Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks? (U.S. Senate Committee on Banking, Housing, and Urban Affairs)

Hearing Takeaways:

• Stablecoins: The hearing focused on the growing popularity of stablecoins, which are cryptocurrencies whose value is tied to a reference asset (such as the U.S. dollar). Stablecoins seek to enable fast and low-cost payments and their pegging to a reference asset should make them less volatile (which should in turn make merchants more likely to accept them).
• • The President’s Working Group on Financial Markets (PWG) Report on Stablecoins: Committee Members and the hearing’s witnesses expressed interest in the recent PWG Report on Stablecoins, which recommended that Congress pass legislation to establish a federal regulatory framework for stablecoins. Full Committee Ranking Member Patrick Toomey (R-PA) and Ms. Massari criticized the Report’s recommendation that stablecoin issuers be insured depository institutions and asserted that stablecoin issuers were fundamentally different than banks. Prof. Allen also criticized this recommendation but raised concerns that that this change would only encourage the growth and systemic importance of decentralized finance (DeFi).
  • Regulation of Stablecoins as Securities: Full Committee Ranking Member Toomey also called for more clarity as to when a stablecoin constitutes a security (as opposed to a commodity or other asset type). He criticized U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler for failing for asserting that certain stablecoins constituted securities without providing a justification.
  • State Regulation of Stablecoin Issuers: Ms. Massari discussed how states largely regulated U.S. stablecoin issuers and digital wallet providers through money transmitter regulators and state trust company authorities. She noted that state money transmitter laws generally require stablecoin issuers to maintain eligible assets to back their obligations to customers and to provide financial reports to their regulators.
• Support for Stablecoins: Committee Republicans, Ms. Massari, and Mr. Disparte contended that stablecoins could improve the privacy and security of financial transactions, bolster financial inclusion, and support financial innovations (such as smart contracts). They contended that Congress must remain vigilant as to not stifle innovation within the stablecoin space or undermine the U.S.’s global competitiveness. 
  • Impact on Financial Inclusion: Committee Republicans, Ms. Massari, and Mr. Disparte remarked that stablecoins would allow for a new form of money that was programmable, was user-controlled, and had a digitally native form factor that worked anywhere and on any device. They contended that this form of money would be more accessible and promote financial inclusion. Ms. Goldstein and Prof. Allen argued however that the purported financial inclusion benefits of stablecoins were overstated given how the use of stablecoins relied upon access to the internet and access to smartphones.
  • Potential for Smart Contracts: Full Committee Ranking Member Patrick Toomey (R-PA) and Mr. Disparte expressed interest in how stableecoins could enable the use of smart contracts. Smart contracts are self-executing transactions based on a sequence of verifiable events. Mr. Disparte noted how smart contracts could be used in the context of insurance for parametric claims. Prof. Allen stated however that the automatic execution of smart contracts could be problematic when the parties involved in the contract agreed that forbearance was in their best interest and the interest of broader financial stability.
• Stablecoin Concerns: Many Committee Democrats, Ms. Goldstein, and Prof. Allen expressed concerns that stablecoins could posed risks to consumers and the broader economy. They also argued that the purported benefits of stablecoins were being overstated. 
  • Limited Exchangeability and High Fees: Ms. Goldstein noted how U.S. stablecoin users could neither purchase nor redeem the top two stablecoins from their issuers and were instead reliant on exchanges to trade stablecoins for U.S. dollars. She also stated that stableocin fees could be very high and unpredictable, which undermined the usefulness of stablecoins as a means of payment. Mr. Disparte remarked however that blockchains were very nascent and highlighted how there were late generation and third generation blockchains that were approaching transaction throughputs akin to major credit card networks. Full Committee Ranking Member Patrick Toomey (R-PA) also suggested that stablecoin users could construct their transactions in ways that would lower the transaction costs.
  • Lack of Transparency and Oversight: Full Committee Chairman Sherrod Brown (D-OH) and Ms. Goldstein expressed concerns that critical stablecoin information was not being provided to both consumers and regulators. This missing information includes the composition of the reference assets backing a stablecoin and stablecoin exchange transactions. Ms. Goldstein asserted that most DeFi platforms were not in compliance with know your customer (KYC) rules, anti-money laundering (AML) rules, and combating the financing of terrorism (CFT) rules.
  • Use of Stablecoins in Speculative Activity and the Potential for Systemic Risks: Committee Democrats, Ms. Goldstein, and Prof. Allen raised concerns over how stablecoins enabled cryptocurrency speculation on DeFi exchanges and stated that this speculation could pose systemic risks to the broader economy. They elaborated that the fiat currency redemption promises made by stablecoin issuers could cause cryptocurrency market problems to migrate into the traditional economy. Prof. Allen further expressed concerns that stablecoins could pose run risks if stablecoin holders lost confidence in their ability to exchange the stablecoins for fiat currency at the expected rate.
  • Potential Involvement of Large Technology Companies within the Stablecoin Space: Prof. Allen also warned that permitting a large technology company (such as Amazon or Meta) to issue a stablecoin would create financial stability risks. She stated that these large technology companies could quickly scale up their stablecoins and contended that these companies could become too big to fail. 
  • Concerns over Deceptive Advertising: Full Committee Chairman Brown expressed concerns that Circle’s U.S. Dollar Coin (USDC) could provide the false impression to consumers that the USDC was backed by the U.S. government (rather than by a private company). Mr. Disparte stated that the Federal Reserve could take the “U.S. Dollar Coin” name.
  • Impact on Monetary Policy: Prof. Allen also argued that stablecoins could harm the U.S.’s ability to conduct monetary policy. She stated that stablecoins weakened the ability of central banks to control the money supply, which would reduce the ability of central banks to respond to inflation and deflation challenges. Ms. Massari asserted however that it was unclear that stablecoins would harm the U.S.’s ability to conduct monetary policy. She stated that stablecoins were already regulated and fully backed by bank deposits and U.S. Treasuries. She contended that U.S. dollar-pegged stablecoins could actually bolster the U.S. dollar’s standing as the world’s reserve currency.
• Policy Proposals for Overseeing Stablecoins: Committee Member and the hearing’s witnesses used the hearing to discuss several policy proposals for stablecoins. 
  • Charters for Stablecoin Issuers: Full Committee Ranking Member Patrick Toomey (R-PA) and Ms. Massari recommended that Congress establish a special purpose federal bank charter option specifically designed for stablecoin issuers. They noted that this charter should be in addition to currently available options for stablecoin issuers (including conventional bank charters and state money transmitter liscenses).
  • Transparency and Oversight Requirements: Full Committee Ranking Member Toomey and Ms. Massari stated that all stablecoin issuers (regardless of charter or license) should be required to disclose their stablecoin’s backing assets, establish clear redemption policies, and provide periodic audits. Prof. Allen also recommended that the U.S. Financial Stability Oversight Council (FSOC) and the U.S. Office of Financial Research (OFR) monitor stablecoins for changes in usage. She added that FSOC could designate stablecoins as systemically important if necessary. 
  • Reserve Requirements: Full Committee Ranking Member Toomey and Ms. Massari also called for establishing minimum reserve requirements and attestations for stablecoin issuers. Ms. Massari stated that stablecoin issuers should have restrictions regarding permissible types of reserve assets and commented that such restrictions would ensure short-term liquid backing of those reserves.
  • Illicit Finance Obligations: Full Committee Ranking Member Toomey and Ms. Massari further stated that stablecoin issuers should have obligations to address illicit finance and sanctions considerations.
  • User Privacy Rights: Full Committee Ranking Member Toomey remarked that the U.S.’s regulatory framework for stablecoins should protect the privacy, security, and confidentiality of stablecoin users and permit customers to opt-out of sharing personal information with third parties.
  • Proposal to Ban Stablecoins: Prof. Allen suggested that the U.S. could ban stablecoins or introduce a licensing regime that would only authorize the issuance of stablecoins if they could demonstrate a purpose outside of the DeFi ecosystem. She commented that this approach would ensure that stablecoins did not pose systemic risks to the financial system. Full Committee Ranking Member Toomey and Mr. Disparte argued however that this approach would be ineffective as it would merely cause stablecoin development to move abroad. They noted that Americans with computers and internet access would still be able to access stablecoins if the U.S. were to ban their issuance.

Hearing Witnesses:

1. Ms. Alexis Goldstein, Director of Financial Policy, Open Markets Institute
2. Ms. Jai Massari, Partner, Davis Polk & Wardwell, LLP
3. Mr. Dante Disparte, Chief Strategy Officer and Head of Global Policy, Circle
4. Prof. Hilary J. Allen, Professor, American University Washington College of Law

Member Opening Statements:

Full Committee Chairman Sherrod Brown (D-OH):

• He noted how the number of cryptocurrencies had grown substantially in recent years and indicated that the estimated total value of these assets in circulation had recently surpassed $3 trillion.
  • He asserted that the sheer amount of money tied up in digital assets posed systemic issues for the U.S. economy.
• He expressed skepticism toward the claim that the blockchain technology underlying cryptocurrencies would democratize money and stated that cryptocurrencies had instead fostered financial speculation.
• He asserted that price volatility and high transaction fees made cryptocurrencies useless for payments and noted how stablecoins were meant to address these issues.
  • He explained that stablecoins were supposed to have their values tied to real assets that would be held by the company issuing the stablecoin.
• He remarked that stablecoins were neither decentralized nor transparent and highlighted how most stablecoins relied upon a single company to manage their reserve assets and their supply of coins.
• He also stated that critical information about stablecoins and their issuers was not being made available to stablecoin holders.
  • He mentioned how he had recently sent letters to several large stablecoin issuers to obtain information about how they manage the assets that back their stablecoins and user rights for their stablecoin users.
  • He commented that the responses from these issuers were “not particularly enlightening” and suggested that most ordinary stablecoin users lacked rights.
• He remarked that people that put their money into stablecoins had no guarantee of redeeming their funds and stated that many stablecoin issuers were hiding their terms and conditions so that they could trap the funds of their customers.
• He contended that stablecoins made it very easy for consumers to gamble on cryptocurrencies that were volatile or even fraudulent in some instances.
  • He mentioned how cryptocurrency markets had recently fallen by almost 30 percent in a single day and called this volatility concerning.
• He also raised concerns that the speculation surrounding cryptocurrencies could ultimately harm retail investors and noted how stablecoins created a link between the traditional markets and the cryptocurrency markets.
  • He stated that stablecoins and cryptocurrencies possessed the same problems as the traditional banking system and commented that these digital assets had even less accountability and rules relative to traditional assets.
• He disputed the assertions that regulation of stablecoins and cryptocurrencies would harm innovation and reduce the U.S.’s international competitiveness.
  • He asserted that these novel digital assets would instead imperil the U.S.’s financial stability.
• He lastly applauded the Biden administration for its personnel appointments at U.S. banking and market regulatory agencies and called on policymakers to provide these regulatory agencies with sufficient resources.

Full Committee Ranking Member Patrick Toomey (R-PA):

• He remarked that stablecoins were a central component of the cryptocurrency ecosystem and highlighted how stablecoins could make payments faster, reduce payment costs, and combat money laundering and terrorist financing through an immutable and transparent transaction record.
  • He also noted how stablecoins could be programmed and made interoperable with other currencies, which could bolster access to financial services.
• He stated however that stablecoins did experience the same levels of price volatility as cryptocurrencies and indicated that the hearing would focus on stablecoins that were designed to maintain a 1:1 value relative to the U.S. dollar.
• He then remarked that the stablecoin market had “exploded” over the previous year and noted how stablecoins were beginning to be used for small business payments and international remittances.
  • He highlighted how stablecoin fund transfers were low-cost and nearly instantaneous.
• He stated that the disruptive nature of stablecoins had caused them to draw skepticism from incumbent industries and regulators.
• He mentioned how the PWG had recently issued a report recommending that Congress pass legislation to establish a federal regulatory framework for stablecoins.
  • He noted how the PWG Report on Stablecoins had expressed concerns over stablecoin consumer protections and how stablecoins impact financial stability.
• He applauded the PWG Report on Stablecoins for concluding that Congress should decide the U.S. government’s oversight and regulatory structures for stablecoins.
  • He expressed his interest in working to develop bipartisan legislation to establish a federal regulatory framework for stablecoins.
• He contended however that Congress must remain vigilant as to not stifle innovation within the stablecoin space or undermine the U.S.’s global competitiveness.
• He noted how he would be releasing a set of guiding principles that should influence Congress’s work on a legislative framework for stablecoins and commented that these principles recognized the innovative nature of stablecoins and how stablecoins provided money with new capabilities.
  • He stated that stablecoins could improve the privacy and security of financial transactions and allow for smart contracts (which allow for automated transactions based on a sequence of verifiable events).
• He remarked that any stablecoin regulations ought to be narrowly tailored and designed to do no harm.
  • He commented however that “sensible” regulatory standards might help to protect against key risks, including redemption and run risks.
• He then highlighted how the PWG Report on Stablecoins recommended that all stablecoin issuers be insured depository institutions and stated that he had three reasons for disagreeing with this recommendation.
  • He first stated that stablecoin issuers should not be subject to banking regulations because these issuers had different business models than banks and did not present the same risks as banks.
  • He then asserted that requiring all stablecoin issuers to become banks would stifle innovation.
  • He lastly stated that the regulation of payments activities should create “an equal playing field” and noted how incumbent companies were already subject to a state-by-state licensing regime (as well as registration requirements with a federal regulator).
• He remarked that there should exist at least three available options for stablecoin issuers.
  • He indicated that the first option would be for the stablecoin issuer to operate under a conventional bank charter.
  • He indicated that the second option would be for the stablecoin issuer to comply with or acquire a special purpose banking charter designed for stablecoin issuers.
  • He indicated that the third option would be for the stablecoin issuer to register as money transmitters under existing state regulatory regimes and as money transmitters with the U.S. Financial Crimes Enforcement Network (FinCEN).
• He contended that all stablecoin issuers should meet certain minimum requirements (regardless of which of the aforementioned options they chose).
  • He suggested that these requirements should include the disclosure of a stablecoin’s backing assets, the establishment of clear redemption policies, and periodic audits.
  • He also suggested that it might be appropriate to set minimum reserve requirements and attestations.
• He then stated that legislation should stipulate that non-interest bearing stablecoins were not necessarily securities and therefore should not be automatically regulated as securities.
• He also remarked that the U.S.’s regulatory framework for stablecoins should protect the privacy, security, and confidentiality of stablecoin users and permit customers to opt-out of sharing personal information with third parties.
• He further called for the modernization of AML and other financial surveillance requirements considering the emergence of cryptocurrencies, stablecoins, and other new technologies.

Witness Opening Statements:

Ms. Alexis Goldstein (Open Markets Institute):

• She expressed agreement with the PWG’s assessment that stablecoins were currently being used for speculative purposes.
  • She noted that while many people believed that stablecoins had the potential to support payments, she stated that retail investors primarily used stablecoins for trading purposes.
• She highlighted how U.S. stablecoin users could neither purchase nor redeem the top two stablecoins from their issuers and were instead reliant on exchanges to trade their stablecoins for U.S. dollars.
  • She called this situation awkward and unusual for the digital payments space.
• She discussed how there existed numerous ways to earn interest and rewards on stablecoins and mentioned how many cryptocurrency lending platforms paid higher rates for locking stablecoins into their platforms than for locking non-stablecoins into their platforms.
  • She highlighted how Coinbase paid its users a 1 percent reward for buying and holding the USDC by default without any additional action required by the user.
  • She indicated that Coinbase did not offer a rate of return for other stablecoin holdings and attributed this preferential treatment for USDCs to a revenue sharing agreement between Coinbase and Circle (which is the issuer of USDC).
• She noted that while the stablecoin industry claimed to be challenging incumbent Wall Street financial institutions, she mentioned that stablecoin issuers were employing the same forced arbitration agreements and class action bans as these incumbent financial institutions.
• She also discussed how stablecoin issuers often claimed that stablecoin regulation was unnecessary because the code underlying the stablecoins was publicly available.
  • She stated however that stablecoin issuers were quick to request assistance from law enforcement when hacks occurred.
• She then noted that while stablecoin proponents claimed that stablecoins could promote financial inclusion, she highlighted how a recent World Economic Forum report had found that stablecoins did not provide any financial inclusion benefits.
  • She explained that this report had found that stablecoins were subject to the same or higher barriers as preexisting financial options, including the need for internet and smartphones.
• She further stated that stablecoin transfer fees tended to accumulate quickly for users.
• She then remarked that the DeFi market was the section of the cryptocurrency market with the least regulatory compliance and asserted that stablecoins were critical for the functioning of this market.
  • She elaborated that stablecoins helped to facilitate trading on decentralized exchanges and served as collateral in lending and borrowing protocols.
• She noted how Uniswap was the largest DeFi exchange and highlighted how eight out of nine of the largest liquidity pools on Uniswap had at least one leg in a stablecoin.
• She remarked that most DeFi platforms were not in compliance with KYC rules, AML rules, and CFT rules.
  • She further stated that many of these platforms were failing to check that the cryptocurrency addresses making calls to the protocol were not on international sanctions lists.
• She commented that while the cryptocurrency market was not substantially involved with the traditional financial market, she asserted that Wall Street firms and the cryptocurrency industry were working to integrate these markets.
  • She called on the Committee to monitor the cryptocurrency and stablecoin markets and stated that these markets could create a crisis.

Ms. Jai Massari (Davis Polk & Wardwell, LLP):

• She discussed how stablecoins were currently used primarily for payments in connection with cryptocurrency transactions and DeFi applications. 
  • She suggested however that stablecoin could have broader uses through complementing existing payment methods, including cash, checks, credit cards, debit cards, and wire transfers.
• She asserted that the U.S. must work to understand both the risks and benefits associated with stablecoins given their growing use in retail payments.
  • She commented that stablecoins presented regulatory concerns around consumer protection, systemic stability, safety and soundness, and illicit finance.
  • She further commented that stablecoins could foster risks related to the operation of blockchain platforms and to regulatory gaps.
• She remarked that the regulation of stablecoins should address the aforementioned risks while also supporting the potential benefits of these assets.
• She contended that stablecoin issuers should have restrictions regarding permissible types of reserve assets and commented that such restrictions would ensure that there was short-term liquid backing of those reserves.
  • She also called for auditing and transparency standards for these reserve assets so that regulators and the public can evaluate the composition of a stablecoin’s reserve assets.
• She stated that there should exist restrictions that preclude stablecoin maturity and liquidity transformation to shield the stabecoin’s reserve assets.
• She asserted that stablecoin issuers should have obligations to address matters related to illicit finance and sanctions.
  • She further called for requiring stablecoin issuers to address operational risks associated with the conducting of stablecoin transfers on blockchain networks.
• She expressed disagreement however with the recommendation from the PWG Report on Stablecoins that stablecoin issuers be insured depository institutions.
  • She commented that this recommendation was unnecessary and unworkable (unless certain adjustments were made).
• She asserted that deposit insurance from the U.S. Federal Deposit Insurance Corporation (FDIC) was not necessary to address stablecoin issuer run risk for instances where a properly regulated issuer holds reserves of short-term liquid assets of at least 100 percent of the par value of outstanding stablecoins.
• She also discussed how banks were subject to leverage ratios and risk-based capital ratios that assume relatively illiquid and riskier assets than cash and genuine cash-equivalents.
  • She stated that the imposition of these ratios on stablecoin issuers would make the stablecoin business model uneconomic.
• She recommended that Congress instead consider an optional federal charter for stablecoin issuers.
• She noted how states largely regulated U.S. stablecoin issuers and digital wallet providers through money transmission regulators and state trust company authorities.
  • She stated that an expanded federal role in the regulation of these issuers and providers could be appropriate and useful.
• She expressed optimism that the U.S. could develop a regulatory framework for stablecoins that would safeguard consumers, the banking system, and the broader economy, as well as would promote innovation.

Mr. Dante Disparte (Circle):

• He noted how his company, Circle, was the issuer of the USDC, which is a U.S. dollar-backed digital currency.
• He remarked that the COVID-19 pandemic had exposed that access to the internet and other public goods was unequal.
  • He asserted that the engagement with money and payments in digital forms had been an area of pre-pandemic vulnerability both in the U.S. and globally.
• He called the advent of stablecoins an important innovation that enabled greater control over how money was sent, spent, saved, and secured.
• He discussed how stablecoins allowed for a form of money that was programmable, was user-controlled, and had a digitally native form factor that worked anywhere and on any device.
  • He noted how stablecoins were designed to reference and import the underlying properties of an underlying asset and highlighted how the most popular stablecoins reference the U.S. dollar.
• He indicated that the USDC was a three-year old U.S. dollar-backed digital currency and testified that there was currently $40 billion of USDC in circulation.
  • He added that the USDC cumulatively supported more than $1.4 trillion in on-chain transactions.
• He stated that the U.S. dollar-denominated assets backing the USDC were strictly cash and short-duration U.S. Treasuries and testified that these assets were all held in the care and control of U.S.-regulated financial institutions.
• He remarked that Circle was working to bolster the inclusivity of the financial and payments system and mentioned Circle’s commitment to allocating a portion of USDC U.S. dollar reserves to minority depository institutions (MDIs) and community banks across the U.S.
  • He also noted how Circle was involved in digital financial literacy initiatives with historically Black colleges and universities (HBCUs), leveraged its SeedInvest platform to support women and minority entrepreneurs, and assisted with humanitarian interventions.
• He stated that Circle worked to catalyze “uncommon coalitions” in its pursuit of the aforementioned initiatives.
• He then dismissed concerns that the U.S.’s failure to issue a central bank digital currency (CBDC) would undermine the U.S.’s international competitiveness.
• He remarked that current digital currency and blockchain-based financial services activities were advancing broad U.S. economic competitiveness and national security interests.

Prof. Hilary J. Allen (American University Washington College of Law):

• She first indicated that while her testimony would be focused on how cryptocurrencies and stablecoins pose risks to financial stability, she also expressed her willingness to address how stablecoins pose threats to monetary policy during the Congressional question period.
• She then noted that while cryptocurrency proponents often argued that these assets created jobs and bolstered financial inclusion, she stated that financial crises destroyed jobs and disproportionately impacted vulnerable communities.
• She stated that cryptocurrency technology introduced several new fragilities into the financial system, including the ability for any programmer to create financial assets out of nothing.
  • She commented that more financial assets could lead to large financial bubbles and larger financial crises.
• She remarked that the digital ledgers underlying cryptocurrencies often had very complex governance mechanisms, which made fixing problems caused by glitches and hacks “extremely challenging.”
• She also noted that the automatic execution of smart contracts could be problematic when the parties involved in the contract agreed that forbearance was in their best interest and the interest of broader financial stability.
  • She further expressed concerns that stablecoins could pose run risks if stablecoin holders lost confidence in their ability to exchange the stablecoins for fiat currencies at an expected rate.
• She then highlighted how the available stablecoin data suggested that stablecoins were almost exclusively being used in DeFi applications (rather than for traditional consumer payments).
  • She asserted that the DeFi space was not particularly decentralized and noted how centralized governance and concentrated ownership were common within this space.
• She raised concerns over the prevalence of financial services that existed primarily to make profits for industry leaders and asserted that DeFi could exacerbate this problem.
  • She called it critical for DeFi to not grow into something that would eventually necessitate a U.S. government bailout.
• She called on Congress and banking regulators to prohibit insured depository institutions and their affiliates from participating in DeFi.
• She also expressed her disagreement with the recommendation from the PWG Report on Stablecoins that stablecoin issuers be insured depository institutions.
  • She commented that this insurance would only encourage DeFi’s growth and systemic importance.
• She stated that the run risks associated with stablecoins could be dealt with in other ways aside from deposit insurance.
  • She suggested that the U.S. could ban stablecoins or introduce a licensing regime that would only authorize the issuance of stablecoins if they could demonstrate a purpose outside of the DeFi ecosystem.
• She mentioned how a recent World Economic Forum white paper had concluded that stablecoins as currently deployed would not provide compelling new benefits for financial inclusion beyond those offered by preexisting options.
  • She stated that simpler mobile payments innovations could be a better and less risky way to promote financial inclusion.
• She also remarked that the U.S. could maintain its current regulatory approach for stablecoins with the SEC and the U.S. Commodity Futures Trading Commision (CFTC) monitoring them from an investor protection perspective.
  • She suggested that the U.S. could prevent systemic risks and stablecoin runs through prohibiting insured depository institutions from accepting any deposits from stablecoin issuers or from issuing their own stablecoins.
• She recommended that FSOC and the OFR monitor stablecoins for changes in usage and added that FSOC could designate stablecoins as systemically important if necessary.
• She further recommended that the U.S. employ antitrust regulations (and FSOC’s designation authority) to prevent large technology firms (like Meta) from launching their own stablecoins.

Congressional Question Period:

Full Committee Chairman Sherrod Brown (D-OH):

• Chairman Brown asserted that stablecoins were mostly used for speculative betting. He noted however that some cryptocurrency advocates argued that stablecoins had the potential to make the payments system faster and more efficient. He asked Ms. Goldstein to indicate whether stablecoins were a better way to settle payments nationally or internationally as compared to the traditional financial system.
  • Ms. Goldstein remarked that four conditions would be needed for stablecoins to serve as a better way to settle payments. She indicated that these four conditions were low fees, predictability, exchangeability, and consistency in speed. She stated that stablecoins did not meet all of these conditions. She mentioned how there were significant fees associated with stablecoin transfers. She added that congestion on the Ethereum blockchain further increased these fees. She commented that low-income people were less able to afford these high and unpredictable fees.
• Chairman Brown asked Prof. Allen to indicate whether she agreed with Ms. Goldstein’s assertion that stablecoins did not show much promise for supporting payments.
  • Prof. Allen expressed her agreement with Ms. Goldstein’s assertion. She also stated that policymakers needed to consider the structure of the distributed ledger. She elaborated that there did not exist a central party that could easily fix problems on a distributed ledger.
• Chairman Brown asked Prof. Allen to indicate whether it would make sense to bring stablecoins into the traditional finance system if stablecoins held promise to provide faster and more inclusive payments.
  • Prof. Allen remarked that there were “real concerns” around bringing stablecoins into the traditional finance system. She expressed particular concerns over the relationship between stablecoins and DeFi. She also stated that stablecoins posed run risks. She asserted that the U.S. would need to carefully monitor the systemic risks posed by stablecoins if it were to bring stablecoins into the traditional finance system. She commented that FSOC and the OFR could help to provide such risk monitoring capabilities.
• Chairman Brown then mentioned how Circle’s CEO had recently told the U.S. House Committee on Financial Services that Circle’s stablecoins were mostly used for trading and speculation. He noted how Circle was currently seeing a bank charter. He asked Mr. Disparte to indicate whether Circle would limit USDC to internet payments platforms if Circle were to receive a bank charter. He also asked Mr. Disparte to indicate whether Circle would still allow for the USDC to be used to facilitate cryptocurrency speculation if Circle were to receive a bank charter.
  • Mr. Disparte remarked that the advent of internet native capital markets, internet native payments, and an always-on economy that was built around these innovations and public blockchains was important. He also asserted that it was important for the U.S. dollar and U.S. dollar-referenced stablecoins to dominate this innovation. He testified that Circle’s counterparties were other financial institutions and companies and indicated that Circle did not face the retail payments market. He stated that this activity was ultimately supporting payments, crypto capital market trading, and other activities. He also discussed how the USDC was increasingly becoming embedded as a mechanism for payment and settlement, including among traditional firms. He indicated that credit companies, banks, and other entities were increasingly using USDC as a settlement option on their networks.
• Chairman Brown asked Mr. Disparte to indicate whether the USDC would still be used for cryptocurrency speculation if Circle were to receive a bank charter.
  • Mr. Disparte remarked that the end users of the USDC have no expectation of receiving a profit from the stablecoin and commented that the USDC served as a medium of exchange. He stated that USDC had maintained price parity to the U.S. dollar with cash and short duration Treasuries inside of the care, custody, and control of the U.S. regulated banking system.
• Chairman Brown noted how it would be illegal for Circle to sell traditional metal coins that said “U.S. Dollar Coin” on them if it were a traditional financial services company. He asked Mr. Disparte to indicate whether the USDC name could mislead users to believe that it was backed by the U.S. government.
  • Mr. Disparte answered no. He stated that Circle was supporting stablecoin innovations that were regulated consistently across the U.S. according to electronic money transfer statutes as a payments innovation. He asserted that Circle was on a “level playing field” with companies like PayPal.
• Chairman Brown asked Mr. Disparte to indicate whether Circle would allow a U.S. CBDC to call itself “U.S. Dollar Coin.”
  • Mr. Disparte noted how sovereign-issued currencies have three currency prefixes. He commented that the U.S. Federal Reserve would therefore enjoy “total autonomy” over the “U.S. Dollar Coin” name choice. He also stated that the U.S. Federal Reserve would learn from the experiences of the stablecoins currently in circulation that reference the U.S. dollar and commented that these stablecoins could serve as “important prototypes” for a publicly-issued digital currency.

Full Committee Ranking Member Patrick Toomey (R-PA):

• Ranking Member Toomey noted how some of the witnesses had suggested that stablecoins would only facilitate cryptocurrency speculation activities. He stated however that stablecoin technology appeared to be moving towards lower costs and increased transaction throughputs. He asked Mr. Disparte to discuss how stablecoins were currently being used beyond the facilitation of cryptocurrency trading. He also asked Mr. Disparte to project any imminent developments for stablecoins.
  • Mr. Disparte noted that the original use case for stablecoins was the provision of support for cryptocurrency capital markets and trading activities. He stated that there was now an emergence of integrated stablecoin-based settlements and payments across third generation blockchains. He commented that these new settlements and payments were better, cheaper, and faster than the analog alternatives for moving money. He also stated that these settlements and payments benefited from the immutable permanent ledgering of financial transactions. He commented that this ledgering provided better accounting and financial integrity.
• Ranking Member Toomey interjected to ask Mr. Disparte to indicate whether there were sophisticated traditional financial institutions that were pursuing the use of stablecoin platforms as an alternative mechanism for settling payments.
  • Mr. Disparte answered affirmatively. He highlighted how the Visa network had enabled USDC as a native settlement option for its 70 million merchants. He also mentioned how traditional money remittance companies (such as MoneyGram) had recently announced that they would enable USDC on the Stellar blockchain for remittances.
• Ranking Member Toomey interjected to note how the banning of stablecoins had been suggested during the hearing. He asked Mr. Disparte to indicate whether other countries would develop stablecoins if the U.S. were to ban them. He also asked Mr. Disparte to confirm that Americans with computers and internet access would still be able to access stablecoins if the U.S. were to ban them.
  • Mr. Disparte remarked that it was in the U.S. national and public interest for there to exist options for how people could move money in an always-on economy.
• Ranking Member Toomey then asked Ms. Massari to elaborate on her argument that stablecoin issuers should not be required to be insured depository institutions.
  • Ms. Massari remarked that the business models and risks associated with well-regulated stablecoins were different from the business models and risks associated with traditional banks. She noted how traditional banks took deposits, which they used to make loans and long-term investments. She stated that the maturity and liquidity transformations associated with such activities could create run risks and indicated that traditional bank regulations (such as leverage ratios) were meant to address these risks. She contended that imposing regulations meant for insured depository institutions on stablecoin issuers would be inappropriate. She noted that well-designed stablecoins held 100 percent short-term liquid reserves and emphasized that stablecoins were meant for payments (rather than lending).
• Ranking Member Toomey asked Mr. Disparte to identify the principles that Congress ought to consider when developing a regulatory regime for stablecoins.
  • Mr. Disparte first remarked that policymakers ought to focus on not harming stablecoin innovations and fostering domestic innovation. He then asserted that state money transmission licenses served as an appropriate starting point and highlighted how many major U.S. payments companies (including PayPal) already used these licenses. He also stated that bank-like risks should be managed through bank-like regulatory structures and supervision. He asserted however that these regulatory structures and supervision should be risk-adjusted and activity-based. He lastly remarked that U.S. stablecoin policy should be technology neutral.
• Ranking Member Toomey acknowledged that his question period time had expired. He indicated that he would submit a question for the hearing’s record to Ms. Goldstein regarding the purported high costs of cryptocurrency transfers. He commented that cryptocurrency users could easily construct cryptocurrency transactions in ways to lower transaction costs.

Sen. Jack Reed (D-RI):

• Sen. Reed remarked that the U.S. Federal Reserve’s ability to control the money supply was very important. He asked Prof. Allen to address how stablecoins could impact the U.S.’s ability to conduct monetary policy.
  • Prof. Allen remarked that central banks needed the ability to match the amount of money in the financial system to the needs of the economy so that they could respond to both inflation and deflation. She stated that a central bank’s loss of control over the monetary supply would therefore reduce the central bank’s ability to respond to inflation and deflation. She commented that this need to control monetary supplies was leading many central banks to consider CBDCs. She noted however that central banks were also concerned about the financial stability and privacy issues associated with CBDCs. She suggested that more interventionist policies might be justified to address stablecoin concerns.
• Sen. Reed noted how stablecoins remained fairly nascent and commented that stablecoins still required significant thought and analysis. He asked Prof. Allen to indicate whether the OFR could play a role in terms of analyzing stablecoins and making recommendations to Congress regarding these assets.
  • Prof. Allen remarked that the OFR could play a role in addressing stablecoins. She noted how the OFR was created to address the data gaps within the financial system. She asserted that the U.S. now required an interdisciplinary approach to financial regulation that would involve computer scientists, data scientists, and climate scientists. She stated that the OFR was currently being underutilized and could have its interdisciplinary expertise bolstered. She commented that these improvements would provide regulators with a more informed foundation for engaging on stablecoin issues.
• Sen. Reed expressed agreement with Prof. Allen’s response. He then asked Ms. Goldstein to identify the most significant data gaps that existed within the cryptocurrency market.
  • Ms. Goldstein asserted that the U.S. was at the mercy of the cryptocurrency industry for cryptocurrency information. She elaborated that while information about particular cryptocurrency prices and trades throughout the day might be made available, she indicated that cryptocurrency quote information might remain obscured. She also noted how variations in prices across cryptocurrency exchanges could lead to arbitrage opportunities. She stated that regulators currently lacked sufficient data to understand the reasons for these price variations across exchanges. She suggested that Congress consider developing standardized data reporting practices for cryptocurrency exchanges.
• Sen. Reed asked Ms. Goldstein to indicate whether she had questions about the existing transparency, auditing, and disclosure requirements imposed on cryptocurrency exchanges.
  • Ms. Goldstein answered affirmatively.

Sen. Mike Rounds (R-SD):

• Sen. Rounds asked Mr. Disparte to address why a consumer would choose to use Circle’s services over traditional fiat currencies.
  • Mr. Disparte first noted that Circle’s direct customers were typically businesses and that Circle did not work with retail consumers. He then stated that more than 20 million Americans and 200 people worldwide were currently enjoying Circle’s infrastructure. He commented that these people were looking for cheaper international remittances, payments, and money transfers, as well as access to the capital markets. He asserted that the traditional financial system was failing to service these people.
• Sen. Rounds interjected to ask Mr. Disparte to confirm that Circle’s services were attractive to consumers because they reduced transaction costs.
  • Mr. Disparte remarked that Circle could provide reduced transaction costs (along with other benefits). He highlighted how there were currently companies using the USDC to support remittances. He stated that Circle’s value proposition was that it enabled lower cost value transfers via the internet.
• Sen. Rounds noted how Ms. Goldstein had asserted that cryptocurrency transaction costs were very high (which contradicted Mr. Disparte’s assertion). He asked Ms. Golstein to explain this discrepancy.
  • Ms. Golstein remarked that the discrepancy between her assertion and Mr. Disprate’s assertion came down to whether a person would use USDC to purchase other cryptocurrencies. She stated that a person using cryptocurrencies for remittances would likely need to convert the cryptocurrencies into the local currency to purchase traditional products. She indicated that this conversion would involve fees. She also noted how USDC used the Ethereum blockchain and commented that the Ethereum blockchain fees were “incredibly high.” She further noted how a person seeking to deposit their remittances might face additional bank deposit fees.
• Sen. Rounds provided Mr. Disparte with an opportunity to respond to Ms. Goldstein’s comments.
  • Mr. Disparte remarked that blockchains were very nascent and stated that there was significant innovation occurring within this space. He highlighted how there were late generation and third generation blockchains that were approaching transaction throughputs akin to major credit card networks. He added that these newer blockchains were approaching cost structures that enabled transactions for “pennies on the dollar.”

Sen. Steve Daines (R-MT):

• Sen. Daines noted how stablecoins were distinct from cryptocurrencies in that there existed a central entity that issued and was responsible for any individual token. He stated that the U.S. ought to pursue a “lighter touch” approach to regulating cryptocurrencies and stablecoins and expressed his interest in developing bipartisan legislation to address these assets. He asked Mr. Disparte to describe the U.S.’s current regulatory environment for stablecoins.
  • Mr. Disparte noted how Circle was licensed under state money transmission regulations and needed to answer to bank supervisors and state money transmission supervisors across the U.S. He also mentioned how Circle had helped to develop a model law that would create a more uniform operating environment for stablecoin issuers. He further noted that Circle was a registered money transmission company with FinCEN and had worked with law enforcement agencies to protect the integrity of the financial system. He then discussed how international bodies, including the Bank for International Settlements (BIS), the Financial Action Task Force (FATF), and the Financial Stability Board (FSB), only represented federal and national regulators. He asserted that this lack of representation for state regulators in international bodies could undermine the U.S.’s international competitiveness. He stated however that the U.S.’s current regulatory regimes for money transmission generally provided for a degree of sufficiency around the use of an electronic form of payments and a medium of exchange like a stablecoin.
• Sen. Daines then asked Ms. Massari to discuss how a U.S. dollar-pegged stablecoin could advance the U.S. dollar’s international role. He also asked Ms. Massari to address how a U.S. dollar-pegged stablecoin could help maintain the U.S. dollar’s status as the world’s reserve currency.
  • Ms. Massari asserted that it was unclear that stablecoins would harm the U.S.’s ability to conduct monetary policy. She stated that stablecoins were already regulated and fully backed by bank deposits and U.S. Treasuries. She discussed how U.S. dollar-pegged stablecoins could facilitate remittance transfers and be used outside of the U.S. She asserted that these U.S. dollar-pegged stablecoins could therefore help to bolster the U.S. dollar’s standing as the world’s reserve currency.
• Sen. Daines asked Ms. Massari to project the future of stablecoin regulation if Congress were to not address this area.
  • Ms. Massari recommended that Congress consider an optional federal charter for stablecoin issuers and commented that such a charter would help to ensure adequate stablecoin regulation. She remarked that the U.S.’s current state-based regulatory regime for stablecoins had served the interests of consumers in different states. She stated that a federal framework for stablecoins would provide an additional level of regulatory clarity.
• Sen. Daines then asked Mr. Disparte to identify the ways that stablecoins lower costs within financial systems and increase access to financial systems.
  • Mr. Disparte remarked that the traditional banking system would be unable to meet the banking needs of many consumers. He stated that the COVID-19 pandemic had demonstrated that the traditional banking system’s inability to move money at scale across the internet was a vulnerability. He remarked that stablecoins would help to address these issues through providing a trusted medium of exchange on the internet that referenced the U.S. dollar. He commented that stablecoins would allow for lower cost transactions and serve as the basis for many financial innovations.

Sen. Jon Tester (D-MT):

• Sen. Tester asserted that current cryptocurrency products resembled the synthetic financial products that had contributed to the 2008 Financial Crisis. He commented that these current cryptocurrency products carried the potential for “foul play.” He asked Prof. Allen to indicate whether it was fair to compare cryptocurrencies with synthetic financial instruments.
  • Prof. Allen stated that it was fair to compare cryptocurrencies with synthetic financial instruments. She highlighted that the synthetic financial products that had contributed to the 2008 Financial Crisis had claimed to promote financial inclusion. She urged policymakers to remain wary of these types of claims within the cryptocurrency context. She also asserted that the complexity of cryptocurrencies could foster confusion, opacity, and ultimately panic. She questioned the need for stablecoins to be so complex and suggested that there could exist other types of innovations that could achieve the goals of stablecoins in a simpler fashion.
• Sen. Tester provided Ms. Goldstein with an opportunity to add to Prof. Allen’s comments.
  • Ms. Goldstein expressed agreement with Prof. Allen’s comments. She remarked that the secondary market for stablecoins resembled the pre-2008 Financial Crisis over the counter (OTC) derivatives markets. She noted however that these OTC derivatives products are aimed toward institutional investors while DeFi products are being marketed toward both institutional and retail investors.
• Sen. Tester then asked Prof. Allen to identify who cryptocurrency users should go to when problems arise with their cryptocurrency products.
  • Prof. Allen remarked that her answer would depend on the specific cryptocurrency product. She stated that a user could go to a stablecoin issuer to resolve their problems assuming that there was an issuer. She commented that the existence of stablecoin issuers suggested that stablecoin products were less decentralized than anticipated. She noted how new intermediaries were entering the stablecoin system. She commented that these intermediaries had profit motives, which undermined the democratization of finance. She also discussed how users would face more challenges when seeking to address problems with more decentralized stablecoins.
• Sen. Tester then noted how Ms. Goldstein had previously stated that stablecoins must meet four conditions to serve as a better way to settle payments, which were low fees, predictability, exchangeability, and consistency in speed. He highlighted how Ms. Goldstein had asserted that stablecoins currently did not provide low fees. He asked Ms. Goldstein to address whether stablecoins satisfied the other three conditions for serving as a better way to settle payments.
  • Ms. Goldstein remarked that stablecoins provided consistency in speed so long as they remained within cryptocurrency environments. She stated however that stablecoins failed to satisfy the predictability and exchangeability conditions for serving as a better way to settle payments.
• Sen. Tester asked Ms. Goldstein to briefly address how stablecoin transfer fees compared to traditional payment transfer fees.
  • Ms. Goldstein remarked that stablecoin transfer fees varied across exchanges and were higher if the stablecoins were being converted into fiat currencies. She stated that stablecoin transfer fees were consistently higher than the fees charged by Western Union.
• Sen. Tester asked Ms. Goldstein to clarify whether stablecoin transfer fees were flat in nature.
  • Ms. Goldsten noted that stablecoin transfers typically involve multiple steps, which each entail their own fees.

Sen. Mark Warner (D-VA):

• Sen. Warner expressed concerns that cryptocurrencies were being used for illicit purposes and noted how bad actors often demanded that ransomware payments be made in cryptocurrencies. He then expressed confusion as to how a fully backed privately issued stablecoin could be profitable. He asked the witnesses to explain how such stablecoins could be financially viable.
  • Ms. Goldstein noted how Circle’s filings with the SEC indicated that the company wanted to begin offering DeFi services. She also highlighted how Circle maintained a revenue sharing agreement with Coinbase and suggested that Circle could be profiting from this agreement. She commented that Mr. Disparte would be best suited to answer Sen. Warner’s question.
  • Ms. Massari remarked that appropriate stablecoin regulations should lead stablecoin issuers to only hold short-term liquid assets to back their stablecoin obligations. She stated that these holdings were likely not the main source of revenue for stablecoin issuers. She noted how stablecoin issuers could provide various services to customers that were adjacent to stablecoin issuances. She commented that these services could include payments services (such as remittances and peer-to-peer transfers) and indicated that the issuers could charge fees for these services.
  • Mr. Disparte first noted how Circle was currently in the process of going public, which meant that the company was now making public disclosures about its revenue model. He then remarked that Circle and PayPal had very similar business models and licensing platforms. He testified that Circle’s current reserve structure involved cash and short-term U.S. Treasuries of 90 days or less. He commented that there was a “nominal” degree of interest rate sensitivity on this reserve composition, which was part of Circle’s revenue model. He also noted how Circle derived revenue from de minimis transaction fees associated with the use of Circle accounts and services.
• Sen. Warner interjected to comment that his question period time was limited. He asked Prof. Allen to explain how a fully backed privately issued stablecoin could be profitable.
  • Prof. Allen remarked that no one would issue a stablecoin if it were unprofitable. She expressed skepticism regarding the purported financial inclusion benefits of stablecoins because stablecoin issuers did not fully disclose how they made money.

Sen. Elizabeth Warren (D-MA):

• Sen. Warren discussed how stablecoins were different from traditional cryptocurrencies in that they were supposedly pegged to a reference asset (such as the U.S. dollar). She stated that stablecoins often chose to use U.S. dollars as their reference asset to foster consumer confidence. She asked Ms. Goldstein to indicate whether there was a guarantee that a user of a U.S. dollar-pegged stablecoins would be able to redeem their stablecoins for U.S. dollars.
  • Ms. Goldstein answered no. She remarked that the ability for a user of a U.S. dollar-pegged stablecoin to exchange their stablecoins for U.S. dollars was dependent on an independent exchange. She stated that the value of these stablecoins on exchanges tended to fluctuate and warned that the stablecoin’s peg to the U.S. dollar could collapse in the event of a run. She also cautioned that the specific reference assets backing stablecoins were not always fully known.
• Sen. Warren interjected to note that if the Tether stablecoin were fully backed at a 1:1 ratio, then Tether would be one of the U.S.’s 50 largest banks. She highlighted however that only 10 percent of Tether’s backing assets were real U.S. dollars. She further indicated that Tether reported this 10 percent figure and expressed concerns that this figure had not been independently verified. She asked Prof. Allen to project how a run on the stablecoin market would look. She also asked Prof. Allen to indicate whether such a run could endanger the broader financial system.
  • Prof. Allen noted how several of the hearing’s witnesses had claimed that stablecoins did not engage in maturity transformation and therefore did not suffer the same fragilities as bank deposits and runs. She commented that this claim was probably true to some degree. She remarked however that a run on a stablecoin would likely resemble previous runs on money market mutual funds and foreign exchange crises. She stated that a loss of confidence in the ability of a stablecoin issuer to provide a stable value could trigger a mass wave of redemptions. She noted that this wave of redemptions would in turn force the issuer to liquidate their reserve of assets to meet their redemption obligations. She stated that while this type of scenario would likely not have systemic consequences at the current time, she cautioned that a run would likely impact the DeFi ecosystem. She contended that it was therefore critical that the U.S. not provide support for the DeFi ecosystem.
• Sen. Warren interjected to remark that stablecoins were not always stable. She noted how people tended to cash out of riskier assets during periods of economic uncertainty and commented that this tendency could create problems for stablecoins. She warned that this dynamic could ultimately imperil the broader U.S. economy. She then referred to DeFi as the most dangerous part of the cryptocurrency ecosystem and commented that this space was rife with scams and frauds. She stated that stablecoins provided the “lifeblood” of the DeFi ecosystem because stablecoins facilitated exchanges across different types of cryptocurrencies. She asked Prof. Allen to indicate whether DeFi threatened the U.S.’s financial stability and to address whether the DeFi ecosystem could continue to grow without stablecoins.
  • Prof. Allen remarked that the DeFi ecosystem would struggle to grow without stablecoins. She stated that the DeFi ecosystem was currently contained and would not impact financial stability. She contended however that the DeFi ecosystem’s growth could eventually pose a threat to the traditional financial system. She called it critical that stablecoins not be allowed to fuel the DeFi ecosystem’s growth.
• Sen. Warren remarked that stablecoins posed risks to traders and risks to the U.S. economy. She called on the U.S. to proactively regulate stablecoins before crises were to arise. She stated that stablecoins lacked regulators, independent auditors, and guarantors and that stablecoins were supporting illicit activities.

Sen. Tina Smith (D-MN):

• Sen. Smith stated that some businesses could adopt stablecoins and cryptocurrencies as their only method of payment as they transitioned to cashless models. She expressed interest in exploring how this type of transition would harm communities with less access to the traditional financial system (including communities of color). She mentioned how the FDIC had found that approximately 7.1 million households were unbanked in 2019. She expressed concerns that low-income, homeless, and undocumented individuals might be unable to purchase goods and services in a payments system that required stablecoins. She asked Ms. Goldstein and Prof. Allen to respond to the argument that stablecoins promoted financial access for small businesses and unbanked Americans. She also asked Ms. Goldstein and Prof. Allen to address how people without either a checking or savings account could make use of stablecoins.
  • Ms. Goldstein remarked that banks were necessary for using stablecoins because stablecoins were currently not widely accepted for goods and services. She also noted how people needed to obtain accounts with cryptocurrency exchanges to purchase stablecoins. She stated that this need for bank and cryptocurrency exchange accounts had led the World Economic Forum to conclude that stablecoins did not provide many financial inclusion benefits.
  • Prof. Allen expressed agreement with Ms. Goldstein’s comments. She also discussed how many consumers struggled with financial literacy. She contended that cryptocurrencies would exacerbate these struggles because cryptocurrencies often necessitated consumers to understand computer code to evaluate the disclosures. She called it “entirely unreasonable” for consumers to be expected to assess the veracity of cryptocurrency disclosures based on the cryptocurrency’s code.
• Sen. Smith then expressed interest in exploring how stablecoins and cryptocurrencies could impact retirement plan assets and determining whether retirement and pension plans should be able to invest in these digital assets. She asked Prof. Allen and Ms. Goldstein to indicate whether stablecoin holdings could benefit retirement and pension plans.
  • Prof. Allen remarked that retirement and pension plans should not hold stablecoins. She called it “very dangerous” for people to gravitate towards highly volatile assets, especially in the context of long-term investments.
  • Ms. Goldstein expressed agreement with Prof. Allen’s response. She stated that cryptocurrencies had volatility and insolvency risks and provided very little yield.
• Sen. Smith then discussed how the stablecoin market was worth about $130 billion and commented that this market had experienced rapid growth in recent years. She stated that regulators had likely failed to keep pace with these developments. She mentioned how the PWG had recently issued its Report on Stablecoins that provided policy recommendations for addressing these assets. She asked Ms. Goldstein to provide recommendations for developing a regulatory framework for stablecoins.
  • Ms. Goldstein suggested that policymakers consider how stablecoins impacted the DeFi space. She stated that the U.S. must ensure that there did not exist a gap between investor protections in the equity markets and investor protections in the crypto asset markets.

Full Committee Chairman Sherrod Brown (D-OH):

• Chairman Brown asked Ms. Goldstein to confirm that cryptocurrency speculation on DeFi platforms would not work without stablecoins.
  • Ms. Goldstein stated that cryptocurrency speculation on DeFi platforms would either not work or be much smaller without stablecoins.
• Chairman Brown asked Ms. Goldstien to answer whether a company could create a stablecoin that could be used for electronic payments and barred from use in speculative activities.
  • Ms. Goldstein answered affirmatively.
• Chairman Brown asked Prof. Allen to identify the risks associated with allowing stablecoins to be used both as a payments system and as a tool for enabling speculative activity in DeFi markets.
  • Prof. Allen remarked that permitting a large technology company (such as Amazon or Meta) to issue a stablecoin would create financial stability risks. She stated that these large technology companies could quickly scale up their stablecoins and that these companies could become too big to fail. She remarked however that if a large technology company did not issue a stablecoin, then she did not foresee stablecoins being adopted for payments absent government support. She noted that this government support could include deposit insurance. She predicted that the widespread use of stablecoins would lead the DeFi ecosystem to grow. She raised concerns that the growth of the DeFi system could ultimately necessitate a government bailout.
• Chairman Brown then mentioned how Circle had previously emphasized that it was a payments platform that could help small businesses and enable cheap international payments. He noted however that Circle’s website highlighted the DeFi protocols that were compatible with its products. He also stated that Circle’s CEO had recently boasted that the USDC was the most used stablecoin for engaging in speculative activity in unregulated markets. He asked Mr. Disparte to explain why Circle was promoting its capabilities for supporting cryptocurrency speculation. He also asked Mr. Disparte to address how such cryptocurrency speculation helped small businesses or the broader economy. 
  • Mr. Disparte remarked that there existed a wide range of use cases for any payments infrastructure and innovation. He noted that while stablecoins played a key role in the DeFi markets, he asserted that the fundamental function of stablecoins remained similar both inside of and outside of the DeFi markets. He elaborated that stablecoin users should be able to redeem their stablecoins for their agreed upon reference assets, regardless of how the stablecoins are being used.

Full Committee Ranking Member Patrick Toomey (R-PA):

• Ranking Member Toomey mentioned how SEC Chairman Gary Gensler had previously asserted that some stablecoins might constitute securities, even if they lack an inherent expectation of profits. He criticized SEC Chairman Gensler for failing to provide a legal justification for this assertion. He posited a hypothetical stablecoin that was non-interest bearing and that did not have an expectation of profits. He asked Ms. Massari to indicate whether this hypothetical stablecoin would meet the definition of a security and therefore be subject to securities regulations.
  • Ms. Massari noted how there existed several tests for determining whether a given asset constitutes a security, including the tests under SEC v. W.J. Howey Co. and Reves v. Ernst & Young (known as the Howey and Reves tests). She stated that non-interest bearing stablecoins with full reserves should not be viewed as securities.
• Ranking Member Toomey then noted how Mr. Disparte had previously discussed how stablecoin capabilities were expanding and how stablecoin network throughputs and speeds were increasing. He stated that these developments could facilitate the use of smart contracts. He asked Mr. Disparte to provide recommendations for how policymakers ought to think about smart contracts. He also asked Mr. Disparte to provide an example of a smart contract use case that could benefit a small business or a consumer.
  • Mr. Disparte remarked that recent Web 3 innovations had broad implications for financial resilience and competitiveness. He then discussed how smart contracts could be used in the context of insurance for parametric claims. He stated that smart contracts could allow for homeowners insurance policies that could automatically liquidate claims based on a georeference for where a natural disaster took place. He remarked that both U.S. dollar digital currencies (like USDC) and smart contracts could help these claims to be paid out at scale and in real time. He also discussed how programmable money would enable the execution of micropayments. He noted how it was currently not feasible to send small payments across the internet because the fees associated with the transfers were far greater than the payment amounts. He suggested that micropayments could support journalism through enabling consumers to send small amounts of money (e.g., 1 cent) to access articles or tip journalists. He further noted how digital currencies could support cross-border payments in a manner that did not violate sanctions. He stated that the transparency, speed, and auditability of stablecoin-based payments and blockchain-based payments could support numerous applications. He highlighted how the USDC had been used to support doctors in Venezuela in their humanitarian efforts. He remarked that stablecoins remained a nascent technology and that it remained too early to conclude that stablecoins could not support financial inclusion.

Sen. Kyrsten Sinema (D-AZ):

• Sen. Sinema noted how stablecoins are cryptocurrencies that are pegged to external reference assets. She asked Ms. Massari to address how consumers could be confident that their stablecoins are backed by the assets claimed by the stablecoin’s issuer.
  • Ms. Massari noted how U.S. stablecoin issuers are regulated by the states in which they offer their services and where they are located. She indicated that stablecoin issuers are regulated under state money transmission license regimes. She also noted how FinCEN oversees U.S. stablecoin issuers as money services businesses to ensure that the issuers are not engaged in financial crimes. She remarked that state regulators are primarily responsible for overseeing and supervising money transmitters (which include stablecoin issuers). She commented that these state regulators are therefore responsible for ensuring that stablecoin issuers are fulfilling their promises.
• Sen. Sinema also noted how stablecoin issuers are generally subject to state money transmitter laws. She asked Ms. Massari to indicate whether these state money transmitter laws contain requirements for stablecoin reserve asset disclosures.
  • Ms. Massari remarked that state money transmitter laws generally require stablecoin issuers to maintain eligible assets to back their obligations to customers. She also noted how these laws require stablecoin issuers to provide financial reports to their regulators. She further indicated that asset disclosures from stablecoin issuers must be accurate.
• Sen. Sinema asked Ms. Massari to indicate whether a stablecoin holder might be unable to redeem their stablecoins for the promised reserve assets if the stablecoin was not actually backed by the promised reserve assets. She also asked Ms. Massari to address how this inability to redeem a stablecoin for its promised reserve assets could create long-term problems.
  • Ms. Massari described Sen. Sinema’s hypothetical stablecoin redemption scenario as plausible. She expressed support for robust stablecoin regulation to prevent this type of scenario from occurring and suggested that federal regulation could be helpful in this area.
• Sen. Sinema posited a scenario in which a person holds $10,000 in a particular stablecoin and there then occurs a run on that stablecoin’s issuer. She asked Ms. Massari to indicate how much money this stablecoin holder could lose if the stablecoin’s backing was not credible.
  • Ms. Massari stated that the losses that the stablecoin holder would experience in Sen. Sinema’s scenario would depend on the assets that were available from the issuer in the bankruptcy process.
• Sen. Sinema then asked Ms. Massari and Ms. Goldstein to identify any special considerations that policymakers should make when pursuing stablecoin regulation.
  • Ms. Massari remarked that stablecoin regulation needed to fit the activity in question. She stated that stablecoin issuance differed from traditional banking activity. She asserted that the U.S. should therefore not impose traditional banking regulations on top of stablecoin issuers.
  • Ms. Goldstein remarked that there existed “looser” standards for stablecoin issuers seeking to raise funds than for traditional companies seeking to go public. She asserted that the U.S. should not be advantaging one industry over another industry with respect to public markets fundraising rules.