Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins (U.S. House Committee on Financial Services)

Hearing	Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins
Committee	U.S. House Committee on Financial Services
Date	February 8, 2022

 

Hearing Takeaways:

• Stablecoins: The hearing focused on stablecoins, which are digital assets that have their values pegged to a reserve asset (such as the U.S. dollar). Stablecoins are primarily used in the U.S. to facilitate the trading, lending, and borrowing of cryptocurrencies.
  • Recent Growth of Stablecoins: Committee Members and Under Secretary Liang noted how the market capitalization of stablecoins had grown “rapidly” over the previous two years from $5 billion at the start of 2020 to approximately $175 billion today. They acknowledged that while stablecoins currently represented a small percentage of the digital asset industry’s total value, they noted that stablecoins were facilitating the majority of trading within the digital assets ecosystem. Rep. Sylvia Garcia (D-TX) emphasized however that the actual number of people that were using and investing in stablecoins remained unknown.
  • Ability of Stablecoins to Support the U.S. Dollar’s Status as the World’s Dominant Reserve Currency: Committee Members and Under Secretary Liang contended that stablecoins backed by U.S. dollar reserves could help the U.S. dollar maintain its status as the world’s dominant reserve currency. Under Secretary Liang attributed the U.S. dollar’s status as the world’s reserve currency to the U.S.’s rule of law, strong institutions, economic potential, and robust financial markets. She stated that stablecoin technology could reinforce these strengths of the U.S. dollar. 
  • Ability of Stablecoins to Support Foreign Populations: Committee Members and Under Secretary Liang noted how stablecoins could be help foreign populations that were facing turmoil in their countries to access and transact money.
  • Ability of the Stablecoin Structure to Provide Tokenized Investment Options: Rep. Tom Emmer (R-MN) and Rep. Warren Davidson (R-OH) suggested that the stablecoin structure could be applied to investment instruments in which a stablecoin would be backed by something other than cash or a cash-equivalent asset (e.g., a company’s stock). They stated that this structure could enable attractive and low-cost financial products. Under Secretary Liang raised concerns however that stablecoins not backed by cash or cash-equivalent assets could be very volatile, which would undermine the ability of said stablecoins to support payments.
  • Concerns Regarding Fraudulent Stablecoins: Several Committee Members highlighted how the stabecoin Tether had deceived clients and markets through failing to hold promised reserves to back their stablecoins in circulation. They raised concerns that there might be other stablecoins currently in circulation making false claims and called for robust stablecoin oversight and reserve disclosures.
  • Impact of Stablecoins and Digital Assets on Minority and Underserved Communities: Committee Members highlighted how minority communities had higher adoption rates of stablecoins and digital assets than the White community. They stated that these higher adoption rates among minority communities had the potential to increase financial inclusion for unbanked and underbanked individuals. They warned however that these higher adoption rates could particularly harm minority communities in the event of stablecoin downturns and frauds.
  • Impact of Stablecoins on Monetary Policy: Rep. Stephen Lynch (D-MA) raised concerns that the U.S. Federal Reserve’s efforts to control inflation could be undermined by the widespread introduction of stablecoins. Under Secretary Liang remarked that the rapid increase in scale of a private digital currency could impact the U.S. Federal Reserve’s ability to control monetary policy, which would pose prudential risks. She suggested that the adoption of interoperability requirements for stablecoins could mitigate these risks.
• The President’s Working Group on Financial Markets (PWG) Report on Stablecoins: Under Secretary Liang’s testimony focused on the recently released PWG Report on Stablecoins. This Report outlined various risks that stablecoins might present to market integrity, investor protection, and illicit finance. The Report further highlighted systemic risk concerns due to the threat of stablecoin runs when the stablecoins were not fully backed by their promised assets, the concentration of economic power, and regulatory gaps that undermined the effective oversight of the market. 
  • Requirement that Stablecoin Issuers Be Insured Depository Institutions: One of the key recommendations of the PWG Report on Stablecoins was that stablecoin issuers ought to be insured depository institutions. Under Secretary Liang stated that this approach would provide sufficient confidence in the assets backing the stablecoin and provide regulatory oversight over stablecoin payment arrangements. Several Committee Members expressed concerns that this approach was too aggressive given how it would subject stablecoin issuers to banking regulations, despite the fact that many issuers did not engage in typical banking activities (e.g., loan making, fractional reserve banking, etc.). They also expressed concerns that this approach could erect barriers to startup stablecoin issuers seeking to enter the digital assets space. Under Secretary Liang remarked however that the PWG recognized these differences between stablecoin issuers and banks and that the insured depository regulatory framework would not provide stablecoin issuers with some flexibility to comply with traditional banking rules depending on the issuer’s structure.
  • Prudential Risks of Stablecoins: Under Secretary Liang noted how the PWG Report on Stablecoins had focused on three prudential risks associated with the use of stablecoins for payments. She indicated that the first risk was run risk, which involved a scenario in which the loss of confidence in a given stablecoin would trigger a wave of redemptions. She indicated that the second risk was payment risk, which included operational issues that could interfere with the ability of users to store stablecoins or use them to make payments. She indicated that the third risk involved concerns related to the concentration of economic power. She testified that the Report had found “significant gaps” in authorities that would address the aforementioned prudential risks and stated that some of the largest stablecoin issuers operated with limited regulatory oversight. She commented that this lack of oversight raised questions as to whether stablecoins received adequate backing. She later clarified that the Report did not suggest that stablecoins were currently a threat to financial stability and posed systemic risk. She stated however that the ability of stablecoins to scale up rapidly could lead them to pose systemic risks.
  • Ability of Technology Companies to Issue Stablecoins: Full Committee Chairman Maxine Waters (D-CA) expressed concerns over the prospect of technology companies (such as Meta) issuing stablecoins. She highlighted how the PWG Report on Stablecoins had recommended that stablecoin issuers should be required to limit their affiliation with commercial entities. Under Secretary Liang noted that the PWG Report on Stablecoins recommended that stablecoins be issued by insured depository institutions. She remarked that this recommendation would therefore mean that technology companies should not issue stablecoins. She stated however that the Report recommended that Congress consider whether technology companies could play a part in the stablecoin ecosystem as providers of custodial wallets and other services related to the use, storage, and transfer of stablecoins for payments.
  • Jurisdictional Uncertainty Surrounding Stablecoin Regulation: Several Committee Republicans expressed concerns over the lack of jurisdictional clarity surrounding stablecoins. They stated that there were conflicting statements from regulators over whether stablecoins should be regulated as securities, commodities, or both. Under Secretary Liang indicated that the PWG Report on Stablecoins did not seek to conclude how stablecoins ought to be classified.
• Republican Concerns with the PWG Report on Stablecoins: Committee Republicans expressed several concerns with the PWG Report on Stablecoins relating to its omissions and recommendations.
  • Republican Criticism Regarding the Report’s Lack of State Analysis: Several Committee Republicans criticized the PWG Report on Stablecoins for failing to discuss the existing regulatory frameworks for stablecoin issuers at the state level. They stated that the U.S. ought to examine all existing regulatory frameworks and structures for stablecoins in order to identify best practices and lessons learned. Under Secretary Liang indicated that while the PWG did consider how states were approaching stablecoin regulation in developing their Report on Stablecoins, she testified that the PWG’s desire to create a consistent regulatory framework led it to not focus on state-based regulatory approaches.
  • Republican Criticism Regarding the Report’s Failure to Highlight the Benefits of Stablecoins: Full Committee Ranking Member Patrick McHenry (R-NC) criticized the PWG Report on Stablecoins for failing to address the potential benefits of stablecoins, including their ability to move money faster, cheaper, and better.
  • Republican Concerns Regarding the Report’s Call for Regulation Absent Congressional Action: Rep. Alex Mooney (R-WV) raised concerns over how the PWG Report on Stablecoins had called on the U.S. Financial Stability Oversight Council (FSOC) to act on its own to regulate stablecoins in the absence of legislation. Under Secretary Liang remarked that FSOC had a responsibility to monitor for risks to the U.S.’s financial stability and to consider actions for reducing such risks. She indicated that while FSOC had some tools to address the stablecoin space, she contended that FSOC action did not constitute a sufficient substitute for Congressional action. She also asserted that any FSOC action on stablecoins would be premature given the rapidly evolving nature of the cryptocurrency space
• Other Stablecoin Topics: Committee Members used the hearing to discuss other issues regarding stablecoins and digital assets more broadly.
  • Development of Central Bank Digital Currencies (CBDCs): Several Committee Members expressed interest in the U.S. Federal Reserve’s current consideration of CBDCs and how a U.S. CBDC would coexist with privately issued stablecoins. Rep. Anthony Gonzalez (R-OH) remarked that a well-regulated private stablecoin provided several potential advantages over a CBDC, including privacy and innovation. Under Secretary Liang expressed agreement with Rep. Gonzalez’s remarks and called it entirely feasible that private stablecoins and a U.S. Federal Reserve-issued stablecoin could coexist. 
  • Use of Puerto Rico as a Cryptocurrency Tax Shelter: Rep. Nydia Velázquez (D-NY) discussed how Puerto Rico’s tax policies had made the territory an attractive for cryptocurrency speculators and investors. She expressed interest in working to ensure that the territory did not became a tax shelter for cryptocurrency profits.
  • Development of a Digital Identification (ID) System: Rep. Bill Foster (D-IL) expressed interest in developing a secure and legally traceable digital identity system for digital asset users. He remarked that a legally traceable digital identity for the beneficial owners behind a given digital asset would be necessary in order to prevent the use of digital assets in illicit activities.

Hearing Witnesses:

1. The Hon. Nellie Liang, Under Secretary for Domestic Finance, U.S. Department of the Treasury

Member Opening Statements:

Full Committee Chairman Maxine Waters (D-CA):

• She remarked that the “explosive” growth of digital assets presented both risks and opportunities for the U.S. economy and U.S. communities.
• She stated that digital assets would particularly impact communities of color, which have historically experienced difficulties in terms of accessing the U.S. financial system.
  • She commented that these communities must be given opportunities for input as part of the policymaking process.
• She noted that the current hearing would focus on stablecoins, which she explained were a subset of cryptocurrencies that were pegged to a reserve asset (such as the U.S. dollar).
  • She indicated that stablecoins were primarily used in the U.S. to facilitate the trading, lending, and borrowing of other cryptocurrencies.
• She discussed how “troubling” investigations had found that many stablecoins were not actually backed fully by reserve assets.
  • She also stated that stablecoins could pose threats to the U.S.’s financial stability due to their speculative trading and lack of investor protections.
• She mentioned how the PWG had published its Report on Stablecoins, which reviewed the regulatory landscape of stablecoins.
• She indicated that the PWG Report on Stablecoins had outlined various risks that stablecoins might present with regard to market integrity, investor protection, and illicit finance.
  • She also noted how the PWG Report on Stablecoins had highlighted systemic risk concerns resulting from the threat of stablecoin runs when the stablecoins were not fully backed by their promised assets, concentration of economic power, and regulatory gaps that undermined the effective oversight of the market.
• She remarked that the aforementioned stablecoin risks could impact the ordinary users of stablecoin products and the overall U.S. financial system.
  • She mentioned that the PWG Report on Stablecoins had recommended that Congress take action to address these risks.
• She stated that policymakers must work to ensure that any innovation within the stablecoin space was responsible, provided robust consumer and investor protections, mitigated environmental impacts, and promoted financial inclusion.
• She also indicated that the Committee would continue to investigate the development of a U.S. CBDC.
  • She commented that such a CBDC might provide a safe, stable, and secure method of instantaneous digital payments.

Full Committee Ranking Member Patrick McHenry (R-NC):

• He remarked that the Committee needed to develop legislation to bring clarity to the digital assets ecosystem.
• He noted how there currently did not exist a federal law governing digital assets and called this lack of a federal law concerning given how nearly a quarter of American adults were now invested in cryptocurrencies.
• He mentioned how Committee Republicans had released a set of principles for developing policies governing CBDCs.
  • He indicated that one of these principles emphasized how stablecoins could support a U.S. CBDC if they were issued under a “thoughtful” regulatory framework.
• He stated that the PWG Report on Stablecoins had outlined a model that could be pursued to oversee stablecoins in the U.S.
• He remarked however that the PWG Report on Stablecoins had failed to account for the full array of options available to policymakers for overseeing the stablecoin space.
• He noted that Committee Democrats had emphasized the need to derisk the U.S. financial services sector in their policy arguments over the previous decade and anticipated that Committee Democrats would argue that stablecoins could introduce new risks into the U.S. financial services sector.
• He highlighted how the PWG Report on Stablecoins had sought to mitigate this potential risk through proposing to regulate stablecoins as banks.
  • He criticized this approach for providing stablecoins with a potential U.S. taxpayer backstop and contended that it would introduce more risk into the U.S. financial services sector.
• He then discussed how the PWG Report on Stablecoins had included an analysis of the U.S. stablecoin market, which he criticized for failing to address existing regulatory frameworks for stablecoin issuers at the state level.
  • He commented that stablecoin issuers were subjected to a “comprehensive” set of state supervisory regimes, including reserve requirements, examinations, and anti-money laundering (AML) rules.
• He contended that the U.S. ought to examine all existing regulatory frameworks and structures for stablecoins in order to identify best practices and lessons learned.
• He further criticized the PWG Report on Stablecoins for failing to address the potential benefits of stablecoins.
  • He commented that digital currencies (including stablecoins) could help to move money faster, cheaper, and better.
• He remarked that requiring that stablecoins only be issued by banks would hamper innovation within the nascent digital assets industry.
• He stated that the U.S. should not force new financial products into ill-fitting and inappropriate existing financial regulatory structures and should instead consider a new approach for these financial products.
  • He asserted that any new policies ought to promote private sector innovation and foster competition in order to build resilient products.
• He further contended that the U.S. should not myopically focus on the risks associated with stablecoins and commented that such a myopic focus would undermine the U.S.’s ability to realize the full benefit of stablecoins.

Witness Opening Statements:

The Hon. Nellie Liang (U.S. Department of the Treasury):

• She first explained how the PWG was chaired by the U.S. Secretary of the Treasury and was composed of members from the U.S. Federal Reserve Board of Governors, the U.S. Securities and Exchange Commission (SEC), and the U.S. Commodity Futures Trading Commission (CFTC).
  • She noted how the PWG Report on Stablecoins received input from the U.S. Federal Deposit Insurance Corporation (FDIC) and the U.S. Office of the Comptroller of the Currency (OCC).
• She then remarked that stablecoins were part of an emerging set of digital assets, activities, and services that could have “profound” implications for the U.S. financial system and economy.
• She stated that the distinguishing feature of stablecoins was that they are designed to maintain a stable value relative to reference asset.
  • She highlighted how the U.S. dollar was a popular reference asset for stablecoins.
• She discussed how the market capitalization of stablecoins had grown “rapidly” from $5 billion at the start of 2020 to approximately $175 billion today.
• She testified that the PWG had focused on stablecoins because the offer of a stable value meant that stablecoins had the potential to be used widely as a means of payment by households, businesses, and financial firms.
  • She commented that this potential use could create benefits and risks for both stablecoin users and payments transactions.
• She noted how the PWG Report on Stablecoins had focused on three prudential risks associated with the use of stablecoins for payments.
  • She indicated that the first risk was run risk, which involved a scenario in which the loss of confidence in a given stablecoin would trigger a wave of redemptions.
  • She indicated that the second risk was payment risk, which included operational issues that could interfere with the ability of users to store stablecoins or use them to make payments.
  • She indicated that the third risk involved concerns related to the concentration of economic power.
• She testified that the PWG Report on Stablecoins had found “significant gaps” in authorities that would address the aforementioned prudential risks and stated that some of the largest stablecoin issuers operated with limited regulatory oversight.
  • She commented that this lack of oversight raised questions as to whether stablecoins possessed adequate backing.
• She also expressed concerns that supervisors might not be able to oversee the broader operations that support the use of a given stablecoin.
  • She elaborated that multiple entities might be involved in operating a given stablecoin.
• She stated that neither state money transmitter nor securities law requirements were designed to address the financial stability of the payment system or the concentration of economic powers for a payment instrument that was based on distributed ledger technology (DLT).
• She mentioned how the PWG Report on Stablecoins had recommended legislation to ensure that stablecoins would be subjected to a consistent and comprehensive framework that was “proportionate” to the risks that they posed.
  • She commented that such legislation would complement existing authorities with respect to market integrity, investor and consumer protection, and illicit finance.
• She noted that the PWG Report on Stablecoins had specifically recommended limiting the issuance of stablecoins to insured depository institutions, giving supervisors of stablecoin issuers visibility into broader stablecoin arrangements, and giving supervisors of stablecoins the authority to set risk management standards for critical activities related to the use of stablecoins for payment.
  • She added that the PWG Report on Stablecoins had proposed certain measures to reduce concerns over the concentration of market power.
• She testified that the PWG Report on Stablecoins had relied upon the flexibility that banking regulatory agencies would have to adjust for differences between stablecoin issuers and traditional commercial banks and to adjust to new market structures that might emerge over time.
• She remarked that the Biden administration was continuing to work across agencies to develop a comprehensive strategy for all digital assets.
  • She expressed the Biden administration’s hope to partner with Congress on these efforts.

Congressional Question Period:

Full Committee Chairman Maxine Waters (D-CA):

• Chairman Waters mentioned how the Diem Foundation (which was founded by Facebook) had recently announced that it had sold its stablecoin project to a bank. She noted that Facebook had made multiple attempts at entering the cryptocurrency market and stated that the Committee’s actions had caused Facebook to slow down their efforts to create a digital currency. She highlighted how the PWG Report on Stablecoins had recommended that stablecoin issuers be required to limit their affiliations with commercial entities. She asked Under Secretary Liang to indicate whether this recommendation meant that technology companies that had access to large amounts of sensitive personal data should not be permitted to create their own stablecoins or other cryptocurrencies. She also asked Under Secretary Liang to indicate whether technology companies engaged within the stablecoin and cryptocurrency space ought to be subjected to heightened scrutiny.
  • Under Secretary Liang noted that the PWG Report on Stablecoins had recommended that stablecoins be issued by insured depository institutions. She remarked that this recommendation would therefore mean that technology companies should not issue stablecoins. She stated however that the PWG Report on Stablecoins had recommended that Congress consider whether technology companies could play a part in the stablecoin ecosystem as providers of custodial wallets and other services related to the use, storage, and transfer of stablecoins for payments. She also noted how the PWG Report on Stablecoins had recommended that Congress consider restrictions on what digital wallet providers could do with the customers transaction data that they would have access to. She further mentioned how the PWG Report on Stablecoins had recommended that Congress consider whether there should exist limitations on privacy and security that could address concerns related to the concentration of economic power if commercial companies were to become involved within the stablecoin space.
• Chairman Waters then noted how the overall value of stablecoins had grown significantly over the previous year. She stated however that simply labeling a stablecoin as stable or having that the stablecoin maintain a 1:1 ratio with a reference asset did not necessarily mean that the stablecoin would have a stable value. She mentioned how some stablecoin issuers had recently transitioned from having their stablecoins being backed by various forms of debt securities to only being backed by the U.S. dollar and short duration U.S. Treasuries. She asked Under Secretary Liang to indicate whether these recent moves were sufficient for addressing the systemic risk and run risk concerns that the PWG Report on Stablecoins had highlighted.
  • Under Secretary Liang remarked that the PWG Report on Stablecoins had focused on the function that stablecoins could provide as a means of payment by households, businesses, financial firms, and governments. She noted how the PWG Report on Stablecoins had found that stablecoins could pose run risks. She explained that run risks would involve investors losing confidence in the quality of a stablecoin’s backing assets, which could in turn lead investors to pull their money from the market and trigger a selloff. She then remarked that the PWG Report on Stablecoins had broadened the policy discussion of stablecoins beyond stablecoin creation and redemption to include the storage and transfer of stablecoins for payments. She called it important for supervisors to oversee the storage and transfer of stablecoins for payments and to establish risk management standards for the stablecoin payments system. She remarked that having insured depository institutions issue stablecoins would allow for sufficient confidence in the assets backing the stablecoin and provide regulatory oversight over stablecoin payment arrangements.

Full Committee Ranking Member Patrick McHenry (R-NC):

• Ranking Member McHenry asked Under Secretary Liang to indicate whether there existed current federal laws that governed stablecoins and/or digital assets.
  • Under Secretary Liang remarked that there existed federal laws that applied to various aspects of stablecoins. She indicated that these federal laws addressed illicit finance and stablecoins as investment assets. She further stated that federal consumer protection laws would apply to stablecoins.
• Ranking Member McHenry interjected to comment that none of the aforementioned federal laws were specifically focused on stablecoins or digital assets.
  • Under Secretary Liang expressed agreement with Ranking Member McHerny’s comment.
• Ranking Member McHenry remarked that the Committee ought to examine current state regulatory frameworks for stablecoins and digital assets. He asked Under Secretary Liang to indicate whether the PWG had consulted with state regulators on their existing frameworks for stablecoins and digital assets.
  • Under Secretary Liang answered affirmatively and stated that many state regulators had increased their expertise in this area. She remarked that the PWG Report on Stablecoins believed that a more consistent and less fragmented regulatory framework was needed for stablecoins and digital assets.
• Ranking Member McHenry interjected to note that the PWG Report on Stablecoins did not mention existing state regulatory frameworks for stablecoins and digital assets. He asked Under Secretary Liang to explain this omission.
  • Under Secretary Liang remarked that the PWG had proposed a consistent regulatory framework for stablecoins and digital assets. She stated that proposals to have insured depository institutions issue stablecoins could involve both federally-chartered and state-chartered banks.
• Ranking Member McHenry asked Under Secretary Liang to address why the PWG Report on Stablecoins did not discuss lessons learned from states that had established their own regulatory regimes for stablecoins and digital assets.
  • Under Secretary Liang stated that there was no “explicit” reason for why the lessons learned from states were not included within the PWG Report on Stablecoins and testified that these lessons were considered in developing the report. She noted how the state regulatory system for stablecoins and digital assets was fragmented across issuers and custodial wallet providers. She commented that this fragmentation was the principal reason that lessons learned from states were not included in the PWG Report on Stablecoins.
• Ranking Member McHenry then noted how the PWG Report on Stablecoins had concluded that stablecoins posed various risks. He indicated that the Report’s proposed solution to these risks was to require that federally-insured depository institutions issue stablecoins. He stated that this proposed solution would provide stablecoins with a federal taxpayer backstop based on the unwinding authority granted in the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) for insured depository institutions. He commented that this proposed solution would increase the likelihood of a federal bailout for stablecoins.
  • Under Secretary Liang remarked that the current stablecoin environment put financial regulators in an uncomfortable position. She noted how the popularity of stablecoins was growing rapidly and stated that regulation was about determining where risks should reside and how to protect users and investors from risks. She remarked that if stablecoins are backed by high quality assets, then the risks posed by stablecoins would be very low. She commented that this low risk would enable stablecoins to play a foundational role in payment systems. She stated however that unsupported stablecoins could create risks for the broader financial system.
• Ranking Member McHenry reiterated that the U.S. ought to identify best practices and lessons learned from state efforts to oversee stablecoins and digital assets.

Rep. Nydia Velázquez (D-NY):

• Rep. Velázquez recounted how the New York State Attorney General had conducted a 2021 investigation that revealed that the stablecoin Tether had deceived clients and markets through failing to hold promised reserves to back their stablecoins in circulation. She mentioned how the PWG Report on Stablecoins highlighted the lack of standards for stablecoin reserve assets and recommended the enactment of legislation that would require stablecoin issuers to become insured depository institutions. She asked Under Secretary Liang to elaborate on this recommendation and to address why it would lead to the creation of standards regarding the composition of the reserve assets and the information that issuers make to the public.
  • Under Secretary Liang mentioned how the PWG Report on Stablecoins had highlighted the risk of stablecoin runs resulting from the quality and composition of the assets backing a given stablecoin not providing stable value (especially during periods of stress). She stated that current market regulators possessed authorities to promote market integrity and protect investors. She remarked that the proposal to require stablecoin issuers to be insured depository institutions would bring the quality and composition of the assets backing a given stablecoin under a supervisory framework where there would be a regulator that could attest to the quality and composition of said assets backing the stablecoin. She also stated that this proposal would ensure that there was a regulator that could oversee a given stablecoin’s entire arrangement for use in payments. She asserted that this approach would provide clarity to stablecoin issuers through providing them with a consistent regulatory framework and not forcing them to comply with various state laws and regulations. She also stated that this clarity would support “beneficial innovation.”
• Rep. Velázquez then discussed how Puerto Rico had become a popular location for cryptocurrency speculators from U.S. mainland investors. She attributed this popularity to Puerto Rico’s Individual Investors Act, which enables wealthy mainland U.S. citizens that establish themselves as Puerto Rican residents to pay zero taxes on capital gains, dividends, and interest. She asked Under Secretary Liang to indicate whether additional legislative authority from Congress would be helpful to go after cryptocurrency investors that were attempting to use Puerto Rico as a tax shelter and evade U.S. Internal Revenue Service (IRS) reporting requirements.
  • Under Secretary Liang testified that she was not familiar with Puerto Rico’s Individual Investors Act. She remarked that the U.S. Treasury Department sought to ensure that U.S. taxpayers paid the taxes that they owed to the federal government. She stated that U.S. Treasury Department and IRS officials were likely examining the efforts of cryptocurrency investors to use Puerto Rico as a tax shelter. She expressed the U.S. Department of Treasury’s willingness to follow up with Rep. Velázquez on this particular issue.

Full Committee Vice Ranking Member Ann Wagner (R-MO):

• Vice Ranking Member Wagner mentioned how the Financial Stability Board (FSB) had made high level recommendations for the supervision and oversight of global stablecoin arrangements. She mentioned that the FSB’s recommendations included the establishment of a comprehensive governance framework, the establishment of effective risk management frameworks, the provision of transparent information for understanding the functioning of the stablecoin arrangement, and the provision of legal clarity for users on the nature and enforceability of any redemption rights and process. She commented that these recommendations sought to address the potential for fraud and the mismanagement of reserves. She mentioned how several cryptocurrency company CEOs had appeared before the Committee in December 2021 to discuss their operations. She remarked that the testimonies of these cryptocurrency company CEOs suggested that existing state-level regulatory structures put the operations of their companies in compliance with the FSB’s recommendations, as well as address the risks highlighted in the PWG Report on Stablecoins. She asked Under Secretary Liang to indicate whether she agreed with this view.
  • Under Secretary Liang stated that the recommendations from the PWG Report on Stablecoins were attempting to meet the FSB’s principles on the supervision and oversight of stablecoin arrangements. She remarked that the U.S.’s current state-level regulatory structures failed to meet all of the FSB’s principles at this point.
• Vice Ranking Member Wagner interjected to reiterate that the cryptocurrency CEOs that had previously appeared before the Committee had asserted that state regulatory structures met the FSB’s principles and addressed the risks highlighted in the PWG Report on Stablecoins.
  • Under Secretary Liang testified that the PWG had consulted with some states in developing its Report on Stablecoins. She noted that these states believed that they had oversight of stablecoin issuers through stablecoin licenses and other oversight mechanisms for digital wallet providers and additional entities that stored, transferred, and permitted stablecoins to be used as payments. She indicated that these oversight mechanisms involved a different set of regulations compared to money transmitter licenses. She remarked that states were not providing plenary oversight of overall stablecoin arrangements. She commented that such oversight would be necessary if stablecoins were to achieve widespread use as a payments mechanism.
• Vice Ranking Member Wagner remarked that the U.S. ought to work to identify the best state regulatory frameworks for stablecoins and digital assets. She asserted that applying a uniform regulatory framework to stablecoin innovation would discourage innovation and cause stablecoin activity and jobs to move abroad. She stated that any federal regulatory framework for stablecoins must provide clarity and ensure that the regulation fits the activity. She then asked Under Secretary Liang to address how stablecoins could reduce barriers to financial inclusion and lower transaction costs.
  • Under Secretary Liang remarked that the potential for digital assets and stablecoins to improve financial inclusion were high. She stated that digital assets and stablecoins could reduce the cost of payments and facilitate payments for unbanked and underbanked individuals that might not feel comfortable going to banks. She mentioned how there were currently pilot programs underway to test the use of stablecoins for cross-border remittances.

Rep. Brad Sherman (D-CA):

• Rep. Sherman first applauded the Committee’s successful efforts to prevent Facebook from pursuing a digital currency. He then expressed skepticism regarding the merits of a state-based regulatory system for financial products and services. He stated that a state-based regulatory system would lead to a “race to the bottom” among states in terms of regulatory standards. He then called it unfair to compare the alleged potential benefits of stablecoins and cryptocurrencies with the current U.S. financial and payments system. He noted how a very small number of businesses currently accepted stablecoins and cryptocurrencies as a means of payment. He also stated that stablecoins posed risks to investors and that stablecoins that were backed by cryptocurrencies posed even greater risks to investors. He then remarked that the U.S. must consider the risks that stablecoins posed to the payments system. He applauded the PWG Report on Stablecoins for focusing on how cryptocurrencies and stablecoins undermined AML and know your customer (KYC) rules. He then stated that the cryptocurrency industry was a powerful political force at the federal level, which made it difficult for the PWG to advance its legislative agenda on cryptocurrencies and stablecoins. He asked Under Secretary Liang to recommend specific laws and statutory language for Congress to adopt.
  • Under Secretary Liang expressed the PWG’s willingness to work with Congress on legislative proposals. She specifically expressed the PWG’s support for proposals requiring that stablecoin issuers be insured depository institutions.
• Rep. Sherman requested that the PWG convert its legislative proposals into statutory language. He then stated that cryptocurrencies enjoyed significant investments from parties and entities that tended to disenfranchise minority communities. He asked Under Secretary Liang to indicate whether a collapse in the cryptocurrency or stablecoin market would negatively impact low- and moderate-income communities (and particularly communities of color).
  • Under Secretary Liang answered affirmatively. She discussed how there were currently many instances of fraud within the digital assets space and stated that the PWG’s member agencies were taking actions to protect investors and consumers from such fraud.

Rep. Blaine Luetkemeyer (R-MO):

• Rep. Luetkemeyer mentioned how the average daily turnover value of the U.S. dollar had constituted 88 percent of foreign exchange market transactions globally in 2019. He stated that the U.S. dollar’s dominance in the global marketplace was a key reason why the U.S. dollar remained the reserve currency of the world. He remarked that the existence of hundreds of different privately established cryptocurrencies presented a threat to the U.S. dollar’s status in global transactions. He stated however that stablecoins backed by the U.S. dollar presented a unique opportunity to ensure that the U.S. dollar remained the world’s reserve currency as the financial services industry adopted blockchain technologies and cryptocurrencies. He noted that the PWG Report on Stablecoins did not mention global competitiveness as a key aspect of stablecoin development. He called this omission a “striking oversight.” He asked Under Secretary Liang to indicate whether she was concerned about the large number of cryptocurrencies currently being established. He also asked Under Secretary Liang to address whether stablecoins provided an opportunity to enhance the U.S. dollar’s global reserve currency status.
  • Under Secretary Liang asserted that the U.S. dollar’s position in the global financial system was very important for the U.S.’s economic well-being. She stated that the recommendations of the PWG Report on Stablecoins to require the issuers of U.S. dollar-backed stablecoins to be put into an established regulatory framework would constitute the best way to promote the U.S. dollar. She remarked that there were currently U.S. dollar-backed stablecoins being issued with limited regulatory oversight or outside the purview of regulators.
• Rep. Luetkemeyer asked Under Secretary Liang to indicate whether there was a way to incentivize stablecoins to use U.S. dollars as reference assets.
  • Under Secretary Liang remarked that stablecoins currently had an incentive to use U.S. dollars as reference assets because the U.S. dollar was the world’s reserve currency. She stated that the U.S. should provide incentives to ensure that the U.S. dollar remained the world’s reserve currency. She attributed the U.S. dollar’s status as the world’s reserve currency to the U.S.’s rule of law, strong institutions, economic potential, and robust financial markets. She stated that stablecoin technology could reinforce these strengths of the U.S. dollar.
• Rep. Luetkemeyer expressed agreement with Under Secretary Liang’s assertion that the U.S. needed a stable economy and currency in order for a U.S. dollar-backed stablecoin to be successful. He then asked Under Secretary Liang to indicate whether there had ever occurred a run on a stablecoin or cryptocurrency.
  • Under Secretary Liang stated that there had occurred runs on some smaller stablecoins.

Rep. David Scott (D-GA):

• Rep. Scott discussed how a significant portion of the U.S. population lacked access to banking services, payments technology, and financial literacy. He asked Under Secretary Liang to explain how stablecoins connected financially underserved populations with the broader financial system. He also asked Under Secretary Liang to discuss the current guardrails in place to protect stablecoin users.
  • Under Secretary Liang remarked that stablecoins could promote financial inclusion through making payments faster and cheaper if users were more willing to use technology for payments than a traditional bank. She also stated that the pilot programs for using stablecoins for cross-border remittances served as an example for how stablecoins could support cheaper payments. She then noted that the recommendations of the PWG Report on Stablecoins tried to address the risks associated with stablecoins. She stated that stablecoins could provide a strong operational payment structure, which would protect consumers.
• Rep. Scott asked Under Secretary Liang to address whether the PWG Report on Stablecoins had recommended that the increased adoption of stablecoins ought to be coupled with corresponding increases in stablecoin user protections.
  • Under Secretary Liang remarked that the recommendations of the PWG Report on Stablecoins were premised on the idea that stablecoins would continue to grow “rapidly” and that guardrails would need to be adopted in order to protect stablecoin users and investors.
• Rep. Scott interjected to ask Under Secretary Liang to discuss the recommendations of the PWG Report on Stablecoins.
  • Under Secretary Liang indicated that the PWG Report on Stablecoins recommended that the U.S. require stablecoin issuers to be insured depository institutions and subject stablecoin custodians, digital wallet providers, and those that manage stablecoin reserve assets to supervisory oversight.
• Rep. Scott asked Under Secretary Liang to indicate whether there was a body that could enforce the recommendations of the PWG Report on Stablecoins.
  • Under Secretary Liang stated that the Report’s proposed supervisory and regulatory framework for stablecoins would provide enforcement of the Report’s recommendations.

Rep. Bill Huizenga (R-MI):

• Rep. Huizenga mentioned how Committee Republicans had released a set of principles for assessing a potential U.S. CBDC. He remarked that a U.S. Federal Reserve-issued CBDC should not impede the development and utilization of stablecoins. He called it important for the private sector to play a leadership role in the stablecoin space. He then noted how the SEC was a member of the PWG. He mentioned how SEC Chairman Gary Gensler had stated that stablecoins may have attributes of investment contracts and banking products and that U.S. banking authorities lacked sufficient resources to oversee stablecoins. He commented that Chairman Gensler’s statement suggested that he believed that Congress needed to put stablecoins under the SEC’s regulatory authority. He noted however that SEC Chairman Gensler had also stated that some stablecoins were commodities. He commented that Chairman Gensler’s latter statement were in conflict with Chairman Gensler’s former statement. He asked Under Secretary Liang to address why the PWG Report on Stablecoins did not include any analysis of how U.S. securities laws apply to stablecoins. He also asked Under Secretary Liang to indicate whether the PWG had considered whether stablecoins constituted securities, commodities, or both.
  • Under Secretary Liang remarked that the PWG was convened to consider whether stablecoins could be used to improve the U.S. payments system and to identify gaps in the regulation of stablecoins. She stated that the PWG Report on Stablecoins built on existing applicable laws and regulations, including the SEC’s regulations that applied to stablecoins as investment assets and securities. She indicated that the PWG Report on Stablecoins did not include analysis on whether stablecoins constituted securities. She stated that she would need to defer to the SEC regarding their enforcement strategy for stablecoins. She noted that the SEC’s authorities were for market integrity and investor protection related to the redemption and creation of stablecoins. She indicated that the SEC did not oversee the use of stablecoins as a payments instrument.
• Rep. Huizenga then noted how Under Secretary Liang’s testimony had mentioned proposals to regulate stablecoins as either securities or money market mutual funds. He asked Under Secretary Liang to identify the parallels between money market mutual funds and stablecoins. He also asked Under Secretary Liang to provide recommendations for approaching this topic.
  • Under Secretary Liang discussed how many money market mutual funds invested in U.S. government securities and noted that investors purchased these funds with the expectation of earning the yield on the underlying asset. She highlighted how a stablecoin could be purchased and used for payments (rather than just investments). She stated that this dynamic made stablecoins unique, which resulted in a “regulatory gap” that necessitated the consideration of a new regulatory framework.
• Note: Rep. Huizenga’s question period time expired here.

Rep. Al Green (D-TX):

• Rep. Green discussed the extreme fluctuations of Dogecoin (which he noted was not a stablecoin). He asked Under Secretary Liang to identify the foundations underlying Dogecoin.
  • Under Secretary Liang remarked that the digital asset marketplace was rapidly evolving and commented that this marketplace was built on top of a novel technology with the potential to “radically” change how different financial services would be provided. She noted how there were numerous digital asset products and services available that consumers could evaluate and make use of. She stated that consumers should have investor protections for these products and services. She asserted that it was difficult for policymakers to anticipate how the digital asset landscape would evolve over the coming years.
• Rep. Green interjected to ask Under Secretary Liang to indicate what exactly investors were investing in with regard to Dogecoin.
  • Under Secretary Liang speculated that cryptocurrency investors could be investing in the application of novel DLTs. She noted that there was a popular view among the cryptocurrency industry that more cryptocurrency investments would lead to the development of new DLT applications. She stated that the long-term durability of existing cryptocurrency products remained an “open question” and that it was difficult for policymakers to prejudge the winners and losers within the cryptocurrency space.
• Rep. Green raised concerns that Dogecoin and similar cryptocurrencies were not based on anything, which could put the investors of these cryptocurrencies in peril. He stated that policymakers need to consider outlawing certain cryptocurrencies given the risks that they may pose to investors.

Rep. Frank Lucas (R-OK):

• Rep. Lucas asked Under Secretary Liang to discuss the diffrent types of reserve assets that were held by stablecoins.
  • Under Secretary Liang mentioned how there were many stablecoins being offered that were tied to the value of the U.S. dollar. She noted that reserve assets backing stablecoins included U.S. Treasuries, bank deposits, short-term liabilities (such as commercial paper), and commercial debt. She stated that stablecoins involved backing from self-reported assets that were subject to audits by private firms. She indicated however that regulators did not confirm whether these self-reported assets were actually being used to back the stablecoins. She concluded that there was a mix of reserve assets being used to back stablecoins and predicted that not all stablecoins would be able to be exchanged for U.S. dollars during periods of economic stress.
• Rep. Lucas asked Under Secretary Liang to indicate whether there was a “typical assortment” of reference assets that backed stablecoins.
  • Under Secretary Liang remarked that the desired asset pool for backing stablecoins would be high quality assets that could enable the stablecoin to be redeemed for U.S. dollars, even under stress conditions. He stated that the current mix of assets backing stablecoins varied across stablecoin issuers. She noted how there might be between 50 and 60 stablecoin issuers currently in existence. She stated that the largest stablecoin issuers relied upon corporate short-term liabilities, which she commented were unproven in their ability to support U.S. dollar redemptions during periods of economic stress.
• Rep. Lucas stated that the assortment of reference assets backing a given stablecoin would impact the ability of the stablecoin’s user to redeem the stablecoin for U.S. dollars. He commented that the choice of such reference assets was therefore important.
  • Under Secretary Liang expressed agreement with Rep. Lucas’s comments.
• Rep. Lucas then noted how the CFTC had demonstrated through enforcement actions that it possessed some authority over stablecoins. He asked Under Secretary Liang to indicate whether the PWG believed that the Commodity Exchange Act (CEA) granted the CFTC the full authority to audit stablecoins to ensure that the stablecoin’s underlying assets were fully accounted for.
  • Under Secretary Liang stated that she would need to defer to the CFTC on that question. She remarked that the PWG did not attempt to determine whether securities or commodities laws should apply to stablecoins. She noted that there were currently enforcement cases going through the judicial process that were addressing which sets of laws applied to stablecoins. She remarked that the PWG had sought to identify gaps in existing regulations related to stablecoins as payment instruments.
• Rep. Lucas then asked Under Secretary Liang to identify the current barriers that stablecoins might face in their efforts to achieve wide adoption. He also asked Under Secretary Liang to answer whether the wide adoption of stablecoins would be a positive development for consumers.
  • Under Secretary Liang remarked that the widespread use of stablecoins provided potential benefits, such as faster and cheaper payments. She testified that the PWG had found that the lack of regulatory clarity surrounding stablecoins served as a barrier to stablecoin adoption based on stakeholder interviews. She also emphasized how stablecoins were very nascent technologies and commented that these technologies could scale up quickly.

Rep. Emanuel Cleaver (D-MO):

• Rep. Cleaver expressed concerns that bad actors could issue digital currencies that were Ponzi schemes. He asked Under Secretary Liang to discuss the current protections in place that would prevent Americans from being taken in by digital currency Ponzi schemes.
  • Under Secretary Liang remarked that consumers and investors needed to be protected from digital currency Ponzi schemes. She stated that the U.S. Consumer Financial Protection Bureau (CFPB) and banking agencies were taking actions to try to protect consumers and investors from digital currency Ponzi Schemes and commented that these actions were likely to continue. She elaborated that these protections were meant to address fraud, misleading advertising, and manipulation. She further mentioned how there was ongoing monitoring of digital assets to determine whether leverage was being used in the trading of these assets, which could lead the prices of these assets to sharply decline. She remarked that financial regulators were very focused on protecting digital currency investors and consumers. She noted how the PWG Report on Stablecoins had focused on stablecoins, which purported to have more stable values than other types of digital currencies.
• Rep. Cleaver highlighted how private companies were actively entering the digital currency space and stated that some of these entrants were likely unregistered entities. He expressed concerns that this environment could foster fraud.
  • Under Secretary Liang indicated that she shared Rep. Cleaver’s concerns regarding the prospects for fraud within the digital currency space. She remarked that the combination of new technologies, a growing market, and an unclear and inconsistent regulatory framework raised concerns. She stated that the PWG Report on Stablecoins had sought to provide ideas for how stablecoins should be regulated. She also mentioned how the Biden administration was engaged in an ongoing effort to review digital assets, including user protection and financial stability concerns.

Rep. Bill Posey (R-FL):

• Rep. Posey discussed how banks received prudential supervision and deposit insurance in order to ensure that the U.S. payment system could redeem its deposit liabilities at par. He stated that this treatment was essential for bank deposits to function as money that could be redeemed during periods of economic stress. He noted how several questions had arisen within the stablecoin realm regarding the quality of the assets backing stablecoins. He asked Under Secretary Liang to address whether the stablecoin Tether was backed by the U.S. dollar or cash equivalents.
  • Under Secretary Liang noted that Tether’s public documents indicated that their reserve assets included assets that were not credit risk-free.
• Rep. Posey asked Under Secretary Liang to indicate whether Tether had investments in Chinese commercial paper or other types of illiquid assets that might threaten its redeemability.
  • Under Secretary Liang stated that Tether held the commercial paper of private firms, which did not constitute a credit risk-free asset.
• Rep. Posey asked Under Secretary Liang to indicate whether there had been Tether issued that was not fully collateralized.
  • Under Secretary Liang stated that she believed that there had been Tether issued that was not fully collateralized under all conditions. She noted how Tether was not regulated.
• Rep. Posey asked Under Secretary Liang to indicate whether she possessed concerns regarding Tether’s opacity and impact on consumers.
  • Under Secretary Liang indicated that she did have concerns regarding the opacity of the reserve assets of stablecoin issuers. She stated that this opacity of stablecoin reserve assets made stablecoins vulnerable to runs, which could create problems for other short-term financing markets.
• Rep. Posey expressed hope that the Committee could enact stablecoin policies that protected consumers and investors while also enabling the U.S. economy to realize financial innovations. He noted how the PWG Report on Stablecoins had concluded that stablecoins ought to be regulated as banks and deposits, which would necessitate that stablecoins obtain deposit insurance. He asked Under Secretary Liang to discuss the alternative regulatory regimes for stabecoins that would provide adequate disclosures to consumers.
  • Under Secretary Liang remarked that the proposal from the PWG Report on Stablecoins that stablecoin issuers be insured depository institutions relied upon flexible nature of that supervisory and regulatory framework. She stated that a stablecoin issuer that only issued stablecoins for payments and that did not engage in lending should be subject to a different supervisory regime than banks. She commented that there existed a “degree of flexibility” in the PWG’s proposal. She then noted that the PWG Report on Stablecoins did not make a statement on deposit insurance. She commented that deposit insurance might not be necessary depending on the quality of the stablecoin’s reserve assets and the capital and liquidity standards of the stablecoin’s issuer.
• Rep. Posey asked Under Secretary Liang to discuss what the Biden administration’s policy was for addressing stablecoins within the financial system.
  • Under Secretary Liang remarked that the PWG Report on Stablecoins recognized that there currently existed gaps in the regulatory system for stablecoins. She noted how there were securities, consumer protection, and illicit finance laws meant to address stablecoins and other digital assets. She remarked however that there did not exist a federal regulatory framework that built upon state-level regulations that would apply to the use of stablecoins for payment purposes.

Rep. Ed Perlmutter (D-CO):

• Rep. Perlmutter discussed how the number of people that bought into a given stablecoin would largely dictate how policymakers would approach that stablecoin. He asked Under Secretary Liang to identify the most secure stablecoins that had been developed from an investment standpoint.
  • Under Secretary Liang noted how stablecoins could serve as both investments and payment mechanisms and stated that the PWG Report on Stablecoins was focused on the near future prospects for stablecoins as a payment mechanism. She then remarked that there could exist stablecoins that were backed by high quality assets and not used as payments. She commented that the recommendations from the PWG Report on Stablecoins would not be applicable to these types of stablecoins. She reiterated that the PWG’s recommendations were focused on stablecoins that could be used as payments, as well as the convertibility and operational risks of these stablecoins.
• Rep. Perlmutter then discussed the U.S.’s experience with money market mutual funds and noted how the widespread use of these funds for payments had led the U.S. to bail the funds out when they experienced challenges. He suggested that the U.S. should take proactive protective measures regarding stablecoins so that it would not need to bail them out in the event of a financial crisis.
  • Under Secretary Liang commented that the PWG Report on Stablecoins suggested that the U.S. take proactive protective measures regarding stablecoins.

Rep. Andy Barr (R-KY):

• Rep. Barr called it important for the U.S. to maintain the U.S. dollar’s status as the world’s reserve currency. He stated that the adoption of stablecoins would likely not compromise the U.S. dollar’s status as the world’s reserve currency given that major stablecoins were denominated in U.S. dollars. He asked Under Secretary Liang to indicate whether she agreed with his statement. He also asked Under Secretary Liang to indicate whether the increased adoption of U.S. dollar-backed stablecoins would diminish threats to the U.S. dollar from cryptocurrencies and other CBDCs.
  • Under Secretary Liang expressed agreement with Rep. Barr’s statement that it was important to preserve the U.S. dollar’s value. She stated that stablecoins that were tied to the U.S. dollar and that could actually deliver a stable value would benefit the U.S. dollar.
• Rep. Barr mentioned how the U.S. Federal Reserve was exploring the feasibility of a digital U.S. dollar and had recently released its report on CBDCs. He expressed concerns that the development of a U.S. Federal Reserve CBDC could stymie private sector innovation (including in the stablecoin space). He asked Under Secretary Liang to indicate whether stablecoins issued within a clear regulatory framework would be able to coexist with a U.S. Federal Reserve-issued CBDC.
  • Under Secretary Liang remarked that the regulation of U.S. dollar-backed stablecoins would not preclude the introduction of a CBDC. She commented that while it was difficult to project the future stablecoin landscape, she stated that it was entirely feasible that private stablecoins and a U.S. Federal Reserve-issued stablecoin could coexist.
• Rep. Barr reiterated his belief that U.S. dollar-backed stablecoins would ensure that the U.S. dollar remained the world’s reserve currency. He also stated that U.S. dollar-backed stablecoins would diminish the need for a U.S. Federal Reserve-issued CBDC. He then mentioned how the PWG Report on Stablecoins had recommended that Congress pass legislation to require that stablecoins only be issued by insured depository institutions. He commented that this recommendation would bring stablecoins within the banking regulatory regime. He expressed concerns that this recommendation could lead cryptocurrency talent, innovation, and stablecoin issuers to move abroad. He also stated that it was inconsistent for the U.S. to assert that only banks should be permitted to issue stablecoins while failing to grant bank charters to the largest stablecoin issuers. He asked Under Secretary Liang to address his aforementioned concerns regarding the PWG’s recommendation that stablecoin issuance be brought into the bank regulatory regime.
  • Under Secretary Liang remarked that the PWG’s recommendation that stablecoin issuers be insured depository institutions was designed to make these issuers stable. She called stability the key attribute of a good stablecoin and asserted that stability and U.S. leadership in the stablecoin space were not conflicting objectives.
• Rep. Barr remarked that oversight of the integrity of stablecoin audits would ensure the integrity of stablecoins and reduce run risk. He stated that such oversight would make it unnecessary to have stablecoin issuance done through insured depository institutions.
  • Under Secretary Liang noted how the PWG Report on Stablecoins had found that stablecoins could pose run risks and risks to the payment system absent adequate oversight. She asserted that disclosure or money market mutual fund-type regulations were ill-suited for addressing the aforementioned risks.

Rep. Jim Himes (D-CT):

• Rep. Himes discussed how stablecoins would likely provide benefits and drawbacks to the U.S. and stated that policymakers must work to regulate stablecoins in a manner that would allow for innovation while protecting consumers. He then asserted that there was a “radical” difference between a stablecoin that was fully backed, redeemable at par, and fully transparent and a stablecoin without sufficient backing. He asked Under Secretary Liang to indicate whether she agreed with this assertion.
  • Under Secretary Liang expressed agreement with Rep. Himes’s assertion.
• Rep. Himes remarked that a stablecoin that was fully backed, redeemable at par, and fully transparent could be regulated differently than a riskier stablecoin. He asked Under Secretary Liang to indicate whether requiring stablecoin issuers to be insured depository institutions and chartered banks might be unnecessary if the stablecoins being issued were fully backed, redeemable at par, and fully transparent.
  • Under Secretary Liang remarked that there existed “important distinctions” between stablecoins and unbacked digital assets. She also stated that the full set of bank regulations did not need to be applied to a stablecoin issuer that exclusively engages in stablecoin issuance. She commented that there was flexibility within the insured depository institution regulatory framework to not focus on the credit risks associated with lending given how many stablecoin issuers did not make loans or engage in fractional reserve banking. She noted however that stablecoin issuers did facilitate payments and highlighted that there existed operational and convertibility risks associated with payments. She stated that oversight was needed regarding stablecoin issuers in order to ensure that the U.S. payment system could continue to properly function.
• Rep. Himes then remarked that it did not appear that there currently existed enough leverage within the stablecoin space to create systemic risk concerns. He asked Under Secretary Liang to identify aspects of the stablecoin market that policymakers ought to monitor in order to guard against systemic risk within the stablecoin space.
  • Under Secretary Liang remarked that assets whose values were increasingly determined by leveraged positions could pose systemic risk concerns. She stated that financial regulators, including FSOC, had been monitoring developments in digital assets in search of leverage. She also remarked that having stablecoins become more interconnected with the traditional financial system could pose systemic risk concerns. She noted how digital assets currently had “tenuous” links to the traditional financial system. She highlighted how banking regulators had raised capital requirements on crypto asset holdings and stated that these regulators were keenly aware of the systemic risks posed by the growing digital assets industry.

Rep. Roger Williams (R-TX):

• Rep. Williams remarked that cryptocurrencies could help to address many of the traditional financial services marketplace’s shortcomings. He highlighted how cryptocurrencies could benefit the underbanked and facilitate international payments. He stated that stablecoins played a key role in the functioning of cryptocurrencies through enabling people to remove the volatility often associated with cryptocurrencies. He noted how the PWG Report on Stablecoins had suggested that the U.S. treat all stablecoin issuers as banks. He commented that this proposal would advantage incumbent financial institutions (that had traditionally been skeptical of cryptocurrencies) and disadvantage the innovative entrepreneurs within the cryptocurrency space. He asked Under Secretary Liang to discuss how the PWG had considered the impacts of their recommendations on cryptocurrency innovation.
  • Under Secretary Liang testified that the PWG was very focused on balancing the benefits for financial innovation with reducing risks to cryptocurrency users, as well promoting the broader financial stability of stablecoins. She contended that stablecoins should be expected to fulfill their promises of stability, which would require stablecoins to face additional regulation. She noted that while the PWG had proposed that stablecoins be issued by insured depository institutions, she remarked the PWG’s proposal relied upon the fact that the regulation and supervision of these institutions could be quite flexible. She stated that stablecoin issuers that had a simple business model of holding high quality reserve assets and issuing liabilities (such as stablecoins) would be subject to a “much less stringent” regulatory and supervisory regime as compared to a traditional commercial bank. She concluded that the PWG’s recommendation for stablecoins to be issued by insured depository institutions would reduce risks and provide regulatory clarity and consistency, which would in turn foster innovation.
• Rep. Williams then asked Under Secretary Liang to discuss how the PWG had consulted the private sector in developing its Report on Stablecoins. He also asked Under Secretary Liang to answer whether the private sector perspectives had been adequately accounted for in the PWG Report on Stablecoins.
  • Under Secretary Liang testified that the PWG had reached out to many stakeholders in developing its Report on Stablecoins and indicated that these stakeholders included academics, regulators, and private sector entities. She remarked that many private sector stakeholders were comfortable with requiring stablecoin issuers to be insured depository institutions and noted that some of these private sector stakeholders were already pursuing bank charters. She stated that the PWG had worked to strike the right balance between innovation and safety in developing its Report on Stablecoins.

Rep. Gregory Meeks (D-NY):

• Rep. Meeks stated that a core recommendation of the PWG Report on Stablecoins was to require stablecoin issuers to be insured depository institutions. He asked Under Secretary Liang to indicate the extent to which this recommendation was assessed using the frameworks within President Biden’s Executive Orders (EOs) on Promoting Competition in the American Economy and on Advancing Racial Equity and Support for Underserved Communities Through the Federal Government. He commented that limiting stablecoin issuance to insured depository institutions (which have a higher barrier to entry) could limit competition and have a racial equity impact.
  • Under Secretary Liang testified that the PWG did consider how its recommendations would impact competition in the development of its Report on Stablecoins. She called the U.S.’s current regulatory framework for stablecoins inconsistent and fragmented. She asserted that a more comprehensive regulatory framework for stablecoins would benefit competition. She also stated that the PWG wanted to provide regulatory clarity in order to foster stablecoin innovation. She further testified that the PWG wanted to ensure that the uneven implementation of standards across regulators did not create unfair advantages for certain stablecoin issuers. She then remarked that stablecoins could help the U.S. meet its equity goals and serve unbanked and underbanked individuals through lowering costs. She also stated that stablecoins could improve access to financial and payment services to individuals that did not feel comfortable with going to banks.
• Rep. Meeks then discussed how stablecoins could be used to help communities abroad that were facing turmoil in their countries. He stated that non-governmental organizations (NGOs) could help refugees to securely access money in new countries through stablecoins. He asked Under Secretary Liang to address how the U.S. Department of Treasury could assist these NGOs to partner with stablecoin issuers in order to distribute humanitarian aid to refugee populations in a safe and efficient manner. He also asked Under Secretary Liang to identify actions that Congress could take to assist the U.S. Department of Treasury in this area.
  • Under Secretary Liang remarked that the ability of stablecoins to support foreign aid was an example of the technology’s potential benefits. She stated that the recommendations of the PWG Report on Stablecoins sought to ensure that stablecoins were actually stable. She commented that these recommendations sought to ensure that stablecoins functioned properly and did not pose unnecessary risks.
• Rep. Meeks commended the cryptocurrency industry for its efforts to support foreign citizens and stated that many stablecoin issuers were adopting AML and KYC procedures. He noted however that peer-to-peer cryptocurrency transactions did not have formal brokers. He mentioned how the U.S. Financial Crimes Enforcement Network (FinCEN) had limited jurisdiction and commented that this resulted in many cryptocurrency transactions not adhering to robust KYC procedures. He asked Under Secretary Liang to address the role that the Financial Action Task Force (FATF) and FinCEN play in combating bad actors within the cryptocurrency space while also facilitating the delivery of humanitarian aid via cryptocurrency and normal cross-border cryptocurrency transactions.
  • Under Secretary Liang stated that the U.S. Department of Treasury was leading FATF in trying to improve the implementation of cryptocurrency standards in countries that were lagging in their implementation efforts.

Rep. French Hill (R-AR):

• Rep. Hill commented that there appeared to exist significant agreement at the hearing between Committee Democrats and Republicans on the potential benefits of stablecoins. He elaborated that there existed a bipartisan belief that stablecoins could improve the efficiency, speed, and cost of payments, expand financial access, facilitate the use and adoption of digital assets, support the U.S. dollar’s continued status as the world’s reserve currency, and make the U.S. a preferred country for financial technology (FinTech) innovation. He contended that stablecoin legislative efforts ought to focus on a stablecoins’s permissible reserve assets (which involved credit quality and collateral requirements), liquidity and redemption requirements, and risk management and other governance issues (including audit, transparency, and privacy controls). He also asserted that U.S. regulatory approaches towards stablecoins ought not to account for the use cases of the given stablecoins. He stated that legislation should simply define what would constitute appropriate stablecoins from a consumer or business perspective. He asked Under Secretary Liang to indicate whether she agreed with his proposed approach to overseeing stablecoins.
  • Under Secretary Liang remarked that regulations ought to follow the function of a given product or service.
• Rep. Hill interjected to expressed agreement with Under Secretary Liang. He asserted that regulations ought to be activity-based rather than entity-based and commented that activity-based regulations were particularly important in innovative fields. He then expressed uncertainty as to whether there should be requirements that stablecoins be issued by depository institutions. He asked Under Secretary Liang to indicate whether she would support the creation of either a federal money transmission license or a national payment provider license.
  • Under Secretary Liang remarked that the U.S. should explore the feasibility of a federal money transmission license and a national payment provider license. She stated that the fact that the U.S. currently lacked the aforementioned license structures had led the PWG to not consider these structures when developing its Report on Stablecoins.
• Rep. Hill asked Under Secretary Liang to indicate whether she supported having states define some quality standards for stablecoins.
  • Under Secretary Liang remarked that current regulators needed to take actions to oversee stablecoins given how stablecoins were already available and growing in popularity. She noted how some state money transmitter licenses did not apply to digital assets and suggested that states could probably revisit their money transmitter rules.
• Rep. Hill then remarked that stablecoins and digital assets should not necessarily be required to obtain deposit insurance and reiterated his support for an activity-based regulatory approach for these assets. He also expressed doubts as to whether stablecoins posed systemic risks, especially given how much smaller the stablecoin market was relative to the credit card and money market mutual fund markets. He stated that the Committee should develop a “narrowly-crafted” definitions bill for overseeing stablecoins.

Rep. Bill Foster (D-IL):

• Rep. Foster expressed interest in developing a secure and legally traceable digital identity system for digital asset users. He remarked that a legally traceable digital identity for the beneficial owners behind a given digital asset would be necessary to prevent digital assets from being used in illicit activities. He stated that courts in trusted jurisdictions should be able to access these legally traceable identities and support the extraditions of suspected bad actors when necessary. He mentioned how the cryptocurrency CEOs that had previously testified before the Committee in December 2021 had expressed support for developing a secure and legally traceable digital identity system for digital asset users. He asserted that existing KYC requirements were insufficient for combating illicit activity because users were able to open shell financial accounts to evade KYC monitoring. He asked Under Secretary Liang to provide recommendations for developing a legally traceable digital identity system for digital asset users (both nationally and internationally). He also asked Under Secretary Liang to indicate whether the U.S. Department of Treasury required more specific guidance from Congress as to how to proceed in this endeavor.
  • Under Secretary Liang remarked that the principles of security and privacy could be in conflict at times within the digital assets context. She stated that legislation could address how to balance these two principles and indicated that the PWG Report on Stablecoins did not make any recommendations on developing a secure and legally traceable digital identity system for digital asset users. She commented that the PWG remained cognizant of the issue of digital identity for digital asset users and added that this issue was very applicable to the CBDC context. She then discussed how the PWG Report on Stablecoins did address the potential for stablecoins to scale rapidly. She stated that this rapid scaling provided the stablecoin issuers with significant amounts of information and control over customer financial transaction data. She noted how the PWG had suggested that Congress consider ways to manage the security of this data. She commented that Congress would need to address this issue if digital currencies were to become more widely used.
• Rep. Foster highlighted how the U.S. National Institute of Standards and Technology (NIST) had established standards for using a modern cell phone with a Real ID compliant mobile identification (ID) or driver’s license. He commented that these standards enabled consumers to establish their identities online.
  • Under Secretary Liang stated that these types of standards would help to prevent fraud and increase security for individuals.
• Rep. Foster asked Under Secretary Liang to indicate whether FinCEN would have specific recommendations on the development of a secure and legally traceable digital identity system for digital asset users.
  • Under Secretary Liang expressed her willingness to ask FinCEN about the issue and to follow up with Rep. Foster on his inquiry.

Rep. Tom Emmer (R-MN):

• Rep. Emmer noted that while stablecoins currently represented just 5 percent of the digital asset industry’s total value, he indicated that stablecoins were facilitating more than 75 percent of trading within the digital assets ecosystem. He remarked that stablecoins offered significant economic benefits, including instant payment settlements. He commented that the benefits of stablecoins led many to conclude that stablecoins were less risky than heavily regulated payment rails of the current banking system. He stated however that the PWG Report on Stablecoins had focused almost solely on the perceived risk of stablecoins. He also noted how the Report did not provide a definition for stablecoins and had recommended that only insured depository institutions be permitted to issue stablecoins. He mentioned how Under Secretary Liang had previously stated that a stablecoin could be both a bank-like product and an investment-like product. He contended however that stablecoins were payment instruments and therefore fundamentally different from investment products. He asserted that a bank-like regulatory framework for stablecoins would improperly regulate stablecoins and inadvertently capture potential future financial products that would be “vastly different” from stablecoins as currently conceived. He stated that the system proposed under the PWG Report on Stablecoins would have a tokenized money market mutual fund (which he commented would constitute a security) fall under the same stablecoin structure as a fiat currency-backed payment token that was fully redeemable for cash. He remarked that legislating and regulating within the stablecoin space should not be done under broad definitional scope (as proposed by the PWG Report on Stablecoins) and asserted that this approach would “severely” limit future market growth. He stated that tokenized money market mutual funds backed by government debt or commercial paper could feasibly come to market in the future. He commented that such financial products could possibly lower the costs of participating in an asset class while offering conservative returns to investors. He asked Under Secretary Liang to indicate whether stablecoins backed purely by U.S. government debt or highly rated commercial paper carried significant run and prudential risks.
  • Under Secretary Liang stated that Rep. Emmer had raised important issues regarding the pace at which stablecoin technology was evolving and the future of digital assets.
• Rep. Emmer interjected to ask Under Secretary Liang to indicate whether U.S. government debt that underpinned U.S. government money market mutual funds was risky.
  • Under Secretary Liang remarked that such debt did not pose credit risk. She stated however that such debt could pose convertibility and liquidity risks.
• Rep. Emmer asserted that a tokenized money market mutual fund backed by U.S. government debt or highly rated commercial paper would not create prudential risks significant enough to reserve the issuance of all tokenized money market mutual funds to banks. He remarked that there existed a void in the market between stablecoins and security tokens. He contended that a tokenized money market mutual fund could provide an attractive and low-cost financial product with conservative returns. He mentioned how he was working to develop legislation that would permit tokenized money market mutual funds to come to market. He asserted that banks should not be the only financial institutions that were permitted to issue stablecoins.

Rep. Joyce Beatty (D-OH):

• Rep. Beatty remarked that “well thought out” stablecoin regulations would provide legitimacy to the stablecoin space, which would enable stablecoins to grow in popularity. She then discussed how the Tether stablecoin had recently settled lawsuits with the state of New York and the CFTC for lying about its backing reserves. She noted how Tether had claimed that about $30 billion of its reserve assets were invested in commercial paper, which made Tether the seventh largest holder of such debt. She asked Under Secretary Liang to discuss the importance of having stablecoin issuers be transparent with their reserves and having U.S. accredited firms audit stablecoin reserves.
  • Under Secretary Liang stated that while ensuring that stablocin issuers be transparent with their reserves was important, she asserted that transparency alone would not be sufficient to prevent stablecoin runs. She highlighted how money market mutual funds had experienced runs, even though their reserve assets were transparent. She stated that having U.S. Treasuries and high-quality corporate debt back stablecoins would therefore not be sufficient for protecting against runs during periods of economic stress.
• Rep. Beatty then asked Under Secretary Liang to address how the concentration of the ownership of tokens among a small number of parties could impact financial stability.
  • Under Secretary Liang remarked that the current distribution of ownership of tokens did not pose significant risks to financial stability. She stated however that these risks were growing. She discussed how digital asset price volatility was an issue and commented that high amounts of leverage could export these volatility issues in the digital assets market to the traditional financial system.
• Rep. Beatty then mentioned how communities of color that were unbanked and underbanked had been very involved within the digital assets space. She asked Under Secretary Liang to discuss the risks that digital assets could pose to these communities.
  • Under Secretary Liang commented that it was important to distinguish between stablecoins and digital assets when assessing their risks. She remarked that stablecoins had the potential to improve payments by making them cheaper and faster. She added that stablecoins could facilitate cross-border payments in some instances. She noted however that digital assets were not always backed by assets and often had volatile prices. She stated that digital asset investors needed to understand the risks of these investments.

Rep. Barry Loudermilk (R-GA):

• Rep. Loudermilk remarked that policymakers must honestly evaluate the potential benefits and drawbacks of new technologies. He criticized the PWG Report on Stablecoins and asserted that the Report was overly focused on the risks associated with stablecoins. He expressed his hope that the Biden administration would be more embracing of technological innovation. He then mentioned how the PWG Report on Stablecoins did not address the regulatory frameworks that many states had already established for digital assets and highlighted how many state banking regulators supervised stablecoin issuers under money transmitter laws. He noted how the Report called on Congress to establish a federal regulatory structure for stablecoins. He asked Under Secretary Liang to address whether the Biden administration intended to account for existing state regulatory frameworks for digital assets in order to avoid creating redundant requirements.
  • Under Secretary Liang remarked that the PWG Report on Stablecoins had recommended a regulatory framework that would reduce inconsistency and fragmentation and that would build upon state regulatory frameworks. She asserted that the PWG’s regulatory proposal could build upon state money transmitter laws and noted how insured depository institutions could be either federally-chartered or state-chartered. She stated that the PWG’s proposed framework sought to provide regulatory consistency, which she commented would be conducive to innovation. She asserted that significant variations in state laws would hinder the ability of stablecoin issuers to pursue innovation.
• Rep. Loudermilk asked Under Secretary Liang to clarify whether she was proposing that the U.S. permit states to oversee digital assets and also prohibit conflicting state laws.
  • Under Secretary Liang remarked that the PWG Report on Stablecoins sought to build upon existing state regulatory frameworks for digital assets. She highlighted how insured depository institutions could be chartered by either states or the federal government. She also noted how the U.S.’s money transmitter laws were all at the state-level. She stated that the PWG Report on Stablecoins had sought to reduce some of the fragmentation in the financial system. She asserted however that the Report’s approach would also provide flexibility and would not force all stablecoin issuers to comply with traditional banking rules.
• Rep. Loudermilk stated that while it was important to avoid fragmentation and conflicting regulations, he expressed concerns over the application of banking regulations to stablecoin issuers. He asked Under Secretary Liang to indicate whether the Biden administration intended to account for the “significant differences” between insured depository institutions and stablecoin issuers as part of its regulatory approach.
  • Under Secretary Liang answered affirmatively. She stated that banking regulators had flexibility to adjust the supervision and regulation that would account for differences between stablecoin issuers and banks that engaged in lending.

Rep. Juan Vargas (D-CA):

• Rep. Vargas remarked that stablecoins and cryptocurrencies had some potential advantages, particularly related to remittances. He mentored how remittances were very important for his Congressional District and Latin America more broadly. He stated however that stablecoins and cryptocurrencies posed significant risks and highlighted how former President Trump had previously expressed skepticism regarding Bitcoin. He then recounted how banks prior to the U.S. Civil War had issued their own banknotes that were purportedly redeemable for silver or gold. He noted how many banks had issued too many banknotes, which led to bank runs and redemption challenges for banknote holders. He mentioned that the U.S. had enacted the Banking Law of 1863 to establish a national currency and guard against runs on private banknotes. He called the current situation with stablecoins analogous to the situation with the privately issued banknotes that predated the U.S. Civil War. He asked Under Secretary Liang to discuss the risks that stablecoins posed to the monetary system.
  • Under Secretary Liang remarked that stablecoins could pose risks related to the concentration of economic power. She noted how stablecoins as a payment mechanism could scale up very quickly and had the potential to create a private system of money. She suggested that Congress consider this type of risk. She mentioned how the PWG Report on Stablecoins had proposed that banking supervisors consider interoperability requirements for stablecoins. She commented that such interoperability would foster competition within the stablecoin space and reduce the potential for the creation of a private system of money. She also stated that such interoperability would reduce the likelihood that private stablecoins would interfere with the U.S.’s ability to implement monetary policy.
• Rep. Vargas asked Under Secretary Liang to indicate whether the establishment of a U.S. CBDC would address the risks that she had just mentioned.
  • Under Secretary Liang remarked that the potential benefits of a given CBDC would be heavily dependent on the CBDC’s features. She noted how many central banks (including the U.S. Federal Reserve) were currently assessing the feasibility of CBDCs and commented that the introduction of a CBDC could be years away. She indicated however that stablecoins already existed and were growing quickly. She stated that it was therefore difficult for regulators to make policies for existing stablecoins based on non-existent CBDCs.

Rep. Alex Mooney (R-WV):

• Rep. Mooney remarked that the growing popularity of stablecoins presented both regulatory challenges and opportunities. He discussed how stablecoins could provide wider access to the U.S. dollar globally and commented that this access could be especially beneficial for people living in authoritarian countries. He also stated that stablecoins pegged to the U.S. dollar could help to ease cross-border transactions and help the U.S. dollar to maintain its status as the world’s reserve currency. He asked Under Secretary Liang to discuss how the recommendations of the PWG Report on Stablecoins aimed to further the U.S.’s global leadership.
  • Under Secretary Liang remarked that the role of the U.S. and the U.S. dollar in the global financial system was primarily dependent upon the U.S.’s governance structure, rule of law, strength of institutions, economic strength, and financial markets liquidity. She stated that while technology could support the U.S. and the U.S. dollar’s role in the global financial system, she asserted that technology would not play the primary role in ensuring the U.S. and the U.S. dollar’s leadership in the global financial system. She remarked that stablecoins whose value was linked to the U.S. dollar could help to promote the U.S. dollar globally. She commented however that these stablecoins must actually provide stability in order to effectively promote the U.S. dollar globally.
• Rep. Mooney remarked that any stablecoin regulation should not undermine U.S. innovation and asserted that the U.S. ought to embrace cryptocurrencies. He then mentioned how the PWG Report on Stablecoins had called for Congressional action on stablecoin issues. He noted however that the report also stated that FSOC should act on its own to regulate stablecoins in the absence of legislation. He asked Under Secretary Liang to indicate when Congress should pass stablecoin legislation before FSOC would need to pursue their own stablecoin regulations.
  • Under Secretary Liang remarked that FSOC had a responsibility to monitor for risks to the U.S.’s financial stability and to consider actions for reducing such risks. She indicated that while FSOC had some tools to address the stablecoin space, she contended that FSOC action did not constitute a sufficient substitute for Congressional action. She noted that FSOC could not reform the structures of stablecoin issuers. She asserted that any FSOC action on stablecoins would be premature given the rapidly evolving nature of the cryptocurrency space. She also stated that FSOC’s processes for rulemaking would be data driven, deliberate, open to public input, and transparent.
• Rep. Mooney asked Under Secretary Liang to address how the U.S. Department of Treasury would respond to hypothetical stablecoin legislation if it was enacted at the end of 2022.
  • Under Secretary Liang remarked that FSOC would be monitoring risks to financial stability and would take actions if necessary to respond to increasing risks. She reiterated that FSOC action did not constitute a sufficient substitute for Congressional action.
• Rep. Mooney raised concerns that hasty action on stablecoins from financial regulators could do more harm than good. He acknowledged that while Congress might be slow to enact stablecoin policies, he contended that the fact that Congress was popularly elected and deliberative in nature made it the preferable body to enact stablecoin policies.

Rep. Josh Gottheimer (D-NJ):

• Rep. Gottheimer remarked that Congress should work to establish appropriate guardrails around stablecoins and digital assets and to ensure that innovation within the stablecoin and digital asset space occurred within the U.S. He mentioned how he was developing draft legislation that would establish guidelines for stablecoins, including stablecoins issued by insured depository institutions and properly constituted non-bank stablecoin issuers. He stated that establishing appropriate guardrails to mitigate the risk of a run or collapse of a stablecoin issuer should be a primary goal of any stablecoin legislation. He asked Under Secretary Liang to answer whether Congress’s failure to pass meaningful reforms for stablecoins in short order could result in the collapse of an improperly backed stablecoin issuer. He also asked Under Secretary to address how such a collapse could impact the broader cryptocurrency market and ordinary investors.
  • Under Secretary Liang remarked that the continued rapid growth of stablecoins coupled with the existence of large stablecoins lacking proper reserve assets could pose run risks. She stated that these risks could have implications for other short-term funding markets and pose broader systemic financial risks.
• Rep. Gottheimer expressed concerns that Congress’s failure to enact stablecoin legislation in a prompt fashion would lead the U.S. to lose innovative stablecoin issuers, which would adversely impact consumers. He then noted how the PWG Report on Stablecoins had outlined how stablecoins could pose “substantial” illicit finance risks without appropriate oversight. He also mentioned how cryptocurrency scams had resulted in $14 billion in losses in 2021 and how these scams had harmed his constituents. He asked Under Secretary Liang to indicate whether she believed that the only appropriate oversight method for stablecoins would be to ensure that all stablecoin issuers would be subject to bank-like AML and KYC requirements.
  • Under Secretary Liang noted how stablecoin issuers were currently subject to AML and Countering Financing of Terrorism (CFT) regulations under their state money transmitter licenses. She stated that having stablecoin issuers obtain banking charters could increase compliance obligations for the issuers. She remarked that a major issue in illicit finance was inadequate enforcement of existing regulations in other countries. She mentioned how the U.S. Department of Treasury was leading an effort at FATF to try to improve compliance with and enforcement of illicit finance policies in other countries.
• Rep. Gottheimer then remarked that it was important to ensure that privately issued stablecoins did not undermine the global supremacy of the U.S. dollar. He mentioned how the PWG Report on Stablecoins had advocated for an approach in which stablecoins would be issued by insured depository institutions. He also noted how the PWG Report had asserted that well-designed and appropriately regulated stablecoins could support faster, more efficient, and more inclusive payment options. He asked Under Secretary Liang to elaborate on this assertion.
  • Under Secretary Liang remarked that stablecoins had significant potential to improve the speed and efficiency of payments, which would benefit all consumers. She mentioned how these improved payments were being experimented with in cross-border remittances and how consumers were expressing a desire to use stablecoins. She stated that it was therefore important for the stablecoin payment system to be operationally resilient to all kinds of stresses. She commented that the PWG’s recommendations sought to provide such operational resilience.

Note: The Committee took a five-minute recess at this point.

Rep. Warren Davidson (R-OH):

• Rep. Davidson noted how the PWG Report on Stablecoins had acknowledged that some stablecoin arrangements could fall under the SEC’s jurisdiction. He stated that this dynamic risked a siloed approach for addressing specific types of stablecoins. He acknowledged that the most popular stablecoin, Tether, was not regulated and asserted that the SEC ought to scrutinize Tether. He stated however that the second largest stablecoin, the USD Coin (USDC), was a highly regulated asset. He asked Under Secretary Liang to indicate whether New York’s financial services regulatory framework was a deficient means of providing regulatory clarity for trust companies. He highlighted how stablecoins have been approved under New York’s trust laws since 2015 and noted that these stablecoins were subject to financial audits and transparency requirements under these New York laws.
  • Under Secretary Liang remarked that stablecoins were special in that they could serve as both investments and payments instruments. She commented that these two functions made stablecoins different from money market mutual funds and other types of investment products. She discussed how New York’s laws applied to stablecoins as investments and sought to provide some transparency around the reserve assets backing stablecoins. She noted however that New York lacked the authority to look into the other functions of stablecoins that enabled stablecoins to function as means of payment.
• Rep. Davidson discussed how the major credit card payments providers (such as Visa and MasterCard) were effectively responsible for the U.S.’s payment system given how difficult it was to pay for goods and services in cash. He stated that this dynamic had created incentives for the development of new payment systems. He commented that the fact that digital assets were not subject to the Dodd-Frank’s Durbin Amendment made transactions of digital assets much cheaper than transactions within the traditional payment system. He also stated that stablecoins were not great investments because they tended to be linked to the value of the U.S. dollar. He noted however that stablecoins could be backed by other assets, such as the stock of a given company. He commented that many consumers might want a stablecoin backed by a company’s stock because they viewed the company’s stock as being better able to keep pace with inflation than cash. He indicated that stablecoins currently could not be backed by a company’s stock in the U.S. He asked Under Secretary Liang to answer whether a token that was backed by a company’s stock could constitute a stablecoin.
  • Under Secretary Liang remarked that the value of a stablecoin was distinct in that its value was designed to be stable and close to the U.S. dollar. She stated that the value of a company’s stock would be more volatile, which could undermine its ability to support transactions.
• Rep. Davidson interjected to comment that while a stock’s value was volatile relative to the U.S. dollar, he stated that a stock’s value might not be as volatile relative to inflation. He asserted that the U.S. dollar did not constitute a good metric for stablecoins and contended that the value of stablecoins should be stable relative to its backing assets. He remarked that the recommendations of the PWG Report on Stablecoins would merely protect large banks 
• Note: Rep. Davidson’s question period time expired here.

Rep. Al Lawson (D-FL):

• Rep. Lawson discussed how Black and Latino communities were driving the mainstream adoption of cryptocurrencies and noted how cryptocurrency ownership rates were greater in these communities as compared to White communities. He commented that while this trend was positive, he stated that the trend signaled the need for greater financial literacy and skills training. He asked Under Secretary Liang to provide suggestions for the federal government to take a more proactive approach to position historically disadvantaged groups to compete in innovative fields and to foster additional equity.
  • Under Secretary Liang mentioned how the U.S. Department of Treasury’s Financial Literacy and Education Commission had recently announced a new digital assets initiative. She stated that there existed a need and an opportunity to provide education about digital assets and noted that this initiative would be a cross-government initiative. She also discussed how the CFPB was taking enforcement actions against misleading advertising within the digital assets space and how other market regulators were taking actions to combat fraud and protect investors within this space.
• Rep. Lawson then noted how financial regulation experts had stated that an effective payment settlements system required four features: lower fees, predictability, exchangeability for goods and services, and consistent high speed. He indicated that most financial regulation experts did not believe that stablecoins currently provided the aforementioned features. He asked Under Secretary Liang to indicate whether stablecoins constituted an effective means of settling payments (as compared to the traditional financial system).
  • Under Secretary Liang remarked that stablecoins had developed “very quickly” and were continuing to develop. She commented that there existed incentives for developers to make stablecoins efficient with strong features. She stated that it was still difficult to assess the current capabilities of stablecoins given how stablecoins had yet to be tested during a period of stress. She contended that there needed to be more oversight of the operational and convertibility risks of stablecoins to function as payments. She remarked however that stablecoins had significant potential to provide a cheaper, faster, and 24/7 payments system.
• Rep. Lawson asked Under Secretary Liang to address whether it was necessary for stablecoin issuers to meet the same capital requirements as traditional insured depository institutions if the majority of the reserve assets were backed by cash.
  • Under Secretary Liang remarked that risk-based capital requirements would be lower for stablecoin issuers that only held high quality liquid backing assets.

Rep. Ted Budd (R-NC):

• Rep. Budd noted how the PWG Report on Stablecoins had stated that federal agencies and FSOC should apply their existing authorities to the stablecoin space absent federal legislation. He posited a hypothetical scenario in which FSOC deemed certain stablecoin issuers to be systemically important financial institutions (SIFIs) as a result of Congressional inaction on stablecoins. He asked Under Secretary Liang to indicate whether such a hypothetical scenario could occur.
  • Under Secretary Liang remarked that it would be premature for FSOC to designate a stablecoin issuer as a SIFI. She discussed how FSOC had a responsibility to monitor risks to financial stability and noted how FSOC had been monitoring digital assets. She stated however that FSOC’s tools were limited. She asserted that SIFI designation was not a substitute for requiring stablecoin issuers to be insured depository institutions. She remarked that FSOC’s future application of its authorities would need to be fact driven and deliberate. She concluded that FSOC would not designate a stablecoin issuer as a SIFI “in the current environment.”
• Rep. Budd then noted how U.S. Federal Reserve Chairman Jerome Powell had recently stated that well-regulated privately issued stablecoins could coexist alongside a U.S. Federal Reserve-issued CBDC. He asked Under Secretary Liang to indicate whether she and the U.S. Treasury Department agreed with Chairman Powell’s statement.
  • Under Secretary Liang expressed agreement with U.S. Federal Reserve Chairman Jerome Powell’s statement that well-regulated and privately issued stablecoins could coexist alongside a U.S. Federal Reserve-issued CBDC. She stated that the regulation of stablecoins would neither preclude the introduction of a CBDC nor determine the features of a CBDC. She commented that the features of CBDCs would likely influence the structures of stablecoins.
• Rep. Budd then discussed how there appeared to exist some disagreement among regulators as to whether stablecoins constituted securities. He stated that stablecoins that were backed by quality assets should not constitute securities under the test provided in the U.S. Supreme Court’s SEC v. W. J. Howey Co. decision (also known as the Howey test). He asked Under Secretary Liang to answer whether stablecoins ought to be treated as securities.
  • Under Secretary Liang remarked that she would need to defer to the SEC and the CFTC with regard to their views of the applicability of their laws and regulations. She stated that stablecoins had the features of numerous financial products and services and commented that regulators ought to be cognizant of these different features in their oversight of stablecoins.

Rep. Ritchie Torres (D-NY):

• Rep. Torres stated that 100 percent of stablecoin reserves should consist of cash and cash equivalents. He asked Under Secretary Liang to indicate whether she agreed with his statement.
  • Under Secretary Liang answered affirmatively.
• Rep. Torres expressed agreement with the concerns of the PWG Report on Stablecoins that failing to regulate and fully back stablecoins would increase the likelihood that stablecoins would pose systemic risks, especially in light of the growing adoption of stablecoins as a means of payment. He stated however that that banking regulation constituted a “blunt instrument” for managing the stablecoin risks. He called for “common sense” rules requiring transparency, accountability, reporting, auditing, liquidity standards, and redemption rights. He asserted that the benefits of properly regulated stablecoins would outweigh their risks. He also stated that the ability to transact U.S. dollars via blockchains could lead to a better, cheaper, and faster payments system. He asked Under Secretary Liang to indicate whether U.S. dollar-backed stablecoins had a role to play in preserving the U.S. dollar’s primacy.
  • Under Secretary Liang answered affirmatively.
• Rep. Torres then mentioned how former Acting Comptroller of the Currency Brian Brooks had previously told the Committee in December 2021 that the Circle, which is the issuer of the USDC stablecoin, had applied for a bank charter with OCC. He noted that former Acting Comptroller Brooks had stated that Circle was unlikely to receive their bank charter. He asked Under Secretary Liang to answer whether the OCC should grant a banking charter to Circle.
  • Under Secretary Liang stated that she did not know the details of Circle’s bank charter application and commented that she could therefore not comment on the specific application. She noted how the recommendation of the PWG Report on Stablecoins was for stablecoin issuers to become insured depository institutions that would be subject to regulations based on their particular activities.
• Rep. Torres highlighted how the PWG had recommended that stablecoin issuers operate within the regulated banking system and stated that denying stablecoin issuers of banking charters appeared to be incongruent with the recommendation. He then posited a hypothetical stablecoin issuer that had verifiably backed U.S. dollar reserves that could be redeemed on a 1:1 basis. He stated that this stablecoin issuer would be operating differently from a bank if it had no fractionalization of reserves and engaged in no lending. He commented that this stablecoin issuer should therefore be regulated differently than a bank. He asked Under Secretary Liang to indicate whether a stablecoin issuer with no fractionalization of reserves and no lending activity ought to be regulated differently than a bank.
  • Under Secretary Liang acknowledged that the lack of lending made stablecoin issuers different from commercial banks. She remarked that the proposal from the PWG Report on Stablecoins relied upon the flexibility of current banking regulation in order to distinguish between activities of stablecoin issuers and banks. She noted that the PWG’s proposal would not subject stablecoin issuers that did not make loans to regulations meant for lending institutions. She remarked however that stablecoin issuer regulations should be about more than just the redemption and creation of stablecoins. She stated that stablecoin issuer regulations should also address the storage, transfer, and usage of stablecoins for payments.
• Rep. Torres interjected to note how the reserves of the stablecoin Tether had consisted of non-transparent commercial paper. He asserted that the public had the right to know the identities of the companies whose debt was used to back Tether and where these companies were located. He noted how Tether had become one of the largest commercial paper holders in the world. He posited a hypothetical rule that would require stablecoins to have reserves that were either 100 percent cash or cash equivalents. He asked Under Secretary Liang to address how such a rule would impact the commercial paper market.
  • Under Secretary Liang commented that the commercial paper space was similar to the money market mutual fund space. She highlighted that there were both government and prime money market mutual funds and noted that the prime money market mutual funds had reduced their holdings of commercial paper as a result of new regulations. She noted how this change had led commercial paper issuers to seek out new investors. She stated that markets and issuers over time would find the right investors and reduce systemic risks.

Rep. David Kustoff (R-TN):

• Rep. Kustoff asked Under Secretary Liang to provide a general overview of the uses and benefits of stablecoins.
  • Under Secretary Liang remarked that stablecoins reflected a new technology and indicated that the technology itself could be complicated. She stated that stablecoins offered the ability to transact payments instantaneously and 24/7 on a public blockchain, which made the transactions immutable. She commented that stablecoins offered efficient, cheaper, and faster payments. She further stated that the technology underlying stablecoins would continue to evolve and support future innovations. She concluded that a stablecoins were fundamentally an alternative means of payments.
• Rep. Kustoff stated that “heavy handed” regulation of the technology underlying stablecoins could stifle stablecoin regulation. He asked Under Secretary Liang to indicate whether she agreed with his statement.
  • Under Secretary Liang expressed agreement with Rep. Kustoff’s statement. She remarked that policymakers must work to provide the appropriate level of regulation over stablecoins.
• Rep. Kustoff then discussed how the Chinese Communist Party (CCP) had sought to crackdown on or outright prohibit certain digital assets within China. He asked Under Secretary Liang to discuss the consequences of China’s crackdown on digital assets and to identify lessons that the U.S. could learn from China’s actions.
  • Under Secretary Liang remarked that China was introducing a digital yuan to reclaim control over their currency that they had lost to private firms that offered digital assets. She stated that China’s experience launching a CBDC will provide important lessons to other countries. She then discussed how China was offering incentives to get people to use the digital yuan. She remarked that these developments were reflecting a change in technology for how payments would work and commented that consumers would dictate the future direction of payments. She noted however that China tended to not value privacy less than the U.S. She commented that this difference between the two countries might limit the applicability of the lessons learned from China’s adoption of a CBDC. She remarked however that the provision of CBDCs and the introduction of custodial wallets would provide lessons to other countries as they considered whether to introduce a CBDC.

Rep. Stephen Lynch (D-MA):

• Rep. Lynch discussed how the U.S. was currently experiencing elevated inflation and noted how the U.S. Federal Reserve had announced that it would increase the federal funds rate over the coming months in order to control this inflation. He raised concerns that the U.S. Federal Reserve’s efforts to control inflation could be undermined by the widespread introduction of stablecoins.
  • Under Secretary Liang remarked that the rapid increase in scale of a private digital currency could impact the U.S. Federal Reserve’s ability to control monetary policy. She stated that the U.S. Federal Reserve would be limited in its abilities to address such a private digital currency and commented that this limited ability would constitute a prudential risk.
• Rep. Lynch asked Under Secretary Liang to address the feasibility of permitting the U.S. Federal Reserve to restrict the issuance of stablecoins during periods of high inflation.
  • Under Secretary Liang remarked that permitting the U.S. Federal Reserve to restrict the issuances of stablecoins during periods of high inflation would constitute an overreach because it would mix monetary policy and financial institution regulation. She stated however that the U.S. Federal Reserve would likely be cognizant of the stablecoin landscape when deciding whether to issue a CBDC and how such a CBDC would coexist with private stablecoins.
• Rep. Lynch asked Under Secretary Liang to indicate whether the U.S. Federal Reserve’s issuance of a CBDC would diminish the value of many private stablecoins, especially with respect to the payment system.
  • Under Secretary Liang remarked that the design of a potential CBDC carried numerous implications for how the CBDC might either coexist or compete with private stablecoins. She stated that the U.S. Federal Reserve would need to determine where they would hold their CBDC accounts, whether there would be caps on these accounts, and whether their CBDCs would be interoperable with private stablecoins. She mentioned how the U.S. Federal Reserve was currently exploring the feasibility of a CBDC and had identified multiple policy issues surrounding CBDCs.

Rep. Trey Hollingsworth (R-IN):

• Rep. Hollingsworth expressed his initial dismay with the recommendation of the PWG Report on Stablecoins that only banks should be permitted to issue stablecoins and that these stablecoins should be subject to prudential regulation. He expressed his content however with Under Secretary Liang’s comments during the hearing that the full set of bank regulations did not need to be applied to stablecoin issuers that exclusively engaged in stablecoin issuance. He expressed support for having “good” stablecoin issuers face lower regulatory standards provided that these issuers were fully reserving for the issued assets. He asked Under Secretary Liang to discuss the types of assets that should qualify as high-quality assets for the purposes of stablecoin regulation.
  • Under Secretary Liang remarked that the high-quality assets that would allow for investors and consumers to redeem their stablecoins should be cash and U.S. Treasuries. She further stated that stablecoins within the formal banking system could have central bank reserves as a backing asset. She commented that central bank reserves were the highest quality assets and did not have convertibility issues. She also remarked that she did not intend to narrow the definition of what should constitute a high-quality asset.
• Rep. Hollingsworth stated that the assets backing stablecoins should be of a limited maturity in addition to being high quality. He commented that ensuring that reserve assets had near-term maturity at pat would be important for addressing run risks.
  • Under Secretary Liang stated that having the backing assets with short-term maturities was an important consideration. She noted how shorter-term U.S. Treasuries tended to convert into cash much more quickly as compared to longer term U.S. Treasuries.
• Rep. Hollingsworth remarked that the U.S. did need to subject stablecoin issuers to prudential regulation if the issuers exclusively focused on stablecoin issuance and had high quality and near-term maturity backing assets.
  • Under Secretary Liang remarked that there were regulations related to the operational risks of stablecoins for storing and transferring the stablecoins as payments. She stated that these regulations went beyond the consumer protections provided under state money transmitter laws.
• Rep. Hollingsworth mentioned how there were many businesses that were not subject to full prudential banking regulation and that were engaged in the payments space.
  • Under Secretary Liang noted that the other service providers in the recommendation of the PWG Report on Stablecoins were not required to be insured depository institutions. She stated that the Report’s recommendations only applied to the issuers of stablecoins.
• Rep. Hollingsworth reiterated his contention that non-bank stablecoin issuers should be permitted to exist provided that these issuers had their assets fully backed, their assets were of a certain quality, and their assets did not exceed a certain maturity length.

Rep. Sean Casten (D-IL):

• Rep. Casten remarked that there was a difference between whether a given asset could be used as a currency and whether a given asset was actually being used as a currency. He noted how very few parties were currently accepting digital currencies (including stablecoins) for means of payment. He commented that this dynamic was unsurprising given how people could choose to use U.S. dollars if they wanted a U.S. dollar-denominated currency. He stated that the U.S. dollar’s value as a currency derived from the fact that it was used for paying taxes and it possessed the full faith and credit of the U.S. government. He remarked that full faith and credit of U.S. dollar-backed stablecoins would require robust stablecoin management and reserve rules, which already existed for money market mutual funds. He asked Under Secretary Liang to indicate whether there existed a reason for not applying the current fiscal protections for money market mutual funds to stablecoin markets.
  • Under Secretary Liang remarked that the protections that applied to money market mutual funds would also apply to stablecoins to the extent that the stablecoins offered a stable redemption. He also stated that the ability of stablecoins to be used as payments raised a separate set of issues from money market mutual funds.
• Rep. Casten interjected to note that stablecoin issuers currently offered easier cross-border remittances, faster payments, and lower fees. He asked Under Secretary Liang to clarify whether she believed that these three features did not enable stablecoin users to evade existing AML and KYC rules.
  • Under Secretary Liang remarked that the aforementioned features did not enable stablecoin users to evade existing AML and KYC rules.
• Rep. Casten asked Under Secretary Liang to address what a well-regulated stablecoin would provide that a CBDC would not provide.
  • Under Secretary Liang noted that a CBDC would not be backed by high quality assets that were not central bank reserves. She also discussed how there currently existed private stablecoins that were rapidly growing in popularity and noted that the U.S. was currently not issuing a CBDC. She stated that private stablecoins could be either substitutes or compliments for CBDCs and added that private stablecoins could go away following the introduction of a CBDC.
• Rep. Casten interjected to acknowledge that his question period time had expired.

Rep. Anthony Gonzalez (R-OH):

• Rep. Gonzalez remarked that a well-regulated private stablecoin provided several potential advantages over a CBDC, including privacy and innovation. He elaborated that private sector innovation tended to be more efficient and economical than public sector innovation. He then expressed interest in where the primary prudential oversight of stablecoins ought to exist. He mentioned how there were some proposals that would make the U.S. Treasury Department the primary prudential regulator of stablecoins and commented that this would be an “odd fit.” He asked Under Secretary Liang to opine on these proposals and to indicate where she believed primary prudential regulation of stablecoins ought to be housed within the federal government.
  • Under Secretary Liang first expressed agreement with Rep. Gonzalez’s description of the advantages of private stablecoins over CBDCs. She then stated that the U.S. Treasury Department was not set up to regulate financial institutions. She noted that the OCC, U.S. Federal Reserve, and the FDIC were all designed to regulate financial institutions. She remarked that requiring stablecoin issuers to be insured depository institutions would have the regulator of the stablecoin issuer be based on the insured depository institution’s charter.
• Rep. Gonzalez then mentioned how Under Secretary Liang had stated that the recommendation of the PWG Report on Stablecoins that stablecoin issuers be insured depository institutions was meant to ensure safety and soundness and to provide consumers with redemption guarantees. He noted how Under Secretary Liang had also stated that stablecoin issuers with high quality reserves and strong redemption rights might not need to become insured depository institutions. He asked Under Secretary Liang to confirm these statements.
  • Under Secretary Liang remarked that a stablecoin issuer within an insured depository institution framework that held capital and was subject to liquidity standards could have reserve assets that were not 100 percent cash. She stated that a stablecoin issuer without adequate capital or liquidity would need full cash backing.
• Rep. Gonzalez remarked that it was possible to have stablecoin issuers that were not regulated as insured depository institutions. He stated that this dynamic would be important to ensure that cryptocurrencies could continue to provide diversity and inclusion benefits. He highlighted how diverse communities had disproportionately adopted cryptocurrencies, which was in contrast to other financial innovations. He attributed this adoption of cryptocurrencies in these communities to low barriers to entry, the lack of minimum balance requirements, and the lack of trust in traditional banks. He raised concerns that requiring stablecoin issuers to be insured depository institutions would push these communities into banking relationships that they did not trust or that did not make sense financially.

Rep. Alma Adams (D-NC):

• Rep. Adams noted how the PWG Report on Stablecoins suggested that federal prudential regulators should oversee stablecoins. She asked Under Secretary Liang to indicate whether she was concerned that bringing stablecoins into the prudential regulatory framework while leaving other cryptocurrencies outside of this framework could create confusion.
  • Under Secretary Liang remarked that there existed a distinction in the minds of consumers and investors between unbacked crypto assets and stablecoins. She stated that policymakers could work to reinforce this distinction with stablecoin regulation so that the public could have confidence that stablecoins actually had stable value. She indicated that she had no concerns that stablecoin regulation would introduce confusion.
• Rep. Adams then asked Under Secretary Liang to provide recommendations for how Congress could work with the Biden administration, the digital assets industry, and other stakeholders to provide the digital assets industry with the necessary tools to grow in a strong and safe manner.
  • Under Secretary Liang mentioned how several members of Congress had introduced legislative proposals for making stablecoins more stable. She commented that there was a general acceptance as to risks that stablecoins could pose to the payments system and noted how there was a discussion occurring about how to address these risks. She stated that there appeared to exist a common acceptance regarding the need for stablecoin regulation and a widespread belief that consistent regulation would best foster innovation and competition within the stablecoin space. She remarked that Congress would need to balance the benefits of stablecoin innovation against the risks that stablecoins could pose. She expressed the U.S. Treasury Department’s willingness to work with Congress on this effort.

Rep. John Rose (R-TN):

• Rep. Rose asked Under Secretary Liang to indicate whether stablecoins would be developed in other countries if Congress were to pass a U.S. ban on stablecoins.
  • Under Secretary Liang answered affirmatively.
• Rep. Rose asked Under Secretary Liang to indicate whether stablecoins would be pegged to currencies other than the U.S. dollar if Congress were to pass a U.S. ban on stablecoins.
  • Under Secretary Liang commented that the use cases for stablecoins would determine what assets stablecoins would be pegged to. She stated that the U.S. dollar’s attractiveness as a backing asset was based on the strength of the U.S.’s government and economy. She remarked that the creation of stabecoins that were backed by currencies other than the U.S. dollar would result in lost opportunities for the U.S. dollar in the global economic system.
• Rep. Rose discussed how the U.S. dollar served as the world’s dominant reserve currency and noted how approximately 59 percent of all foreign exchange reserves were held in U.S. dollars. He indicated that the five U.S. dollar-pegged stablecoins currently represented 94 percent of the stablecoin market. He asked Under Secretary Liang to discuss the benefits of having stablecoins that were pegged to the U.S. dollar as opposed to other currencies.
  • Under Secretary Liang remarked that the fact that the major stablecoins had their values pegged to the U.S. dollar reflected the U.S. dollar’s dominance as a reserve currency. She stated that policies to promote the U.S. dollar’s strength were critical. She predicted that stablecoins would continue to peg their value to the U.S. dollar so long as the U.S. dollar remained strong.
• Rep. Rose interjected to ask Under Secretary Liang to indicate whether having a majority of stablecoins pegged to the U.S. dollar might help to preserve the U.S. dollar’s status as the world’s reserve currency.
  • Under Secretary Liang answered affirmatively.
• Rep. Rose asked Under Secretary Liang to indicate whether there currently existed stablecoins that referenced other currencies, such as the Chinese Yuan or the Euro.
  • Under Secretary Liang noted how China’s central bank has issued a digital currency.
• Rep. Rose then mentioned how the U.S. Federal Reserve’s recent staff working paper on stablecoins had stated that stablecoins had served as a digital safe asset while more speculative crypto assets had been in temporary freefall during the crypto market crashes of March 2020 and May 2021. He noted that this paper asserted that these episodes demonstrated the potential for stablecoins to serve as a “digital safe haven” during market distress. He noted how Under Secretary Liang had told the Committee that stablecoins may pose systemic risks. He asked Under Secretary Liang to indicate the current size of the market for stablecoins.
  • Under Secretary Liang indicated that the current size of the market for stablecoins was approximately $175 billion. She stated however that stablecoins were used in many transactions and that their value did not fully represent their importance within the crypto asset market.
• Rep. Rose asked Under Secretary Liang to indicate the current size of the market for money market mutual funds.
  • Under Secretary Liang estimated that the money market mutual fund industry was currently worth around $4 trillion.
• Rep. Rose asked Under Secretary Liang to indicate the current size of the market for U.S. Treasuries.
  • Under Secretary Liang stated that the current size of the market for U.S. Treasures was “much larger” than the current size of the market for stablecoins.
• Rep. Rose asked Under Secretary Liang to indicate whether the stablecoin market was actually large enough to pose systemic risks. He also asked Under Secretary Liang to address whether the crypto market crashes of March 2020 and May 2021 demonstrated that adequately capitalized stablecoins with appropriate safeguards in place could serve as a “digital safe haven” during periods of economic stress and provide a level of stability that was on par with traditional forms of safe value.
  • Under Secretary Liang indicated that the PWG Report on Stablecoins did not suggest that stablecoins were currently a threat to financial stability and posed systemic risk. She stated however that the ability of stablecoins to scale up rapidly could lead them to pose systemic risks.

Rep. Sylvia Garcia (D-TX):

• Rep. Garcia asked Under Secretary Liang to indicate how many consumers were actually using stablecoins.
  • Under Secretary Liang stated that she would need to follow up with Rep. Garcia on her question.
• Rep. Garcia asked Under Secretary Liang to indicate how many investors were involved with stablecoins.
  • Under Secretary Liang stated that she did not know how many investors were involved with stablecoins.
• Rep. Garcia noted that while there has been discussion about the significant growth of stablecoins at the hearing, she stated that the actual number of people that were using and investing in stablecoins remained unknown. She then mentioned how the PWG Report on Stablecoins had called for legislation that would require stablecoin issuers to be registered as insured depository institutions. She expressed interest in how this requirement would prevent smaller issuers from participating in market activity. She raised concerns that this approach could create market entry barriers to underserved populations and smaller stablecoin issuers. She asked Under Secretary Liang to provide recommendations for ensuring that underserved populations and smaller stablecoin issuers would be able to participate in the stablecoin market.
  • Under Secretary Liang acknowledged that the proposal requiring that stablecoin issuers be insured depository institutions would make it more expensive for parties to enter this business. She stated however that new types of bank charters could be more flexible to allow for more stablecoin issuers to become insured depository institutions.
• Rep. Garcia interjected to ask Under Secretary Liang to address how policymakers could ensure that the stablecoin market would actually be accessible and not prevent underserved populations and smaller stablecoin issuers from entering the market. She noted that while supporters of stablecoins often highlighted their ability to facilitate cross-border remittances, she stated that more work would need to be done before such remittances became widely available. She also raised concerns over the conversion fees and the ability to access funds in the context of cross-border stablecoin remittances.
  • Under Secretary Liang mentioned how stablecoin issuers and digital wallet providers had launched pilot programs to test the feasibility of cross-border remittances.
• Rep. Garcia interjected to note that many people lacked digital wallets, cellular phones, and internet accessibility. She stated that the failure to account for people with technological access would reinforce existing inequities.
  • Under Secretary Liang expressed agreement with Rep. Garcia’s concerns that not all households were currently able to make use of stablecoins. She remarked that fostering greater competition would be the best way to improve the payment system and stated that stablecoins were a competitor to the existing payment system. She commented that this competition could lead to a payment system that met the needs of all consumers.

Rep. Bryan Steil (R-WI):

• Rep. Steil remarked that digital assets were already transforming the U.S.’s financial system and stated that Congress had an opportunity to put the legal foundations in place that would support continued innovations and long-term growth in the U.S. He raised concerns that ill-fitted regulatory constructs could drive digital assets innovation abroad. He noted how digital asset firms tended to be state-regulated and remarked that several states had developed “pretty sophisticated” approaches to digital assets regulation. He mentioned how New York had established the BitLicense program, which enabled digital asset firms to apply for limited purpose trust charters under the state’s laws. He noted that the PWG Report on Stablecoins did not significantly address state regulatory frameworks for digital assets. He asked Under Secretary Liang to confirm that the PWG had consulted with state regulators and had analyzed state regulatory frameworks for digital assets in developing its Report on Stablecoins.
  • Under Secretary Liang testified that the PWG did consider state regulatory frameworks for digital assets in developing its Report on Stablecoins.
• Rep. Steil commented however that the PWG Report on Stablecoins did not include an analysis of state regulatory frameworks for digital assets.
  • Under Secretary Liang confirmed Rep. Steil’s comment.
• Rep. Steil asked Under Secretary Liang to indicate whether state-chartered depository institutions have a primary federal regulator and are subject to federal banking regulations.
  • Under Secretary Liang stated that federal banking regulations can apply to banks that were state-chartered. She noted that some of the New York BitLicense recipients were limited purpose trust charter banks.
• Rep. Steil mentioned how Under Secretary Liang had previously stated that the PWG’s approach toward stablecoins was built upon previous state laws. He stated however that the PWG Report on Stablecoins did not engage in significant analysis of state laws and was mainly focused on providing federal oversight of stablecoins. He asked Under Secretary Liang to clarify her previous statement that the PWG’s approach toward stablecoins was built upon previous state laws.
  • Under Secretary Liang noted how all stablecoin issuers and custodial wallet providers were currently money services businesses, which meant that they were subject to state money transmitter laws. She remarked that the PWG’s proposal would not replace the state money transmitter license with a federal money transmitter license. She stated however that the proposal could require a set of risk management standards that could apply to custodial wallet providers. She commented that this expansion of risk management standards would build upon state regulatory frameworks. She also mentioned how insured depository institutions could be either state-chartered or federally-chartered. She noted however that state-chartered banks still had some level of federal oversight.
• Rep. Steil asked Under Secretary Liang to indicate how she would propose that the U.S. account for existing state-based financial institutions in its pursuit of new stablecoin policies.
  • Under Secretary Liang remarked that the U.S. accounting for existing state-based financial institutions in its pursuit of new stablecoin policies would require further consideration. She noted how some state financial institution charters currently did not provide the supervisors of those institutions with sufficient visibility into the broader payment arrangement. She stated that the U.S. Department of Treasury was looking to address this “gap” in supervision.

Rep. Madeleine Dean (D-PA):

• Rep. Dean mentioned how she had previously raised concerns over the cryptocurrency market’s volatility during the Committee’s December 2021 hearing on digital assets. She asked Under Secretary Liang to indicate whether the U.S. was at risk for an economic bubble caused by volatility within the cryptocurrency market.
  • Under Secretary Liang remarked that the price volatility of many digital assets was very high and commented that this high volatility was a particular issue with regard to unbacked digital assets. She stated that investors needed to understand whether digital asset investments were appropriate for them. She then discussed how the costs of an economic bubble were high when the prices of the underlying assets were supported by leverage. She stated that investors in crypto assets were currently bearing the losses and gains largely on their own. She testified that the U.S. Treasury Department was concerned that poorer cryptocurrency investors would bear the costs of a decline in prices resulting in an economic bubble bursting. She remarked however that declines in digital asset prices would have less severe implications for the broader economy and vulnerable consumers.
• Rep. Dean then asked Under Secretary Liang to further discuss the role that leverage played in digital asset markets in terms of fostering instability.
  • Under Secretary Liang remarked that the topic of leverage in digital asset markets was of “high importance” because high leverage in a volatile asset could cause problems for the financial system and the economy. She testified that FSOC was monitoring this issue. She stated that it remained too early to provide conclusions on the Biden administration’s assessment of the role that leverage played in digital asset markets.
• Rep. Dean then discussed how the digital assets investor base was “quite diverse” and expressed concerns that digital assets market volatility might therefore disproportionately impact minority communities. She asked Under Secretary Liang to provide demographic information about the digital assets investor base.
  • Under Secretary Liang mentioned how some surveys suggested that the digital assets investor base tended to be disproportionately composed of minorities and lower income individuals. She stated that this dynamic raised concerns that volatility in the digital assets markets would especially harm such individuals. She remarked that the digital assets space was not regulated and that demographic information about digital assets investors remained very limited.

Rep. William Timmons (R-SC):

• Rep. Timmons asked Under Secretary Liang to answer whether stablecoins ought to be regulated exclusively within the traditional banking system.
  • Under Secretary Liang indicated that the recommendation of the PWG Report on Stablecoins was to require stablecoin issuers to be insured depository institutions with a “flexible regulatory framework.” She elaborated that this flexible framework would be lower cost for stablecoin issuers with simpler business models.
• Rep. Timmons asked Under Secretary Liang to indicate whether there were other regulatory approaches discussed in the PWG Report on Stablecoins.
  • Under Secretary Liang testified that the PWG did consider other regulatory approaches in its development of a recommendation. She stated that the PWG had focused on providing a clear, consistent, and comprehensive regulatory framework for stablecoins. She reiterated that the regulatory framework for insured depository institutions did provide some degree of flexibility for stablecoin issuers. She also testified that no one at the PWG had recommended that stablecoin issuers be regulated in the same way as traditional commercial banks. She commented that insured depository institution charters contained enough flexibility to provide some supervision and regulation that would be adjusted for the risks of the activities of the stablecoin issuer.
• Rep. Timmons expressed concerns that the regulation of products under regimes designed for entirely different products was an ill-advised approach. He asked Under Secretary Liang to identify the obstacles that stablecoin issuers would likely face if the PWG’s recommendation to regulate stablecoin issuers like banks were to come to fruition.
  • Under Secretary Liang stated that regulators would be responsible for reducing the costs for stablecoin issuers that were not traditional banks. She commented that regulators would have some flexibility to reduce regulatory costs. She remarked that the PWG had recommended a bank-like regulatory framework for stablecoins because the stablecoin function of providing payments was a bank-like function. She noted however that the PWG had also recognized that stablecoin issuers were unlikely to make loans, extend credit, and engage in fractional reserve banking. She commented that this dynamic meant that stablecoin issuers could receive some relief from the regulatory requirements that were traditionally imposed upon banks engaged in lending activities.
• Rep. Timmons commented that Under Secretary Liang was making many assumptions regarding the ability of regulators to provide tailored oversight of stablecoin issuers. He stated that Congress should craft policies designed specifically to address stablecoin issuers.
  • Under Secretary Liang remarked that Congress should consider whether new policies were appropriate for stablecoin issuers. She stated that the PWG was trying to promote a more consistent regulatory framework for stablecoins, which made the PWG less inclined to propose a new regulatory framework.

Rep. Rashida Tlaib (D-MI):

• Rep. Tlaib remarked that the U.S. must ensure that there were adequate protections in place as FinTech became an entry point into the financial system for unbanked and underbanked Americans.
• Note: Rep. Tlaib’s internet connection experienced technical difficulties at this point.

Full Committee Vice Chair Jake Auchincloss (D-MA):

• Vice Chair Auchincloss discussed how there were concerns that stablecoins posed prudential risks and noted that these prudential risks involved run risks and payment risks. He noted that Under Secretary Liang had suggested that run risks could be mitigated through subjecting stablecoin issuers to a registration process in order to provide transparency. He noted however that Under Secretary Liang had suggested that payment risks would need to be mitigated through requiring stablecoin issuers to become insured depository institutions. He expressed confusion regarding this proposal and stated that the use of stablecoins as payments was mainly confined to the crypto economy. He asked Under Secretary Liang to explain why there needed to exist a federal regulation around a medium of exchange that mainly existed within the crypto economy. He further commented that other types of FinTech innovations, such as Venmo and PayPal, had not been subject to this type of federal regulation.
  • Under Secretary Liang remarked that the premise underlying the PWG Report on Stablecoins was that there would be continued efforts to convert stablecoins into fiat currencies and that stablecoins would work both inside and outside of the crypto economy. She noted how cross-border remittances were an example where stablecoins would be converted both into and out of fiat currencies. She remarked that stablecoins would therefore become a part of the general payments system.
• Vice Chair Auchincloss interjected to encourage policymakers to further investigate the premise underlying the PWG Report on Stablecoins. He asserted that stablecoin issuers did not necessarily need to be insured depository institutions and raised concerns that such a requirement could lead to regulatory capture by the incumbent banks. He then noted how Under Secretary Liang had previously stated that stablecoins did not pose systemic risks at the current time. He commented that FSOC ought to persistently monitor the stablecoin space and flag if and when stablecoins were to pose systemic risks. He also mentioned how Under Secretary Liang had suggested that interoperability between stablecoins could help to mitigate these systemic risk concerns. He asked Under Secretary Liang to recommend additional measures for mitigating systemic risk concerns within the stablecoin space. He also asked Under Secretary Liang to indicate whether a “firewall” could be established to identify when systemic risk concerns became material.
  • Under Secretary Liang noted how regulators had traditionally sought to identify vulnerabilities in their efforts to guard against systemic risks and identified leverage as one such vulnerability. She stated that the ability to measure and quantify leverage in the stablecoin system could provide early warnings of emerging systemic risks. She commented however that such measurement and quantification was difficult to do in the current environment.
• Vice Chair Auchincloss remarked that a registration process for stablecoin issuers could be used to track leverage in the stablecoin space.
  • Under Secretary Liang clarified that the stablecoin itself as registered was not leveraged. She indicated that the use of the stablecoin as collateral for lending was the aspect of stablecoins that enabled leverage.
• Vice Chair Auchincloss commented that custody wallets would therefore need to be registered in order to track leverage in the stablecoin space. He then asked Under Secretary Liang to indicate whether the U.S. needed a CBDC in order to address the risk of the U.S. dollar losing its status as the world’s reserve currency. He expressed agreement with Under Secretary Liang’s previous comments regarding how the U.S. dollar’s status as the world’s reserve currency mainly derived from the strength of the U.S. government and economy. He asked Under Secretary Liang to indicate whether the U.S. could accomplish many of the objectives of a CBDC through better stablecoin regulation and reinforcing the U.S.’s existing strengths.
  • Under Secretary Liang reiterated that the strength of the U.S. dollar was based on the U.S.’s government and economy. She stated that while technology could play a constructive role in making a currency attractive, she asserted that technology was not the primary factor in making a currency attractive.