of a race to the top. These are lessons we have failed 
to learn from the past. Keeping with the tradition of 
congressional implication of the commerce clause, the law 
should be the same across all 50 States.
    The committee draft could also go further to include 
specific key requirements which parallel requirements for 
traditional banking. While both drafts retain some equivalent 
requirements to provide information about the organizers, 
senior management teams, and capital adequacy, we urge the 
committee to also retain requirements to promote diversity and 
inclusion in the compromise bill. We support the addition of 
requirements for Federal regulators to issue rules related to 
risk management infrastructure.
    Second, while the committee bill outlines a role for 
Federal oversight, it does not require entities that become 
stablecoin issuers to be insured depository institutions. The 
compromise bill, however, makes it clear that issuers shall not 
represent stablecoins as insured depositors. We would encourage 
adoption of this language. We are most concerned about the 
removal of key text in the committee draft, maintaining 
separation of banking and commerce, prohibiting non-financial 
commercial businesses like Facebook or Walmart from owning a 
payment stablecoin issuer. Additionally, we would encourage the 
adoption of stronger consumer protections.
    The bill sets up a regime to prove issuers of payment 
stablecoins, but it doesn't outline adequate consumer 
protections for payment activities conducted or facilitated by 
issuers or their coins. We urge the committee to move forward 
with the provisions in the compromise bill that require 
stablecoin payment regulation to additionally be technology-
neutral, to promote interoperability and to ensure stablecoin 
arrangements share common features with the traditional 
financial system.
    We also request that the committee adopt language 
associated with strong oversight of custodial wallets, as the 
committee draft does not cover all assets held by custodial 
wallets. We do not need another Lehman Brothers. And in the 
event of another insolvency, a bankruptcy court could 
reasonably view, as they have in Celsius, that commingled funds 
are grounds for giving the company and its creditors priority 
access to those funds rather than stablecoin holders, the 
rightful owners. Lastly, we urge explicit clarification on how 
and when the SEC can and should regulate in this space.
    Thank you again for the opportunity to testify.
    [The prepared statement of Ms. Hand can be found on page 36 
of the appendix.]
    Chairman  Hill. Thank you for your testimony. And we 
appreciate all of the testimony from our witnesses. We will now 
turn to Member questions.
    The Chair recognizes himself for 5 minutes.
    Mr. Homer, those were interesting comments you made about 
validation of the reserves for a stablecoin, and you referenced 
the ability to do that on an intraday basis versus the way the 
bill is drafted. Is that technology readily available for a 
stablecoin issuer to provide an intraday valuation of their 
reserves and transparency on that?
    Mr.  Homer. Thank you for the question, and, yes, the 
technology is available. I think there will be two aspects of 
it. One is the number of stablecoins that you have issued, 
which is available publicly through the blockchain, and then, 
the second aspect of it would be technology to show that the 
backing assets match that on a one-to-one basis. And both of 
those things can be accomplished,
    Chairman  Hill. Right. And that would obviously be backed 
up by the attestation and monthly financial reporting, and then 
audits. Yes. Thank you. That is a good comment you made.
    In our last hearing, we heard testimony from NYDFS 
Superintendent Harris on the role of State regulators. She 
described how State regulators can regulate payments, 
stablecoin issuers, and how a regulatory regime could be built 
on a well-established dual banking system that we have in our 
country. I think it is important as we work through the drafts 
that we strike the right balance there. I think it is a key, 
effectively, a difference between these two drafts, and the one 
that we are going to try to figure out between both sides of 
the aisle as we work through this. And naturally, it is an area 
that the Federal Reserve cares a lot about since they would be 
the primary regulator for federally-qualified nonbanks. And in 
our Republican draft, we have the Comptroller of the Currency 
as the primary Federal regulator for national trusts.
    Our September bill, from last fall, the Maxine Waters-
Patrick McHenry bill, would require a State-chartered issuer 
also registered with the Fed.
    Mr. Homer, striking a balance there, what is your view on 
making sure we get that balance right?
    Mr.  Homer. Yes. As you pointed out, I think that balance 
is very important to get right for a number of reasons, most 
importantly, that we want a competitive marketplace. I have 
been a Federal regulator, and I have been a State regulator, 
and I think both regulatory systems are important to the 
stability of our financial system. But I will say with 
certainty that State regulators are much closer to the ground. 
They know their local constituents much better. They are much 
more able to effectively calibrate a regulatory environment 
that meets local requirements. The State pathway is important, 
because if you are someone who is starting a financial services 
company, that is where you go to get licensed or chartered for 
the first time.
    Chairman  Hill. But you know the ranking member's concerns 
about a race to the bottom, right? You have been a State 
regulator and an FDIC employee. Can we strike that balance with 
the way we have approached it in the Republican bill, do you 
think?
    Mr.  Homer. I think so. I think in both of these bills, 
there is a strong Federal floor. I would argue that a race to 
the bottom is not possible.
    Chairman  Hill. Okay. Good. Thank you.
    Let me turn to you, Mr. Portilla, on the issue of the OCC 
charters. The Comptroller of the Currency had two digital asset 
firms that they had given conditional approval to act as a 
trust. And those conditional approvals now have lapsed, like so 
many things, around our lack of a regulatory framework, adding 
to the frustration here. The Republicans on the subcommittee 
sent a letter to the Agency pointing out its inconsistent 
approach in reviewing national trust bank charter applications. 
Could you discuss the benefits of allowing the OCC to serve as 
the primary regulator for any stablecoin issuers that receive 
an OCC national trust charter, please?
    Mr.  Portilla. Yes. Thank you for the question. I think the 
main benefit of having the OCC serve as the primary Federal 
regulator for a stablecoin issuer that has a national trust 
charter is that you avoid multiple Federal regulators of the 
same entity. And in addition, the OCC is at heart a supervisor 
and an examiner of banks and trust companies, and so they are 
well-qualified to do that.
    Chairman  Hill. That is helpful. Let me yield back the 
balance of my time, and call on my friend from Massachusetts, 
the ranking member of the subcommittee, Mr. Lynch, for his 5 
minutes of questions.
    Mr.  Lynch. Thank you, Mr. Chairman. Mr. Homer, how many 
stablecoins are registered in New York State?
    Mr.  Homer. There are, I believe, currently three companies 
that have been chartered to issue--
    Mr.  Lynch. How many stablecoins are there?
    Mr.  Homer. I believe it is five.
    Mr.  Lynch. No, no. How many stablecoins are in existence 
right now?
    Mr.  Homer. There are probably--
    Mr.  Lynch. 20,000, I think, yes.
    Mr.  Homer. That would claim they are stablecoins.
    Mr.  Lynch. Yes. So, 5 out of 20,000 are registered in New 
York. I think that is evidence of a race to the bottom right 
there, where stablecoins are trying to and crypto companies are 
trying to go to the areas with the least amount of regulation. 
I also worry, and I know you have done extensive work in New 
York. We had Ms. Harris in yesterday, and I know people have 
done a lot of good work in New York around this issue.
    But the practice--a race to the bottom is not possible. A 
race to the bottom is the practice, is the custom of this 
industry, to go offshore and seek areas of least regulation. I 
compliment the State of New York for the work that they have 
done. However, my feeling is that if we directed this to the 50 
States and the Territories, perhaps that practice would 
continue, and cryptocurrencies would seek out those areas, 
those jurisdictions that offer the best opportunity for them to 
maximize their profit and avoid cumbersome and costly 
regulation and disclosure. That is what I worry about here, 
that we are not engaged in that type of practice where New York 
would be penalized for having a robust regulatory system. They 
would run elsewhere. There are other States that are in the 
game here. We all know who they are, that are offering 
themselves as safe havens, that offer us some real concerns.
    But anyway, I do appreciate you all being here and helping 
us. This is a learning process, and we are all trying to 
understand this in a better way so that we can craft this 
legislation and come to a meeting of the minds. I deeply 
respect the chairman, Mr. Hill, and I know he is a good man, 
and we are trying to get to a good situation on this. But, Ms. 
Reynolds Hand, back in February of this year, the Fed Board of 
Governors offered guidance on member banks regarding the use of 
digital assets within the Federal banking ecosystem, and they 
said they are offering this guidance because of rampant fraud.
    The rule that they promulgated covered two directives. One 
was to presumptively prohibit holding crypto assets out of 
safety and soundness concerns, and the rule also noted 
significant risks associated with the cryptocurrency sector, 
including fraud, legal ambiguity and volatility. They also 
said--and this really got me--that in the absence of a 
fundamental use case, the value of most crypto assets is driven 
largely by sentiment and future expectations, and not by cash 
flows from providing goods or services outside the crypto asset 
ecosystem.
    So in light of so many of these stablecoins breaking the 
buck, becoming de-pegged, wreaking havoc for those who hold 
this because of the inability of depositors and investors to 
get their money back in redemption, is this something that we 
want to tie to a traditional financial system and give access 
to the Federal Reserve discount window or access to Federal 
Reserve services?
    Ms. Hand. I would say we certainly shouldn't start there, 
with so much volatility and disruption occurring. We shouldn't 
open up the Federal purse, frankly, until industries are proven 
to be safe and we cut down on rampant fraud and other abuses. 
We should start first with clear rules of the road and strong 
protections for consumers. Then, once proven, we should add the 
additional programs in which companies are interested.
    Mr.  Lynch. That is great. Thank you. Mr. Chairman, I yield 
back.
    Chairman  Hill. The ranking member yields back.
    I now recognize Mr. Davidson of Ohio, who is the vice 
chairman of this subcommittee, and the chairman of our Housing 
and Insurance Subcommittee, for 5 minutes.
    Mr.  Davidson. I thank the chairman. Thanks for our 
witnesses, and, frankly, for the colleagues who are here to 
help make good policy. I will try to stay calm and measured in 
my responses here. But the whole point that we are trying to do 
is provide a clear legal framework for the entire country so 
that no one State can game the system or, frankly, so that 
people aren't driven offshore, out of our capital markets and 
our regulatory framework. Often, they are fleeing our markets 
to find certainty, so it would be great if we would provide 
some. I have been working on this for a long time, as have many 
of you.
    Speaking of efforts, people say, oh, there is a lack of 
stability, that a lot of the same people are working to create 
a lack of stability.
    Mr. Homer, this year it has become fairly apparent to many 
people in a bipartisan way that the traditional banking 
industry has started taking a hostile position with digital 
asset companies in the space in which they operate. When 
Silicon Valley Bank failed, some people pointed to digital 
asset companies, one of which was a stablecoin issue, and said 
they held too much of their capital at one bank, Silicon Valley 
Bank. When Signature Bank failed, people claimed that maybe it 
had something to do with digital assets.
    Barney Frank, a former chairman of this committee, said it 
didn't have anything to do with that. The director of the New 
York State Department of Financial Services, who was there for 
the whole thing, said it didn't have anything to do with 
digital assets. So, where are they going to go for banking? 
Could you speak to the harm that comes with deep banking, the 
industry, and the damage, and, frankly, the lack of stability 
that it has caused?
    Mr.  Homer. Yes. Thank you for the question. I think it is 
something that has been a challenge, and it has become much 
more difficult for companies in the space to find banking 
services, even for the most basic of services, to find an 
account for payroll, for example. I think, unfortunately, what 
that will lead to is people looking for alternatives that are, 
in some instances, offshore.
    Mr.  Davidson. If you can't deposit your cash in America, 
you are probably going to deposit your cash somewhere, right?
    Mr.  Homer. Right.
    Mr.  Davidson. So then, they will point to that and say, 
see, they are offshore. Well, you drove them there, on purpose, 
I might add. Let me just address this. Could a stablecoin go to 
zero, a regulated stablecoin that is backed by high-quality 
liquid assets, or, frankly, commodities, physical custody of 
commodities, would that really go to zero?
    Mr.  Homer. Under this proposal, it would be very difficult 
to foresee a scenario.
    Mr.  Davidson. There would have to be complete fraud. They 
didn't have the assets, right? Could somebody in that case, 
where you had full custody of the assets that you say you have, 
whether they are level-one, high-quality assets or physical 
custody of a commodity that backs it, could it possibly go to 
less than the value unless there was actual fraud?
    Mr.  Homer. It would be very difficult.
    Mr.  Davidson. I think that is the case, and that is the 
whole goal of the regulatory regime we are trying to put in 
place here with stablecoins. As we confront the debt ceiling 
and the fact that this town spends way more money than we 
collect in revenue for a long, long period of time, we are 
spending more money than anyone will even lend us, there seems 
to be a shortage of demand for Treasuries, given that the most 
frequent backing for a stablecoin so that it really is fully 
backed is Treasuries.
    Mr. Portilla, could you talk about the important linkage 
that stablecoins would create for demand for U.S. dollar-
denominated Treasuries?
    Mr.  Portilla. Right, yes. Thank you for the question. I 
think you are right. If stablecoins are required to hold their 
reserves and high-quality liquid assets, which of course 
includes short-term Treasuries, there would inherently be 
increased demand for those assets from those issuers. So, I 
think that is right.
    Mr.  Davidson. Yes. I think it could actually help us solve 
a number of problems. And then the last thing in terms of the 
payment space, frankly, for a lot of people, is they look at a 
stablecoin as in many ways superior to a fiat currency, because 
while the fiat currency is backed by the full faith and credit 
of the United States, and we could just print more money, you 
have a hard time guaranteeing that it will buy the same amount 
of goods. But in the case of a stablecoin, it is fully backed 
and could be backed by physical custody of assets as well.
    My time has expired. I hope we land on something in a 
completely bipartisan way and that we can get this done. I 
yield back.
    Chairman  Hill. I thank the gentleman. Mr. Foster, who is 
the ranking member on our Financial Institutions and Monetary 
Policy Subcommittee, is now recognized for 5 minutes.
    Mr.  Foster. Thank you. Mr. Homer, you mentioned real-time 
monitoring of reserve balances versus tokens issued. Wouldn't 
it be actually easiest and safest to simply require as part of 
the minting process that digital attestation for the Federal 
Reserve, that the amount of deposit in the relevant account at 
the Fed exceeds the amount of tokens that are proposed to be in 
circulation following any proposed minting operation? So 
basically, that any proposed minting operation would not be 
cryptographically valid until it was accompanied by a Fed 
attestation that the assets are actually there on reserve. Do 
you understand where I am going? It seems like this is a very 
unburdensome operation to require for both the Fed and the 
issuer.
    Mr.  Homer. I think they could be complementary. If we are 
thinking about trust in the market and how do we produce trust, 
I think real-time dashboards could assist with that. But of 
course, attestations from a regulator or required by a 
regulator are important and probably not in addition to that. I 
don't think they are mutually exclusive.
    Mr.  Foster. I am worried about the sort of abuses that we 
saw with flash loans and things where even, for a fraction of a 
second, you can have weird things happening, and all of a 
sudden, a giant fraud has taken place, whereas if you would 
have simply said the minting is not valid until the Federal 
Reserve says, yes, they are there, before, during, and after 
the minting operation, you have some excess buffer of reserves. 
It seems like that should be an absolutely solid way of 
guaranteeing.
    Also, that approach, it seems to me, really eliminates all 
of the worries about monetary effects, because there is a one-
to-one ratio in which you emphasize fraudulent issuance, runs 
on stablecoins, and that would all just disappear if we adopted 
that approach. So, I think there is a lot to be said for it.
    Ms. Wang, in your testimony regarding Humanity Cash 
projects, I see that you have kind of independently discovered 
and implemented the two principles that I believe must be 
included to have the controlled privacy and security that will 
be needed to avoid fraudulent and criminal use of stablecoins.
    First, in your testimony you state that the use of a 
blockchain ledger can also cost-effectively and in transparency 
meet part of the public reporting requirements under the 
proposed stablecoin bill. For example, you can show in real 
time that the number of tokens on a chain compared to the U.S. 
dollar reserve balances is what we have just been talking 
about.
    But second, I was very pleased to see that you have also 
attached what amounts to be automobile license plates on each 
digital wallet, something that I have been advocating in this 
committee for quite some time.
    Then, in your testimony, you state that at the point of 
wallet creation, we collect information regarding username and 
contact information associated with each wallet, not available 
to the public on a public ledger to preserve user 
confidentiality, and then go on to explain why it would be to 
the advantage of that system.
    So, let us spend a moment looking through the privacy 
implications of this to see if it is a comfortable place to 
land. For example, if a person uses Humanity Cash to buy a 
secret gift for their secret lover with no criminal activity 
involved, can they expect that it will remain anonymous and 
secret?
    Ms.  Wang. Yes. The blockchain itself doesn't show any 
personal identifying information, but we can also design 
systems that preserve the balance between preserving your 
privacy versus law enforcement needs. One of the other areas 
that I have done work on is around digital identity. You can, 
for example, have the DMV or a bank issue a digital token that 
represents like KYC credential, right? So, your identity
    Mr.  Foster. Yes. The so-called mobile ID or digital 
driver's license?
    Ms.  Wang. Right. And a wallet can hold that digital 
identity token to signal that it has been checked, and then, 
you are going to have safe transactions without needing to 
actually know who that person is, unless there was a compliance 
reason to reveal the underlying information.
    Mr.  Foster. I know that. I am a huge fan of mobile ID as 
well. Now, on the other hand, if there is a ransomware attack, 
say attempting to use Humanity Cash as a payment and someone's 
screen locks up and says that in order to decrypt your computer 
files, we want you to transfer this much Humanity Cash to this 
wallet, then I presume you can go to some judge somewhere, 
prove a crime has been committed, and de-anonymize the owner of 
that wallet. How does that take place? What is the mechanism 
for control of de-anonymization?
    Ms.  Wang. In our specific case, I think the chances of 
that are pretty low because you would only be able to suspend 
it--
    Mr.  Foster. I understand, but we are talking about systems 
at a scale.
    Ms.  Wang. Right, but at a systems level, there will be 
ways to prevent that. Instead, you would know exactly where the 
money has been transferred. But you can freeze, for example, 
compromised tokens and so they would no longer be transactable 
after the point of attack. And then, you still have the 
underlying real-world assets, the deposits in the bank, and all 
of that remains safe, so we can then--
    Mr.  Foster. Thank you. I think my time is up. Your project 
may be small, but I think you have seen the future pretty 
clearly.
    Ms.  Wang. Thank you.
    Chairman  Hill. Thank you, Dr. Foster. We now turn to the 
gentleman from Tennessee, Mr. Rose, for 5 minutes.
    Mr.  Rose. Thank you, Chairman Hill and Ranking Member 
Lynch, for holding this hearing, and thank you to all of our 
witnesses for your time today. I would like to also thank the 
chairman for noticing Ranking Member Waters' stablecoin draft 
to this hearing to give us the opportunity to discuss some of 
the bad policies that it includes. For instance, it would 
require each stablecoin issuer to disclose so-called diversity 
statistics, which have nothing to do with the financial 
stability of the issuer. Additionally, the Waters draft 
proposes to push forward with a study on a central bank digital 
currency, which has been called the single greatest assault to 
financial privacy since the creation of the Bank Secrecy Act.
    Since my time is limited, I want to dive directly into my 
questions. Mr. Morgan, the U.S. dollar is the world's reserve 
currency, accepted all around the world because it is backed by 
the full faith and credit of the U.S. Government. In that 
sense, it is the original utility token. I see the value in 
U.S.-based stablecoins to facilitate payments. So, Mr. Morgan, 
if we are going to use blockchain technology and crypto rails 
to facilitate payments, is it essential to have a less-volatile 
asset, like a U.S.-backed stablecoin, than, say, Bitcoin or an 
Ethereum-based token?
    Mr.  Morgan. Congressman, thank you for the question. We 
think that stable asset is a critical piece of facilitating 
real-world value. In particular, we believe tokenized deposits 
are one path to do that. Today, bank deposits are 73 percent of 
money in the U.S. economy. Stablecoins are separate and apart 
from that, but we believe that competition from well-regulated 
parties for the form of that money can only benefit the 
economy.
    Mr.  Rose. Thank you.
    Mr. Portilla, the McHenry bill does not include a 
requirement for a report on financial inclusion, which was 
included as part of an earlier draft. It also does not require 
regulators to consider financial inclusion when evaluating a 
stablecoin issuer's application, which is also required in the 
earlier draft. Mr. Portilla, does information pertaining to 
diversity and financial inclusion have any bearing on whether 
the stablecoin issuer is capable of operating a stablecoin in a 
safe and sound manner?
    Mr.  Portilla. Yes. Thank you for the question as well. No, 
I think the safety and soundness factors in the proposed 
legislation, both of the proposed pieces of legislation, are 
different than what you might call the community benefit or the 
financial inclusion standards. I think the financial inclusion 
or community benefit standards are not going towards safety and 
soundness. They are addressing other policy goals.
    I think those are borrowed from our banking laws, where 
those factors are required to be considered under the banking 
statutes for mergers and acquisitions, for example, for 
different reasons. For example, classic banking is taking 
deposits and making mortgage loans, and Congress in the past 
has worried about banks making decisions about whom they are 
lending to. To me, that is not relevant to the business of a 
stablecoin. They are not making those types of decisions. So, I 
think there is a question of if that is the right piece of the 
banking statutes to draw from for stablecoin legislation.
    Mr.  Rose. Thank you. I agree.
    Mr. Morgan, tokenized deposits have a role to play in 
utilizing the benefits of the blockchain in our payment 
systems. Can you address the benefits of tokenized deposits and 
how they differ from traditional stablecoins?
    Mr.  Morgan. Congressman, thank you for the question. We 
believe that this is a critical distinction. Unlike 
stablecoins, tokenized deposits are not designed to connect 
that broader crypto ecosystem to the real world. Tokenized 
deposits will not trade on exchanges, and in most cases, will 
not be held by the general public. They are simply backend 
infrastructure that can bring the innovations associated with 
blockchain technology into the traditional banking space.
    Mr.  Rose. Thank you.
    Mr. Homer, how do we ensure that stablecoin issuers work 
with their regulator to utilize an appropriate amount of on-
balance sheet liquidity and concentration limits to offset the 
risk of withdrawals in a stress scenario based on their risk 
profiles?
    Mr.  Homer. Thank you, Congressman, for the question. It is 
a great question, and it really speaks to the importance of a 
prudential supervisor being the primary regulator of 
stablecoins. And that is the balance the stablecoin issuers 
have to strike, a balance between stability and liquidity, and 
prudential supervisors have an important role to play there in 
helping them think through scenario planning to get that right.
    Mr.  Rose. Thank you. I see my time is expiring, so I yield 
back.
    Chairman  Hill. The gentleman yields back. The gentleman 
from California, Mr. Sherman, is recognized for 5 minutes.
    Mr.  Sherman. I am here to channel Nancy Reagan. Just say 
no to crypto and to so-called stablecoins, the biggest oxymoron 
in the American language. Mr. Rose points out that the other 
way to go here is with the digital dollar, and the reason he 
opposes that is he wants to have financial privacy. That is 
right. If you want to be a drug dealer, you need financial 
privacy. If you want to evade our sanctions laws, you need 
financial privacy. But the big market is the tax evaders. The 
IRS has testified that we have a trillion dollars of 
uncollected taxes, chiefly from billionaires, in this country. 
That means they have to hide $3 trillion of income every year. 
That is the big market for this.
    I first got involved in crypto because it blows a giant 
hole in what has been the most effective element of national 
power, and that is our ability to impose sanctions. We differed 
on the Iran nuclear deal, but we were able to order every 
country in the world to not buy Iranian oil in excess of the 
amount we specified for that country because of the role of the 
U.S. dollar. Some would say that got us a great nuclear deal, 
some would say it should have gotten us a better nuclear deal, 
but if this works, we are not going to have that power anymore. 
You can build a couple more aircraft carrier groups at great 
expense, but it isn't going to give you the power that we had 
at that time.
    My concern is what happens if this works as a payment 
system. It is designed to compete with the U.S. dollar. I think 
Mr. Davidson had it right. Here in Congress, we spend money 
like we are Democrats, we impose taxes like we are Republicans, 
and we have a fiscal deficit that would make Argentina blush. 
If we didn't have the U.S. dollar playing the role that it 
does, our economy would be worse than that of Argentina, so if 
this works, it is a problem. We have people here concerned with 
either helping billionaires make money or maybe helping 
consumers not get ripped off. All of the billionaires make the 
money, but we don't have anybody on our panel concerned with 
the power of the United States through its U.S. dollar.
    Now, we have the McHenry bill, which allows you to go to 
any one of the 50 States and make them your regulator. So, you 
supposedly have one-to-one backing for your money, but you pick 
your auditor out of any one of the 50, so it certainly gives 
you the opportunity to have less oversight, and eventually not 
to have support. Mr. Davidson points out that the inflation 
means that the dollar is worth less. That doesn't mean these 
stablecoins preserve value because these stablecoins are tied 
to the value of the U.S. dollar. They are never worth more than 
one-to-one. They can be worth less if you have fraud and you 
invite fraud by saying, go to the State that has the least-
effective audits.
    Finally, there is the use of private wallets. Now, those 
who talk about fiat currencies will say, hey, I have a private 
wallet. You can't conveniently put a million dollars in this. 
The Federal Government doesn't regulate it, but how much money 
can you put in it? In contrast, we are going to have a 
stablecoin system that is like an iceberg. Some will be above 
the water and will see it, but then you will have private 
wallets below the water that will be a lot more efficient for 
tax evaders, drug dealers, and sanctions evaders.
    I can't believe I still have an additional 40 seconds.
    I will also point out that this stablecoin is not some hip 
new thing. It is as hip as John Quincy Adams. We already had 
this in the 1820s. Banks would issue their own currency, 
similar to what Ms. Wang was talking about. I want to add one 
more thing, and that is, we already have money market funds. 
They work much better than stablecoin as a payment system now, 
and we can make them much better than they are now. You can tie 
them to a debit card. The only problem is they have Know Your 
Customer (KYC) rules, and that means they are not good for tax 
evaders and sanction evaders. I yield back.
    Chairman  Hill. The gentleman yields back, and the Chair 
reminds all Members that there is no loss of prestige by 
yielding back in less than 5 minutes.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Steil, for 5 minutes.
    Mr.  Steil. Thank you very much, Mr. Chairman. Thanks for 
holding today's hearing. I think it is a really important 
topic.
    Mr. Homer, one of the things I think a lot about is how we 
make sure that the development of these products isn't 
overseas, but rather, in the United States. A lot of times, I 
think about the challenges that I have with Big Tech, but if I 
look at all of the challenges that I have with Big Tech, I 
think I can't even fathom to wrap my head around the challenges 
that we would face if, instead of having U.S.-domiciled 
companies at the forefront, if all of our Big Tech companies 
were like TikTok and were developed outside the United States, 
the challenges that we would face or the infancy in some ways 
of this technological revolution.
    I want to make sure it remains and is developed here in the 
United States with our values rather than internationally, as 
well as the jobs and value that will come from that. And so, as 
I look at that, do you believe that the proposed McHenry 
legislation will provide innovators with the certainty they 
will need to invest here in the United States?
    Mr.  Homer. I do, and I can--
    Mr.  Steil. No, no, no. That is good. Okay. Straightforward 
answer then. Singapore has enacted a regulatory framework for 
stablecoins, so let's examine Singapore's experience as we 
craft our own framework here in the United States. Is there 
anything specifically we can learn from the Singapore 
experience?
    Mr.  Homer. Sure. I think one thing that is important now 
is that stablecoins will happen regardless of whether we want 
them to happen or not. The U.S. dollar dominates stablecoins. 
There is nothing stopping offshore entities from doing this 
already. We should have it done in the U.S. so we can regulate 
it on our own terms.
    We can learn a lot from stablecoin frameworks being 
proposed in other countries like Singapore and the European 
Union. In some ways, they mirror much of what is reflected in 
this proposal regarding reserve requirements. I think one 
feature that is different that you see in other markets is a 
tiering. Under this proposal, someone who issues $5 of 
stablecoins is regulated in the same way as someone who issues 
$5 billion worth of stablecoins, and in other country's 
proposals, we see a tiering in terms of regulatory 
requirements.
    Mr.  Steil. That is helpful. Thank you very much. Let me 
stay with you, Mr. Homer, but let me shift gears somewhat 
dramatically. The SEC recently issued a, ``Wells notice,'' to 
Paxos that alleges the stablecoin, BUSD, is a security. We all 
know one of the key prongs to the Howey test is that there will 
be an expectation of profit. Could a purchaser of a stablecoin 
have an expectation of profit?
    Mr.  Homer. It is hard to understand how a user of a 
stablecoin could have an expectation of profit.
    Mr.  Steil. So, you would agree that stablecoins are not 
securities, based on your answer, correct?
    Mr.  Homer. Correct.
    Mr.  Steil. Thank you. I think that is important for the 
record. Let me shift gears, if I can, to you, Mr. Portilla. I 
am assuming you have had an opportunity to review the ranking 
member's alternative proposal ahead of this hearing?
    Mr.  Portilla. I have.
    Mr.  Steil. Did you review the section of the legislation 
entitled, ``Risk Management for Contracted Services,'' which 
requires Federal regulation of payment stablecoin issuers, 
affiliates, and subsidiaries?
    Mr.  Portilla. I did.
    Mr.  Steil. And would you agree that the legislation 
requires an entity without an existing Federal regulator to be 
regulated by the Federal Reserve?
    Mr.  Portilla. That is correct.
    Mr.  Steil. So is it fair to say that entities that may not 
issue stablecoins, but instead engaged in other market 
activities, would end up being regulated by the Fed?
    Mr.  Portilla. Correct, if they provide the services in 
that section.
    Mr.  Steil. And you agree that this is outside the scope of 
the Fed's normal regulatory activities?
    Mr.  Portilla. It would be a new responsibility for them, 
right.
    Mr.  Steil. Is this even in the Fed's area of expertise?
    Mr.  Portilla. I don't want to speak for them, but to my 
knowledge, no.
    Mr.  Steil. It appears to me to be a bit of a question as 
to why we would look for the Fed to engage in a regulatory 
oversight role that is outside their area of expertise, so I 
appreciate your feedback. I think it is broadly problematic. I 
think it would further cause market confusion and potentially 
conflict with other regulators. I appreciate your time.
    Mr. Chairman, since you noted I could yield back time with 
no disgrace, I will yield back to the Chair. Thank you.
    Chairman  Hill. The gentleman from Wisconsin yields back in 
a most gracious manner.
    The Chair now recognizes the ranking member of the Full 
Committee, Ms. Waters, for 5 minutes.
    Ms.  Waters. Thank you very much, Mr. Chairman. Mrs. 
Reynolds Hand, the Democratic compromise draft that I posted 
for today's hearing includes several critical provisions that 
are missing from the Republican draft. One of them would give 
the Federal Reserve Board the option to decline any 
registration of a State-approved stablecoin issuer. This aligns 
bank and non-bank stablecoins issuers with the current process 
we have for State-chartered banks and would ensure a strong 
Federal floor for registration. This means that stablecoin 
issuers could not engage in regulatory arbitrage. Can you 
elaborate on the importance of giving a Federal agency, like 
the Fed, a role to approve payment stablecoins before they are 
issued?
    Ms. Hand. Thank you for the opportunity, Ranking Member 
Waters. In this country, there is a strong role for Federal 
regulators in approving all banks, the backbone of consumer 
finance, and the cryptocurrency and the Fed overlap when banks 
hold cryptocurrency as an asset on their balance sheets. And in 
the last couple of years, we have seen that when the 
traditional banking system and decentralized finance (DeFi) 
begin to intersect, it can create significant questions and 
structural issues. For example, although stablecoins may peg 
their value to the same real-world asset, stabilization 
mechanisms vary greatly.
    This is one of the reasons payment stablecoins can impact 
the monetary system, and why we need a role for the Fed in the 
same way that there is the role for Federal regulators to 
approve State-chartered banks. There has to be a role for the 
Fed to review applications and reject them if they don't meet 
certain requirements.
    Ms.  Waters. Thank you. That is an important issue that we 
are dealing with, with stablecoins. Let me move on. One of the 
most-devastating impacts of the FTX collapse resulted from the 
intentional lack of customer asset segregation. The assets of 
FTX's customers were used to fund personal loans for senior FTX 
staff, and funneled into FTX founder, Sam Bankman-Fried's, 
trading from Alameda Research. Customer funds were commingled 
with the firm funds. When the exchange collapsed, commingled 
customer assets largely vanished, and to this day are difficult 
to recover. Some are unlikely to be recovered at all. However, 
this is a different experience compared to FTX's Japanese 
customers, who were largely made whole because Japan passed 
strong regulations against the commingling of funds. 
Unfortunately, only a few months after the FTX collapse, the 
Republican stablecoin draft allows for the creation of 
stablecoins but has no oversight of the wallets where they 
would hold them.
    Can you describe the importance of customer protections, 
like the complete segregation of customer assets by issuers, 
exchanges, wallet providers, and other entities? What are the 
dangers presented by firms commingling customer assets with the 
firm's own assets?
    Ms. Hand. Briefly, custodial structures help protect 
consumer funds, and it is important because if a firm goes 
bankrupt, then consumers need to have a clear pathway to be 
able to recover their funds. And as we saw in the court rulings 
in Celsius, there is a clear gray area there, and we need clear 
rules of the road, particularly around custodial wallets. We 
need a segregation of consumer funds in these instances.
    Ms.  Waters. So, commingling is a serious issue. Again, we 
have seen it with FTX, and we should be aware of that, and that 
is one of the issues we have to resolve in this legislation. 
Thank you, and I yield back the balance of my time.
    Chairman  Hill. The gentlewoman yields back. The gentleman 
from Illinois, Mr. Casten, is recognized for 5 minutes.
    Mr.  Casten. Thank you, Mr. Chairman. Mr. Homer, I want to 
just run through some hypotheticals with you as I think about 
some of the mechanics of this bill. If I am a broker-dealer of 
conventional equities, am I legally allowed to unilaterally 
halt trades on a volatile security, or do I need to have the 
regulator's approval for that?
    Mr.  Homer. I don't have the answer to that question right 
now.
    Mr.  Casten. It is a, ``yes.'' I hope you would agree that 
we would not want to give broker-dealers that power, give them 
the conflicts of interest. I asked the question, because from 
March 10th to March 12th, Coinbase made a unilateral decision. 
Coinbase was registered as a broker-dealer, and made a 
unilateral decision to pause USDC conversions after Circle 
disclosed that they had $3.3 billion in exposure to Silicon 
Valley Bank and they lost their peg. So, exchanges that are 
registered as broker-dealers in the crypto space, is there 
something unique about crypto? Should they have authorities 
that we do not give to other broker-dealers because of the 
conflicts of interest? It is not a super-complicated question.
    Mr.  Homer. I think that anyone who is registered as a 
broker-dealer should experience a consistent set of regulatory 
requirements.
    Mr.  Casten. Okay. That is great, because the implication 
of that is that cryptocurrency exchanges should comply with 
securities laws and be registered with the SEC.
    Second question. Mr. Homer, I was trying to read your 
background, and I don't know how long you have been at this 
firm, but you are the managing member of a venture capital 
fund. Is that right?
    Mr.  Homer. That is correct.
    Mr.  Casten. And does your fund invest in crypto firms?
    Mr.  Homer. In companies, yes. Not in tokens.
    Mr.  Casten. Okay. Do you receive or buy cryptocurrency 
tokens in connections with those investments?
    Mr.  Homer. We have not.
    Mr.  Casten. Would you be open to that possibility with the 
right deal and the structure?
    Mr.  Homer. I would not preclude it.
    Mr.  Casten. Okay. So if you did, once your contractual 
lockout ends, however long that is, you are then allowed to 
sell those tokens to the public immediately, right?
    Mr.  Homer. It depends on how it is structured, but in your 
scenario, it sounds like yes.
    Mr.  Casten. I am just saying, legally; I am not saying how 
you might structure it. I am just saying, just as a venture 
fund, when your lockout period is over, you can sell that back, 
because if you were subject to SEC registration, those would 
first have to comply with Section 5 of the Securities Act and 
be registered with the Commission, right?
    Mr.  Homer. I am guessing the answer is yes.
    Mr.  Casten. And furthermore, if you are getting paid in 
these crypto tokens, you don't have to comply with Section 
12(a)(1), which would allow individuals who might feel that 
they had been defrauded, to sue you if there was something that 
they thought was a fraudulent conveyance or something else, 
right?
    Mr.  Homer. I am following.
    Mr.  Casten. I raise all this because this lack of 
regulation in the crypto space--and I am not saying anything 
about you personally; it is just that you are the only venture 
capital guy up here--allows crypto startups to bypass 
regulations so that you could exit your position quicker even 
if it is defrauding investors. I am not saying that is your 
intent, but I am saying there are a whole lot of problems here 
with this lack of regulation, and I, frankly, don't think that 
either of these bills go far enough to address that.
    The next piece is, do non-bank stablecoin issuers have a 
fiduciary obligation to meet customer demands for redemption?
    Mr.  Homer. Yes, they would.
    Mr.  Casten. Okay. When Circle saw that SVB was going 
under, they tried to pull the $3.3 billion out. They were 
meeting their obligations to their customers, right?
    Mr.  Homer. Yes.
    Mr.  Casten. Okay. Now in the case of SVB, $3.3 billion 
wasn't going to make a difference in the overall troubles that 
they were facing. But it is really easy to imagine that money 
being in a smaller bank or stablecoin succeeding the way we are 
talking about, and it all of a sudden being a massively 
destabilizing event on our fiscal system if you have this 
obligation to pull, right?
    Mr.  Homer. Yes. This is why I think prudential supervision 
is important and prudential supervisors are the best set of 
regulators.
    Mr.  Casten. No, I think there is a different issue here. 
There is a good case for blockchain. There is a good case for 
Web3. There is a good case for distributed ledger. Why are we 
creating a currency within that mix that has access to our 
financial system? If you want to buy this pen for three magic 
ponies, we can do that. That is a barter transaction. Why are 
we connecting this to our financial system?
    And Ms. Reynolds Hand, I guess I will just end with you, if 
you have any final thoughts on what risks we expose ourselves 
to?
    Chairman  Hill. The gentleman's time has expired. I am just 
sensitive to it since we have votes on the Floor, and I want to 
get to Mr. Green. So, I yield to Mr. Green for 5 minutes, and 
at the end of Mr. Green's questioning, the hearing will be 
adjourned.
    Mr.  Green. Thank you, Mr. Chairman. And I thank the 
witnesses for appearing. Let me just start by indicating to you 
that I am very much concerned about the stability of our 
currency. There is a war for currency supremacy. This war for 
currency supremacy is one that involves countries that don't 
always have our best interests at heart, and our reserve 
currency is preeminent. It is something that we treasure, but 
opposition in the world is dependent, to a certain extent, on 
the validity of our currency. People trust us because of the 
validity of our currency. They invest in our country and our 
Treasury because of the validity of our currency.
    So, my concern emanates from this belief that we must 
proceed with caution. And as we proceed with caution, we must 
keep in mind that the system we have, has some flaws, but it 
isn't bad, it isn't the worst system in the world, and I want 
to be very careful about how we do things to impact a system 
that is fairly efficacious. It seems to be something that 
others would love to have. In fact, they try to create it on a 
daily basis.
    Here is my concern for you non-bank financial companies. 
Non-bank financial companies can issue stablecoins. What kind 
of power are we giving to non-bank financial companies when 
they can issue stablecoins? In a sense, someone might say they 
are issuing currency of a sort.
    Why don't we just start with you, Ms. Reynolds Hand? Could 
you kindly comment on what we will be doing when we do this?
    Ms. Hand. Congressman, I completely share your concern. I 
was on the Hill as a staffer during the last financial crisis, 
and since then, we have continued to see the proliferation of 
non-bank financial services, i.e., fintech, explode and 
eclipse, in some parts, the traditional banking system. And 
that is a primary reason why we do need some clear rules of the 
road. Unfortunately, via the mobile phones that consumers walk 
around with, consumers now have access to these digital assets, 
but they severely lack protections. And that is the only reason 
why there is a need for legislation and clear rules of the road 
in this space, but I do share your concern about how we proceed 
forward.
    We have a strong financial system. We have some solid 
principles around which that system is based, and yet, because 
there are clear vagaries and gaps in terms of regulation and 
rules, new entrants are always entering the space and engaging 
with consumers without adequate protections.
    Mr.  Green. Thank you.
    Ms. Wang, just an additional predicate before you respond. 
Our fiat currency is the envy of the world. Everybody wants the 
dollar. If we allow circumstances to continue unabated without 
the legislation, what can happen? Give me your opinions as to 
how this can metamorphose into something.
    Ms.  Wang. Thank you, Congressman, for the question. I 
think, on a global level, countries want to de-dollarize. They 
want to have the dollar be less influential in international 
trade. So if there are competing stablecoin legislations 
elsewhere, they are going to promote their own national 
currency and de-emphasize dollar-denominated stablecoins, so 
having this bill would allow us to stay competitive.
    And as you said, the U.S. dollar is the reserve currency. I 
believe that, and I understand the concerns you have, but don't 
paint all of us with the same brush, because there are those of 
us who may be non-bank financial institutions, but we are 
community organizations. We are grassroots organizations. We 
support the work of local community banks. And we are doing 
that work to ensure that the U.S. dollar works harder, and by 
allowing us an opportunity to also--
    Mr.  Green. Let me recede. The chairman has been very 
generous. Thank you, Mr. Chairman. Mr. Chairman, I am a 
supporter of Ms. Waters' bill, and I am going to do what I can 
to help us to have a good piece of legislation.
    Chairman  Hill. I thank the gentleman from Texas. And I 
thank our witnesses, and I appreciate your patience. We have 
two votes on the House Floor. We have other Members who do have 
some questions. It won't be that many. We ask your indulgence. 
And the committee will stand in recess until after votes.
    [recess]
    Mr.  Timmons. [presiding]. The committee will come to 
order. I now recognize myself for 5 minutes.
    My colleagues across the aisle have asserted that all 
stablecoin issuers must register with Federal regulators before 
conducting business, including those that are regulated on the 
State level.
    Mr. Homer, although stablecoin issuers that go through the 
State pathway are not also required to register with the 
Federal Reserve under the McHenry proposal, would there still 
be a significant role for the Federal Reserve to play, and what 
would that role be under the McHenry proposal?
    Mr.  Homer. Thank you for the question, Congressman. There 
would be a significant role for the Federal Reserve to play in 
that scenario, namely, in two ways, the first being backstop 
supervision. The Federal Reserve would have access to the books 
and records of the companies that are regulated by the States 
and would have the ability to step in if they felt they were 
not being properly regulated, and also would be able to take 
enforcement actions.
    Mr.  Timmons. Thank you for that. Both proposals noticed to 
this hearing establish a list of factors that Federal 
regulators must utilize when considering an application for a 
given stablecoin issuer. Again, Mr. Homer, would you discuss 
the factors in the McHenry proposal and how they provide the 
bounds for what the banking regulators may and may not 
consider?
    Mr.  Homer. Yes. Thank you for the question. The factors 
include the financial requirements, including reserve assets, 
etc. It includes character and fitness of management and 
includes an analysis of risks and benefits.
    Mr.  Timmons. And what are the consequences of including 
more open-ended or subjective factors, as contemplated in the 
Waters proposal?
    Mr.  Homer. There are tradeoffs associated with doing that. 
For companies/applicants in the space, it makes it more 
difficult to understand your requirements and to put together a 
complete application, and for regulators, it would give them 
significant discretion to reject applications based on a 
potentially unlimited set of reasons.
    Mr.  Timmons. And if our objective is to provide certainty 
and a framework from which the market can operate, would the 
McHenry or the Waters proposal accomplish that objective?
    Mr.  Homer. Yes. I think that the first noticed proposal 
would provide greater certainty.
    Mr.  Timmons. Thank you. One risk identified in the 
President's Working Group report on stablecoins was a lack of 
transparency.
    Mr. Portilla, would you describe how the draft legislation 
attached to this hearing could help provide transparency and 
how that transparency will in turn give consumers confidence in 
stablecoins?
    Mr.  Portilla. Yes, for sure. Thank you for the question. I 
think both of the proposals noticed for the hearing include 
provisions that would enhance transparency for stablecoin 
issuers. In particular, there is a requirement to disclose the 
issuers' redemption policy, to establish procedures for timely 
redemption, to publish the monthly composition of the reserve 
assets, and to provide attestations of the accuracy of the 
report of those disclosures to the relevant regulators. And 
there are, in fact, criminal penalties associated with false 
attestations, which should provide significant incentive for 
management to make sure those attestations are correct and 
provide accountability for when they are not.
    Mr.  Timmons. Thank you for that. Some claim that the State 
regulatory framework under Chairman McHenry's legislation will 
be insufficient to address anti-money laundering and financial 
crime issues with stablecoins.
    First of all, the bill requires all stablecoin issuers to 
be treated as financial institutions for purposes of the Bank 
Secrecy Act, which levels a number of requirements including 
registering with the Financial Crimes Enforcement Network 
(FinCEN) and submitting suspicious activity reports (SARs). 
States may add additional enhanced requirements under their 
framework.
    Mr. Homer, again, can you describe how the New York DFS 
considers anti-money laundering compliance when determining 
whether to approve the application of a stablecoin?
    Mr.  Homer. Yes. Thank you for the question, Congressman. 
It is one of the most significant factors. New York is a 
leading regulator in the space, but it is not an easy 
regulator, and it is still very challenging for companies to 
get approval in New York, and rightfully so. This risk area is 
one of the most-significant areas, I would say, where it takes 
companies a while to really adequately meet those requirements. 
The requirements in New York are incredibly robust, and look at 
the policies and procedures a company has related to this 
issue, including ensuring that adequate KYC is being done at 
the time of issuance and at the time of redemption of 
stablecoins.
    Mr.  Timmons. Thank you for that. I yield back.
    And the Chair now recognizes Representative Nickel from 
North Carolina for 5 minutes.
    Mr.  Nickel. Thank you so much, and I want to thank 
Chairman Hill and Ranking Member Lynch for holding today's 
hearing, and thanks so much to our witnesses for being with us 
here today. I am hopeful that we can come to a bipartisan 
agreement on stablecoin legislation as the status quo is both 
risky for consumers and stifling for innovation. We also have 
the opportunity with stablecoins to reinforce the dominance of 
the U.S. dollar as the global reserve currency, all while 
making it stronger, more accessible, and more competitive.
    We are already seeing challenges to the dollar's influence 
with the share of dollars in global currency reserves 
decreasing from 66 percent to 58 percent since 2015. If the 
dollar were to lose its status, there would be negative impacts 
across our economy, in addition to national security concerns. 
The dollar is the asset underlying 98 percent of stablecoin 
transactions. If stablecoin use increases, the dollar will only 
get stronger. By passing bipartisan stablecoin legislation to 
provide regulatory clarity and improve the infrastructure on 
which the U.S. dollar travels, we can ensure it remains the 
global reserve currency.
    Mr. Homer, I would like to start with you. Can you please 
describe the role of stablecoins in supporting U.S. dollar-
dominance?
    Mr.  Homer. Thank you for the question, Congressman. I 
believe stablecoins are the most significant way in which the 
U.S. Government can ensure continued dollar dominance in a 
digital era. We are seeing a transformation of money from 
analog to digitized, and we are moving toward a digital native 
era which stablecoins represent, and we see that in the form of 
users in other countries wanting to hold U.S. dollar-
denominated stablecoins. If we want to maintain our ability to 
engage in economic statecraft and use tools like sanctions, 
having stablecoins be issued from the U.S. is essential to that 
objective.
    Mr.  Nickel. And you kind of touched on this in your answer 
here, but I would like to hear more about the national security 
implications of the dollar losing its status as the global 
reserve currency. How would this impact the effectiveness of 
our sanctions, having stablecoin legislation?
    Mr.  Homer. Yes. Sanctions tools are only effective to the 
extent to which payment instruments or payment systems are 
denominated in dollars or involve U.S. leadership. And if 
significant stablecoin issuance were to happen outside of the 
U.S., it would lessen our ability to use sanctions tools in the 
future.
    Mr.  Nickel. I think we are really close on a lot of the 
different forms of legislation that I am seeing, but I am 
concerned about the Federal Reserve Board having a very broad 
veto authority to decline registrations by State-regulated 
issuers of stablecoins. Are there certain scenarios where you 
think the Fed should have this veto? How can we narrow this to 
keep a strong Federal floor while also preserving North 
Carolina's ability to regulate stablecoins in our dual banking 
system? Mr. Homer?
    Mr.  Homer. I think we can look at some of what has 
happened in other countries, places like the EU or even 
Singapore, where there is a tiered approach, where issuers who 
are below a certain threshold can be subject to subnational 
regulation or a different regulatory regime. But once you have 
reached a systemic or significantly-important level, then I 
certainly think enhanced oversight would make sense.
    Mr.  Nickel. Thank you so much, and I yield back.
    Mr.  Flood. [presiding]. The gentleman yields back. And I 
now recognize myself for 5 minutes. First of all, I want to 
thank all of the witnesses who are here today.
    My number-one concern on stablecoins is ensuring that there 
is a robust State pathway for stablecoin issuers. Much like the 
dual banking system, there should be an opportunity for 
stablecoin issuers to be regulated at both the State and the 
Federal level. This is important for a few reasons. First, it 
makes it possible for States like Nebraska to come up with our 
own regulatory frameworks for stablecoins. Over time, States 
will learn from each other and adopt best practices from their 
neighbors, reaching consensus on common issues and, ultimately, 
better regulation across-the-board.
    The problem with only Federal regulation is that it doesn't 
undergo that natural iterative process. Instead, you have this 
top-down approach that might be more difficult to change over 
time, and that is not a system that fosters innovation. And it 
is hard to argue that America's financial system built on this 
two-tier Federal and State approach to regulation of banks 
hasn't yielded great results for the United States. In the case 
of stablecoins, we are talking about something that we may very 
well have to revisit periodically as blockchain technology and 
its use cases continue to develop. It is much better to have 
several State regulators working in this area than just one or 
two Federal regulators, who may require an act of Congress to 
make technical changes.
    Additionally, it creates opportunities for States to 
develop specialization. Regulators can establish a reputation 
as knowledgeable on a particular set of issues. Such a 
reputation can then become a reason for a business to locate in 
that State. My hope was to develop precisely that kind of 
environment in Nebraska when, as a State senator, I wrote and 
passed the Nebraska Financial Innovation Act.
    Ms. Wang, in your testimony, you compared the State 
regulatory pathway for stablecoins to the, ``laboratories of 
democracy,'' that Constitutional scholars write about. Can you 
elaborate on this point and on the importance of allowing 
States to write some of their own rules?
    Ms.  Wang. I think that the State regulatory pathway is 
absolutely critical for grassroots innovation, without which we 
would not be able to have true bottom up diversity and 
inclusion of our financial system. These grassroots innovators 
are for the community, of the community, and by the community, 
and we should be allowed to experiment and to fail safely.
    Under Chairman McHenry's proposal, we would already be 
required to meet the minimum Federal guidelines for issuance 
under Section 4, backstopped by the Federal Reserve Board in 
the event of exigent circumstances. In my view, there is no 
constitutional reason to preempt State regulation in the case 
where not all stablecoins may necessarily implicate interstate 
commerce.
    Mr.  Flood. Thank you for that.
    Mr. Homer, one of the claims we hear occasionally, and we 
heard it today about a State pathway for stablecoin issuers, is 
that it could lead to a so-called race to the bottom. As a 
former New York State Department of Financial Services 
executive deputy superintendent, would you mind just responding 
to that claim?
    Mr.  Homer. Yes. I think under the proposal, it would be 
very hard to imagine a race to the bottom. A Federal standard 
is established, which is basically the New York standard. New 
York best practices that have been tried and tested and proven 
would be established as a Federal floor.
    Mr.  Flood. I would like to close by speaking just a little 
bit on the two drafts noticed for this hearing. I am glad that 
Ranking Member Waters and the Democrats have come forward with 
a stablecoin proposal. I am hopeful that we can take serious 
steps on this and lead because the United States needs to lead 
here, not just for our country, but for the world.
    However, when I look at Ranking Member Waters' bill, the 
State pathway includes the following provisions: number one, 
State-issued stablecoins must register with the Federal 
Reserve, and the Fed is responsible for creating registration 
requirements; number two, the Federal Reserve is directly 
responsible for regulating and examining the State issuer; and 
number three, the Federal Reserve may, if it chooses, enter 
into a memorandum of understanding where it could delegate some 
of the regulatory enforcement obligations to the State 
regulator if they so choose.
    To summarize, the Federal Reserve would be in charge of 
processing applications, regulation, examination, and 
enforcement. That is the whole ballgame. The Federal Reserve 
would be responsible for all of the nuts and bolts of 
regulating and overseeing State issuers, and they would 
delegate some of their responsibilities only if they so choose. 
To be frank, that is just not a State pathway in any meaningful 
sense. And my number-one focus as a member of this subcommittee 
is to maintain a State pathway, an opportunity for all of these 
laboratories in our democracy, all of the different States to 
be able to participate in a true two-tier system.
    With that, I yield back. And I now recognize Mr. Torres.
    Mr.  Torres. Thank you, Mr. Chairman . There has been a 
suggestion that State regulators cannot be trusted to regulate 
State-licensed stablecoins without parental supervision from 
the Federal Reserve. If State regulators can be trusted to 
regulate State-chartered banks, then why can they not be 
trusted to have analogous authority with respect to 
stablecoins? Regulating fractionally-reserved banks that take 
on credit risk strikes me as far more complicated than 
regulating a fully-reserved stablecoin that takes on no credit 
risk at all.
    So, Mr. Homer, can you explain to me why there should be a 
strong State option for fractional reserve banking but no 
strong State option for stablecoin issuance? Imagine you are 
ChatGPT, and I am a 5-year-old. Please explain the logic that 
underlies that criticism.
    Mr.  Homer. It is really hard to make a rational argument 
for that. I think, as you point out, fully-reserved stablecoins 
and other forms of non-bank companies don't hold the same type 
of risk as fractional companies. And States like New York have 
really been the primary chartering entities or regulators for 
non-bank companies in the history of the United States.
    Mr.  Torres. So, it certainly should be possible to set a 
Federal floor that prevents regulatory arbitrage that prevents 
a race to the bottom without subordinating State regulators, 
like DFS, to the Federal Reserve?
    Mr.  Homer. Absolutely.
    Mr.  Torres. Okay. And let's be crystal clear, State 
regulators, like DFS, have been more effective at crypto 
regulation than the Federal Government. The SVB collapse 
happened under the watch of the Federal Reserve. The FTX Ponzi 
scheme happened under the watch of the Federal Government. 
Federal regulators, like the SEC, spent more time targeting Kim 
Kardashian than Sam Bankman-Fried. So, the evidence is crystal 
clear that we have been poorly served by the SEC's regulatory 
ambulance chasing. As far as the lessons learned from FTX, 
those lessons should inform the development of a Federal 
framework for regulating stablecoins. A lesson learned, 
stablecoins should be fully reserved, and those reserves should 
consist of 100 percent cash or cash equivalents. Raise your 
hand if you agree.
    [Hands raised.]
    Mr.  Torres. I imagine all of you agree. Lesson learned, 
stablecoin reserves should be verified not only by self-
attestation, but also by a third-party audit. Please raise your 
hand if you agree.
    [Hands raised.]
    Mr.  Torres. Customers should have the right to immediately 
redeem a stablecoin on a one-to-one basis. Please raise your 
hand if you agree.
    [Hands raised.]
    Mr.  Torres. And stablecoin issuers should be prohibited 
from lending, leveraging, or commingling customer funds. Please 
raise your hand if you agree.
    [Hands raised.]
    Mr.  Torres. A federally-licensed stablecoin issuer should 
have a single Federal regulator. Too many cooks in the kitchen 
creates regulatory confusion and duplication. If a stablecoin 
is a currency regulated by the Federal Reserve or trust 
regulated by the OCC, it should not simultaneously be a 
security regulated by the SEC. Do you agree with that, Mr. 
Homer?
    Mr.  Homer. I do.
    Mr.  Torres. There is a common misconception that crypto 
threatens the status of the dollar as the world's reserve 
currency, but the experience of stablecoins has shown the exact 
opposite. The fact that most stablecoins are pegged to the 
dollar reinforces rather than challenges the reserve status of 
the U.S. dollar.
    Mr. Homer, you actually referenced competition. My 
understanding is that, in the realm of financial technology, 
China has largely been now competing with the United States. 
The only fintech battleground on which the United States has 
been now competing, China has been the domain of digital 
currency, stablecoins. Dollar stablecoins have been far more 
successful than China's failed attempt at a CBDC. Is that a 
fair assessment?
    Mr.  Homer. It is a fair assessment, and it is because that 
is what people throughout the world want. People want U.S. 
dollar-denominated stablecoins.
    Mr.  Torres. And a common refrain heard from critics of 
crypto in Congress is that crypto has no use case. But it seems 
to me that blockchain enables real-time transactions, 
stablecoin tokenizes the dollar, and the ability of a tokenized 
dollar to move at the speed of the blockchain creates a better, 
cheaper, and faster payment system, which would include the 
potential for better, cheaper, and faster remittances for the 
lowest-income Americans. Is that a fair assessment?
    Mr.  Homer. A very fair assessment, and we are already 
seeing that happen.
    Mr.  Torres. Would anyone else like to comment on the use 
cases of stablecoins?
    [No response.]
    Mr.  Torres. The enthusiasm is overwhelming, I know. The 8 
seconds you have, okay. Other than that, I yield back.
    Mr.  Flood. The gentleman yields back. I would like to 
thank all of our witnesses for their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.

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