Examining the President’s Working Group on Financial Markets Report on Stablecoins (U.S. Senate Committee on Banking, Housing, and Urban Affairs)

Hearing	Examining the President’s Working Group on Financial Markets Report on Stablecoins
Committee	U.S. Senate Committee on Banking, Housing, and Urban Affairs
Date	February 15, 2022

 

Hearing Takeaways:

• Stablecoins: The hearing was focused on stablecoins and how U.S. policymakers were approaching this novel payments technology. Stablecoins are cryptocurrencies that have their values pegged to reference assets (such as the U.S. dollar). Stablecoin users are supposed to be able to redeem their stablecoins for the reference assets. Stablecoin proponents argue that stablecoins can improve on traditional forms of money through increasing payment speeds, reducing transaction costs, and combating illicit finance. They also contend that stablecoins could support the U.S. dollar’s status as the world’s reserve currency through ensuring that U.S. dollars served as the basis for cryptocurrency transactions. The market capitalization of stablecoins has grown from just $5 billion at the start of 2020 to approximately $175 billion today.
  • Use of Stablecoins in Illicit Activities: Sen. Robert Menendez (D-NJ) and Sen. Bill Hagerty (R-TN) expressed concerns over the potential for stablecoins to be used in illicit activities, such as money laundering, fraud, and sanctions evasion. Under Secretary Liang discussed how the U.S. Department of the Treasury has been leading Financial Action Task Force’s (FATF) work on illicit finance issues.
• Policies Governing Stablecoins: Committee Members expressed interest in how stablecoins were currently being regulated and overseen. Committee Members and Under Secretary Liang expressed interest in working to develop a more consistent and comprehensive framework for digital assets (including stablecoins). They asserted that such a framework would help to attract digital assets innovation to the U.S. 
  • Absence of Standards for a Stablecoin’s Reserve Assets: Committee Members and Under Secretary Liang expressed concerns that stablecoin issuers were not required to disclose the contents of the reserve assets backing the stablecoins. They stated that this situation could provide stablecoin issuers with a false impression that their stablecoins were sufficiently backed. They also expressed concerns that this situation could lead to redemption problems during periods of economic uncertainty, which could pose systemic financial risks. They noted that while many stablecoin issuers did make audits of their reserve assets publicly available, they emphasized that there currently were no regulators to confirm the veracity of the audits.
  • State-Based Nature of Stablecoin Regulation: A key area of interest during the hearing was how stablecoin issuers largely operated as state-based money transmitters and trust companies. Committee Republicans contended that states ought to continue to play key roles in regulating digital assets moving forward. Under Secretary Liang argued however that these structures were suboptimal for supporting payments and that these structures needed updates.
  • Lack of Deposit Insurance and Consumer Protections: Sen. Chris Van Hollen (D-MD) expressed concerns over how stablecoins lacked deposit insurance and protections from payment errors, fraud, and unauthorized payments. He noted how these features were common in the traditional financial and payments system.
  • The U.S. Financial Stability Oversight Council’s (FSOC) Oversight and Supervision of Stablecoins: Committee Members expressed interest in whether FSOC could deem stablecoin issuers to be systemically important (which would subject the issuer to additional regulatory requirements). Under Secretary Liang noted how FSOC had not yet deemed any stablecoin issuers to be systemically important. She stated that FSOC would need to review the specific facts and circumstance before it would make such a determination. Sen. Elizabeth Warren (D-MA) argued that FSOC must be prepared to proactively deem stablecoin issuers as systemically important before they could pose risks to the broader economy.
  • Full Committee Ranking Member Patrick Toomey’s (R-PA) Proposed Stablecoin Legislation: Full Committee Ranking Member Toomey discussed his upcoming legislative proposal to establish a new regulatory framework for stablecoins. He stated that the legislation would promote competition within the stablecoin market through allowing at least three types of regulated entities to issue stablecoins: state-registered money service businesses and money transmitters, insured depository institutions, and newly established stablecoin charter entities with stablecoin-specific requirements. He also mentioned how his proposed legislation would require stablecoin issuers to meet minimum requirements, regardless of their charter or license. He noted that these requirements would include disclosures of the assets backing a stablecoin, the adoption and disclosure of redemption policies, and third-party audit requirements.
• The President’s Working Group on Financial Markets (PWG) Report on Stablecoins: The hearing largely focused on considering the recommendations of the recently released PWG Report on Stablecoins. The PWG is chaired by the U.S. Secretary of the Treasury and is composed of the U.S. Federal Reserve Board of Governors, the U.S. Securities and Exchange Commission (SEC), and the U.S. Commodities Futures Trading Commission (CFTC). The PWG Report on Stablecoins also involved participation from the U.S. Federal Deposit Insurance Corporation (FDIC) and the U.S. Office of the Comptroller of the Currency (OCC). The Report found three main prudential risks associated with stablecoins: run risks, payment system risks, and risks related to the concentration of economic power. The Report’s recommendations sought to protect against these prudential risks.
  • Recommendation that Stablecoin Issuers be Insured Depository Intuitions: The primary recommendation from the PWG Report on Stablecoins was that stablecoin issuers be required to be insured depository institutions. Under Secretary Liang remarked that the current insured depository framework was flexible in terms of matching activities and risks with appropriate regulation. Full Committee Ranking Member Patrick Toomey (R-PA) asserted that stablecoin issuers should not be required to be insured depository institutions given how the issuers have different business models than banks. Under Secretary Liang stated however that the insured depository institution regulatory framework could account for these differences and exempt stablecoin issuers from certain requirements (such as deposit insurance requirements).
  • Recommendation that the U.S. Address the Promote Stablecoin Interoperability: The PWG Report on Stablecoins specifically recommended that regulators have authorities to implement standards to promote interoperability among stablecoins. Under Secretary Liang discussed how payments systems were prone to network effects, which could result in the concentration of economic power. She stated that this concentration of economic power could be mitigated through the promotion of interoperability among stablecoin issuers. She commented that this interoperability would allow for consumers to more easily exchange stablecoins, which would prevent the creation of “closed loop” systems. Sen. Catherine Cortez Masto (D-NV) predicted that Congress will need to standardize certain stablecoin features if it wants the U.S. to achieve stablecoin interoperability.
• Other Policy Issues: In addition to the current stablecoin landscape and the recent PWG Report on Stablecoins, Committee Members expressed interest in other digital asset and stablecoin issues.
  • Implementation of the Infrastructure Investment and Jobs Act’s (IIJA) Digital Asset Tax Provisions: Sen. Cynthia Lummis (R-WY) and Sen. Kyrsten Sinema (D-AZ) both expressed interest in the U.S. Department of the Treasury’s implementation of the IIJA’s requirement that brokers report digital asset transactions to the U.S. Internal Revenue Service (IRS). They expressed interest in how the U.S. Department of the Treasury would define the term “broker.” Sen. Sinema asserted that cryptocurrency miners, stakers, and parties that sold hardware or software to allow individuals to control private cryptocurrency keys should not be considered brokers under the IIJA. Under Secretary Liang testified that the U.S. Department of the Treasury was working “very actively” on guidance to define the term “broker.”
  • Potential for Commercial Entities to Issue Stablecoins: Full Committee Chairman Sherrod Brown (D-OH) noted how the U.S. had traditionally prohibited commercial entities from partnering with financial entities. He expressed concerns over recent reports that certain large commercial entities might seek to issue stablecoins. Under Secretary Liang noted how stablecoin issuers were currently licensed under state money transmitter laws and policies. She asserted that there thus did not exist anything preventing a large commercial entity from issuing a stablecoin. She stated however that requiring stablecoin issuers to be insured depository institutions would preclude a commercial entity from issuing stablecoins.

Hearing Witnesses:

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

Member Opening Statements:

Full Committee Chairman Sherrod Brown (D-OH):

• He highlighted the prevalence of cryptocurrency advertisements in the U.S. and asserted that these advertisements did not convey how cryptocurrencies posed risks for frauds, scams, and thefts.
  • He also stated that cryptocurrency advertisements did not convey that cryptocurrencies were volatile, had high fees, and lacked investor protections.
• He remarked that cryptocurrencies were not money and asserted that cryptocurrencies were instead designed for speculation.
• He mentioned how the U.S. Department of the Treasury had recently led a team of financial regulators in conducting a report on stablecoins and stated that this report had found that unregulated stablecoins could endanger the U.S. economy and payments system.
  • He called this unregulated nature of stablecoins concerning considering the significant growth of stablecoins in recent years.
• He then discussed how stablecoin issuers often claimed that their stablecoins were backed by real money held in a reserve account and noted how these claims had been proven false in certain instances.
  • He highlighted how the U.S. had levied nearly $60 million in fines on one stablecoin issuer for lying about their reserves.
• He noted that while stablecoin issuers often claimed that stablecoin holders could convert their stablecoins into U.S. dollars at any time, he stated that the legal details of these contracts often precluded retail investors from making such conversions.
• He also expressed skepticism regarding the claims of stablecoin issuers that they were interested in helping unbanked Americans and contended that stablecoins were ill-suited for addressing financial access issues given their limited acceptance as a means of payments.
  • He asserted that stablecoins would merely trap the funds of consumers in risky and speculative investments.
• He further expressed skepticism regarding the security claims of stablecoin issuers and stated that financial institutions had a long history of harming consumers.
• He called on Congress and federal regulators to proactively address stablecoins before they would pose any risks to Americans and the broader economy.
  • He expressed particular interest in the warnings highlighted in the PWG Report on Stablecoins.

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

• He noted how stablecoins already played a significant role in the cryptocurrency trading ecosystem and stated that stablecoins could be adopted as a common medium of exchange in the broader goods and services economy.
• He explained how stablecoins are designed to maintain a 1:1 value relative to some reference asset.
  • He indicated that this reference asset was often a fiat currency (such as the U.S. dollar).
• He remarked that this price stability provided stablecoins with the potential to serve all the traditional functions of money.
• He also stated that stablecoins could improve on traditional forms of money through increasing payment speeds (especially within the context of cross-border transactions), reducing transaction costs, and combating illicit finance.
  • He elaborated that stablecoins could create an immutable and traceable record of transactions, which would make it more difficult to engage in illicit activity.
• He further noted how stablecoins could be programmed to execute payments automatically following the occurrence of some pre-designated and verifiable event.
• He then stated that while regulatory regimes for stablecoins will inevitably focus on protecting consumers and ensuring financial stability, he contended that policymakers ought to also focus on preserving the unimaginable benefits that will stem from future stablecoin innovations.
• He highlighted how the recent PWG Report on Stablecoins had recommended that Congress pass legislation to establish a federal regulatory framework for stablecoins.
  • He called this recommendation appropriate.
• He also noted how the PWG Report on Stablecoins had recommended that Congress address three perceived prudential concerns: stablecoin runs, payments system risks, and risks related to the concentration of economic power.
• He indicated that the main recommendation of the PWG Report on Stablecoins was that stablecoin issuance be limited to insured depository institutions.
  • He expressed his disagreement with this recommendation and contended that the U.S. could protect against the aforementioned concerns through a more appropriately tailored approach.
• He mentioned how he had released a set of guiding principles for stablecoin legislation and stated that these principles recognized that stablecoin issuers have “significantly” different business models than banks.
  • He highlighted how stablecoin issuers generally did not make loans or take deposits.
  • He also noted how stablecoin issuers may choose not to transform maturity or intermediate credit risk.
• He contended that a stablecoin issuer using cash or cash equivalents to back its stablecoin was likely safer than most existing financial institutions.
  • He asserted that the aforementioned differences between stablecoin issuers and banks made it inappropriate to subject stablecoin issuers to all of the U.S.’s banking regulations.
• He expressed his encouragement with Under Secretary Liang’s recent recognition of the differences between stablecoin issuers and traditional banks and her call for regulatory flexibility for stablecoin issuers not engaged in traditional banking.
• He remarked that his proposed stablecoin legislation would provide a regulatory approach that would be flexible and adaptable to future technological innovations.
• He also stated that the legislation would promote competition within the stablecoin market through allowing at least three types of regulated entities to issue stablecoins.
  • He indicated that the first type of regulated entity that would be permitted to issue stablecoins would be state-registered money service businesses and money transmitters.
  • He indicated that the second type of regulated entity that would be permitted to issue stablecoins would be insured depository institutions.
  • He indicated that the third type of regulated entity that would be permitted to issue stablecoins would be a newly established stablecoin charter entity with stablecoin-specific requirements.
• He commented that Under Secretary Liang’s recent testimony suggested that she believed in having a tailored approach for stablecoin issuers.
  • He asserted that Congress (rather than regulators) ought to design a tailored approach for stablecoin issuers.
• He also mentioned how his proposed legislation would require stablecoin issuers to meet minimum requirements, regardless of their charter or license.
  • He noted that these requirements would include disclosures of the assets backing a stablecoin, the adoption and disclosure of redemption policies, and third-party audit requirements.
• He expressed optimism that Congress could develop bipartisan legislation to address stablecoins and expressed interest in working with the Biden administration on this issue.

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 the U.S. Federal Reserve Board of Governors, the SEC, and the CFTC.
  • She noted how the PWG regularly produces reports on financial market issues, which may include recommended legislative changes.
• She testified that the PWG Report on Stablecoins had involved participation from the FDIC and the 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 commented that the distinguishing feature of stablecoins was that they were designed to maintain a stable value relative to a reference asset.
• She highlighted how the market capitalization of stablecoins had grown “rapidly” from just $5 billion at the start of 2020 to approximately $175 billion today.
• She stated that the PWG Report on Stablecoins was interested in how the purported stability of stablecoins meant that stablecoins had the potential to be used widely as a means of payment.
  • She commented that this potential widespread use carried both benefits and drawbacks.
• She noted that the PWG Report on Stablecoins had focused on three prudential risks associated with the use of stablecoins for payments: run risk, payment risk, and 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.
  • She remarked that some of the largest stablecoin issuers operated with limited regulatory oversight, which raised “significant” questions about whether their stablecoins were adequately backed.
  • She also expressed concerns that regulators might lack sufficient oversight of the broader operations of a stablecoin issuer.
  • She further stated that neither state money transmitter nor securities law requirements were designed to address the financial stability and payments system risks for payments instruments that were based on distributed ledger technology (DLT).
• She mentioned how the PWG Report on Stablecoins had recommended legislation to address the aforementioned gaps in authorities and to ensure that stablecoins would be subject to a consistent and comprehensive framework that would be proportionate to the risks posed.
  • She commented that this legislation would complement existing authorities with respect to market integrity, investor and consumer protection, and illicit finance.
• She specifically listed three recommendations from the PWG Report on Stablecoins.
  • She first noted how the Report had recommended limiting the issuance of stablecoins to insured depository institutions.
  • She also noted how the Report had recommended giving supervisors of stablecoin issuers visibility into the broader stablecoin arrangements and authority to set stablecoin risk management standards for critical activities related to the use of stablecoins for payments.
  • She further noted how the Report had recommended creating certain measures to reduce concerns related to the concentration of economic power.
• She stated that the PWG Report on Stablecoins had relied upon the flexibility that banking agencies would have to adjust for differences between stablecoin issuers and traditional commercial banks and to adjust to new products and structures that might emerge over time.
• She then discussed how the Biden administration was working across federal agencies to develop a comprehensive strategy for all digital assets (including stablecoins).
  • She stated that the goals of this effort are to ensure that digital assets were not used for illicit finance, address risks related to financial stability, consumer protection, investor protection, further financial inclusion, and maintain U.S. global leadership.
• She expressed the Biden administration’s interest in working with Congress on these issues.

Congressional Question Period:

Full Committee Chairman Sherrod Brown (D-OH):

• Chairman Brown asked Under Secretary Liang to indicate whether the U.S. should swiftly regulate stablecoins. He also asked Under Secretary Liang to discuss how stablecoins could hurt working families if left unregulated.
  • Under Secretary Liang remarked that the digital asset market was growing “very rapidly” and that digital assets could “radically” change the provision of financial services. She commented that digital assets provided both benefits (such as payments system efficiencies) and drawbacks (such as support for illicit finance, tax evasion, and fraud). She stated that policymakers must address these drawbacks, protect digital asset users, and ensure the resilience of the financial system. She mentioned how stablecoins were a subset of digital assets and noted how their prospect of having a stable value gave them the potential to be used for payment transactions and as stores of value. She commented that these features could support 24/7 payments and reduced payments costs. She stated that policymakers must assess whether stablecoins were actually stable and were providing their promised services. She indicated that the PWG Report on Stablecoins had studied these issues and had concluded that regulators would require additional authorities for overseeing stablecoins.
• Chairman Brown then discussed how stablecoin issuers claimed that consumers could redeem their stablecoins for U.S. dollars without problems. He asked Under Secretary Liang to indicate whether stablecoin holders were at risk of not being able to easily exchange their stablecoins for U.S. dollars. He also asked Under Secretary Liang to indicate whether stablecoin issuers made these risks clear to consumers.
  • Under Secretary Liang remarked that there was a risk that a stablecoin would not be able to deliver their promised backing U.S. dollars to their holders during periods of economic stress. She also stated that stablecoins had problems with redemptions and undisclosed fees. She further remarked that there were features of stablecoins that created run risks.
• Chairman Brown interjected to ask Under Secretary Liang to indicate whether stablecoin issuers were informing their prospective customers about the aforementioned risks.
  • Under Secretary Liang remarked that stablecoins were not required to disclose their risks because they were not regulated. She estimated that there currently existed between 50 and 60 different stablecoins and commented that these stablecoins likely varied in terms of their disclosures.
• Chairman Brown commented that the U.S. ought to study the disclosure practices of these stablecoins. He then noted how the U.S. had traditionally prohibited commercial entities from partnering with financial entities. He mentioned however that there were reports that certain commercial entities (like Walmart) were considering whether to issue their own stablecoins. He asked Under Secretary Liang to indicate whether there currently existed any policies that would prevent large commercial entities from issuing their own stablecoins. He also asked Under Secretary Liang to discuss the risks associated with permitting large commercial entities to issue stablecoins.
  • Under Secretary Liang noted how stablecoin issuers were currently licensed under state money transmitter laws and policies. She asserted that there thus did not exist anything preventing large commercial enitites from issuing a stablecoin. She mentioned how the PWG Report on Stablecoins had recommended that stablecoin issuance be limited to insured depository institutions. She commented that this recommendation would preclude commercial entities from issuing cryptocurrencies. She also mentioned how the PWG Report on Stablecoins had recommended that Congress decide whether custodial wallet providers and other stablecoin service providers could be commercial entities.

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

• Ranking Member Toomey asserted that the PWG Report on Stablecoins had failed to sufficiently account for existing state-based regulatory frameworks for stablecoins. He noted how stablecoin issuers currently operated as state-based money transmitters and trust companies. He stated that a trust company-issued stablecoin that was solely backed by cash and cash equivalents could be safer than many existing financial institutions. He asserted that a trust company that issued such a stablecoin ought to be subject to a different regulatory regime than a traditional bank because a trust company and a traditional bank had very different business models. He posited a scenario in which Congress authorized a well-defined charter for trust companies that issued fully backed stablecoins. He asked Under Secretary Liang to indicate whether such a charter could be designed in a manner that was consistent with safety and soundness concerns.
  • Under Secretary Liang remarked that the regulation for stablecoins should be flexible and reflect the risks of the stablecoin activity. She noted how stablecoin issuers that exclusively issued stablecoins did not extend credit. She commented that these stablecoin issuers should therefore not be subject to banking regulations relating to the provision of credit. She then discussed how trust charters had generally been developed to address fiduciary responsibilities. She stated that these trust charters currently prevented regulators from supervising a stablecoin’s entire arrangement. She commented that this dynamic undermined the ability of stablecoins to be used for payments. 
• Ranking Member Toomey remarked that the existing state-based regulatory regime for stablecoins was not perfect could be improved. He contended however that the state-based regulatory regime for stablecoins could serve as a part of a broader regulatory framework. He then expressed his appreciation for Under Secretary Liang’s comments regarding how the full set of banking regulations should not be applied to stablecoin issuers that did not engage in the full range of traditional banking activities. He suggested that the U.S. consider creating a more narrowly defined bank charter that would be better suited for stablecoin issuers. He asked Under Secretary Liang to answer whether a more narrowly defined bank charter could be consistent with the goals of the PWG Report on Stablecoins.
  • Under Secretary Liang remarked that the current insured depository framework was flexible in terms of matching activities and risks with appropriate regulation. She noted how the PWG Report on Stablecoins had not necessarily recommended that stablecoin issuers be required to have deposit insurance. She commented that a stablecoin issuer without deposit insurance would be consistent with Ranking Member Toomey’s proposal for a narrower bank charter for stablecoin issuers. She remarked however that the PWG Report on Stablecoins had called for financial firms to serve as stablecoin issuers. She concluded that stablecoin issuers must be regulated as insured depository institutions and that this regulatory framework was very flexible.
• Ranking Member Toomey stated that there appeared to be agreement that the nature of stablecoin issuers was “very distinct” from traditional banking, which necessitated a different regulatory approach. He commented however that there appeared to be disagreement as to how Congress should design a distinct regulatory approach for stablecoin issuers. He contended that the insured depository framework was not optimal for stablecoin issuers.

Sen. Mark Warner (D-VA):

• Sen. Warner asked Under Secretary Liang to indicate whether it was possible to check if stablecoins had sufficient backing on a real-time basis. He also asked Under Secretary Liang to address how fully backed stablecoins could have viable business models absent “exorbitant” transaction fees.
  • Under Secretary Liang indicated that some stablecoins did make audits of their assets publicly available. She noted however that there neither existed any regulations or regulators to confirm the veracity of these audits. She then discussed how there probably were several different business models for stablecoins that varied heavily. She noted how one such stablecoin business model involves having the stablecoin’s backing assets be invested in longer-term securities (including safe securities). She highlighted how many stablecoin issuers charged fees for their stablecoins to make the stablecoins profitable. She stated that the stablecoin space was changing “very rapidly” and noted how new products were constantly being introduced. She predicted that stablecoin business models would therefore evolve over time in response to these new products.
• Sen. Warner then noted how the U.S. had significantly more exchange listed tokens than publicly listed stocks. He stated that publicly listed stocks were well regulated while exchange listed tokens had varying levels of regulation. He asked Under Secretary Liang to indicate whether policymakers ought to be concerned about the lack of transparency and the volume of items being traded within the digital assets space.
  • Under Secretary Liang stated that the digital assets market had grown rapidly and highlighted how there existed concerns over the market’s lack of transparency, potential for fraud, and potential for manipulation. She asserted that regulators needed to adopt investor and consumer protections to address these concerns. She also noted that the SEC and the CFTC were actively working to address these concerns. She emphasized that stablecoins were a “small subset” of the digital assets space and highlighted how stablecoins purported to have stable values. She remarked that this promise of stable value made stablecoins more attractive for payments relative to other cryptocurrencies. She stated that this attractiveness of stablecoins as a means of payment created run risks, payments system risks, and risks related to the concentration of economic power.

Sen. Mike Rounds (R-SD):

• Sen. Rounds discussed how his state of South Dakota had several different licensed digital asset custodians and indicated that these custodians had received their charters from the federal and state governments. He expressed concerns that the U.S.’s failure to adopt an appropriate regulatory framework for stablecoins could undermine the U.S.’s international competitiveness and stymie innovation. He asserted that U.S. support for stablecoins would play a key role in maintaining the U.S. dollar’s status as the global reserve currency. He asked Under Secretary Liang to indicate whether the U.S.’s adoption of a “limited” regulatory environment for stablecoins could support the U.S.’s international competitiveness.
  • Under Secretary Liang remarked that the recommendations from the PWG Report on Stablecoins were designed to promote responsible innovations that protected stablecoin users and the broader economy. She contended that an actually stable stablecoin would help to preserve the U.S. dollar’s status as the world’s reserve currency. She predicted that stablecoins would play an important role in the future of the payments system. She stated however that stablecoins might not serve as the only payment mechanism moving forward.
• Sen. Rounds also asked Under Secretary Liang to address whether central bank digital currencies (CBDCs) and private stablecoins could coexist.
  • Under Secretary Liang stated that CBDCs and private stablecoins could coexist.
• Sen. Rounds then asked Under Secretary Liang to identify what part of the federal government ought to oversee and regulate stablecoins.
  • Under Secretary Liang stated that the PWG Report on Stablecoins had concluded that a consistent and less fragmented regulatory framework for stablecoins would be preferable and more conducive to innovation. She stated that stablecoin firms and developers had expressed a desire for more regulatory clarity. She discussed how states currently issued charters for stablecoin issuers and highlighted how these charters could differ across states. She also noted how state money transmitter licenses varied across states in terms of what they cover. She indicated that while these licenses tended to address consumer protections, she asserted that these licenses were not designed for modern payments systems.

Sen. Robert Menendez (D-NJ):

• Sen. Menendez noted how the defining feature of stablecoins was a claim of being backed by reference assets (such as U.S. dollars). He asserted however that the absence of transparency for stablecoins meant that stablecoin holders only had the illusion of stability. He asked Under Secretary Liang to address whether market participants could verify the portfolio of assets backing a given stablecoin.
  • Under Secretary Liang noted how some stablecoin issuers were providing self-audited statements of the backing assets of their stablecoins to market participants. She hypothesized that these disclosures might be in response to pressure from investors and regulators. She stated however that regulators currently did not confirm the veracity of the statements or set the standards for these statements.
• Sen. Menendez recounted how Tether, which was the world’s largest stablecoin, had falsely claimed to be fully backed by U.S. dollars. He noted how some risky loans to Chinese companies had instead been used to partially back Tether stablecoins. He remarked that stablecoins needed to be more transparent and expressed his support for more robust stablecoin transparency rules. He asked Under Secretary Liang to indicate whether the U.S. Department of the Treasury intended to promulgate stablecoin transparency measures so that stablecoin issuers would properly disclose the value of the assets backing their stablecoins.
  • Under Secretary Liang indicated that the PWG Report on Stablecoins was supportive of making the assets backing stablecoins more transparent. She asserted however that transparency and disclosure alone were not sufficient for addressing run risk. She stated that there must be certainty that a stablecoin’s declared backing assets actually existed and could be redeemed.
• Sen. Menendez then remarked that Congress and financial regulators would need to address the illicit uses of stablecoins as stablecoins became more popular for payments and investments. He noted that these illicit uses included money laundering, fraud, and sanctions evasion. He mentioned how FATF had published updated guidance on virtual currencies in October 2021. He asked Under Secretary Liang to provide an assessment of the global implementation of policies to combat illicit financial activity. He asked Under Secretary Liang to identify countries that were effectively implementing these policies and countries that were poorly implementing these policies.
  • Under Secretary Liang remarked that the U.S. Department of the Treasury has been leading FATF’s work on illicit finance issues. She stated that the implementation of illicit finance standards was uneven across jurisdictions and that policymakers were currently working to address these implementation issues. She remarked that the U.S. Financial Crimes Enforcement Network (FinCEN) could provide additional information about the current global efforts to implement illicit finance policies.
• Sen. Menendez asked Under Secretary Liang to identify the U.S. Department of the Treasury’s priorities over the next six months for implementing illicit finance policies.
  • Under Secretary Liang reiterated that the U.S. Department of the Treasury was leading FATF’s work on illicit finance issues. She noted how these efforts were largely focusing on cryptocurrency exchanges in foreign jurisdictions. She then testified that the Biden administration’s broader effort on digital assets was “ongoing” and indicated that more details about this effort would be announced within “the next few weeks.”
• Sen. Menendez expressed concerns that Venezuela, Russia, and Iran would continue to use digital currencies to evade sanctions, which will weaken the U.S. ability to implement its foreign policy. He stated that the anonymous nature of stablecoins and other cryptocurrencies was very useful for facilitating illicit activity. He contended that the U.S. Department of the Treasury must swiftly act to address this issue given the growing popularity of stablecoins and cryptocurrencies.

Sen. Bill Hagerty (R-TN):

• Sen. Hagerty expressed agreement with Sen. Robert Menendez’s (D-NJ) concerns over the potential for stablecoins and cryptocurrencies to be used in illicit activities. He remarked however that the digital assets industry had “great promise.” He then raised concerns with Under Secretary Liang’s comments regarding the roles of states in overseeing the digital assets space. He asked Under Secretary Liang to address how the U.S. Department of the Treasury intended to incorporate state perspectives into its overall regulatory strategy for digital assets.
  • Under Secretary Liang remarked that the recommendations from the PWG Report on Stablecoins were building upon current state regulatory frameworks for digital assets. She noted how the PWG Report on Stablecoins had called on stablecoin issuers to be insured depository institutions and highlighted how these institutions could be state-chartered. She also stated that these recommendations were seeking to build on (rather than replace) the state money transmitter license system. She asserted however that some state money transmitter license requirements needed to be updated to account for digital assets.
• Sen. Hagerty remarked that his state of Tennessee could incorporate the recommendations of the PWG Report on Stablecoins while being agile enough to respond to new innovations. He then asked Under Secretary Liang to address the extent to which a fully backed stablecoin would be vulnerable to a run. He also asked Under Secretary Liang to indicate whether a fully backed stablecoin faced more run risk than a fractional reserve bank.
  • Under Secretary Liang noted a fractional reserve bank possessed deposit insurance or had access to central bank discount windows. She commented that these features and regulatory oversight could help to prevent bank runs. She stated that fully reserved instruments that were backed by high quality assets (such as money market funds) had limited run risks. She remarked that stablecoins were different from money market funds in that stablecoins were mainly purchased for payments purposes (rather than for investment purposes). She commented that the redemption features would therefore distinguish a stablecoin from a government money market fund.
• Sen. Hagerty stated that the U.S. would need to balance economic competitiveness goals with national security concerns in devising a regulatory approach for digital assets.
  • Under Secretary Liang remarked that actually stable stablecoins that were tied to the U.S. dollar would support the U.S.’s efforts to maintain the world’s reserve currency.
• Sen. Hagerty remarked that the U.S. must swiftly develop a regulatory approach for digital assets to ensure that digital assets innovation would occur within the U.S. He then expressed interest in FSOC’s authority to deem financial market utilities to be systemically important. He specifically expressed interest in how this authority could be applied to stablecoin issuers.
  • Under Secretary Liang indicated that FSOC had not yet deemed any stablecoin issuers to be systemically important. She noted how FSOC had been looking at the extent to which leverage has been raising the value of crypto assets. She then remarked that it remained too early to project how FSOC would approach stablecoins. She commented that any FSOC determinations on stablecoins would need to be based on the specific facts and circumstances surrounding a given stablecoin.

Sen. Elizabeth Warren (D-MA):

• Sen. Warren discussed how stablecoins claimed to be pegged to fixed assets (such as U.S. dollars). She noted that while stablecoin advocates had asserted that stablecoins represent the future of the payments system, she stated that stablecoins were currently not being used to pay for real world goods and services. She highlighted how stablecoins had grown rapidly in terms of market capitalization over the previous two years and asserted that stablecoins were being used to support speculative activities. She mentioned how the PWG Report on Stablecoins had identified numerous risks and problems posed by stablecoins, including run risk, payments system risk, concentration of economic power, illicit finance, and weakening of investor protections. She asked Under Secretary Liang to indicate whether these risks and problems could pose systemic threats to the U.S. financial system if the stablecoin market continues to grow.
  • Under Secretary Liang remarked that there was “some urgency” for U.S. policymakers to apply the appropriate regulations to stablecoins to reduce run risks. She stated that stablecoins could pose systemic threats to the U.S. financial system.
• Sen. Warren expressed agreement with Under Secretary Liang’s response and asserted that the U.S. would need to contain these risks. She mentioned how Under Secretary Liang advised FSOC and sometimes represented the U.S. Secretary of the Treasury in FSOC meetings. She noted that FSOC was responsible for identifying emerging threats to financial stability and coordinating regulatory actions to address the threats. She asked Under Secretary Liang to indicate whether she had advised FSOC to use their authorities to proactively mitigate the risks and problems posed by stablecoins.
  • Under Secretary Liang testified that FSOC was discussing consumer protection, investor protection, and illicit finance issues and was assessing how regulators could respond to these issues. She mentioned that the PWG Report on Stablecoins had identified some regulatory gaps concerning the use of stablecoins for payments. She stated that the Report had made some recommendations for addressing these gaps.
• Sen. Warren then mentioned that Under Secretary Liang had recently suggested to the U.S. House Committee on Financial Services that FSOC should not and would not act ahead of Congress in terms of addressing stablecoins. She asserted that this suggestion was inconsistent with FSOC’s mission. She asked Under Secretary Liang to clarify her suggestion.
  • Under Secretary Liang remarked that FSOC had a responsibility to consider its existing authorities when addressing stablecoins and apply these authorities if necessary. She stated that the U.S.’s stablecoin landscape was rapidly developing, which made it difficult for FSOC to project how it would apply its authorities to stablecoins.
• Sen. Warren asked Under Secretary Liang to indicate whether FSOC would act to address stablecoins before Congress were to act on the issue.
  • Under Secretary Liang stated that FSOC would use its authorities to address stablecoins if they determined stablecoins to pose systemic risks.
• Sen. Warren asserted that FSOC must be prepared to preemptively act to address stablecoins that might eventually pose systemic risks. She expressed concerns that the U.S. Department of the Treasury was taking a sanguine approach to stablecoins and had failed to account for existing risks. She called on Congress to establish “guardrails” for the cryptocurrency space and mentioned how she was currently developing legislation on the topic.

Sen. Cynthia Lummis (R-WY):

• Sen. Lummis noted how the PWG Report on Stablecoins had recommended that only insured depository institutions serve as stablecoin issuers. She asked Under Secretary Liang to indicate whether the FDIC and the U.S. National Credit Union Administration (NCUA) had found that stablecoins and their backing assets were insurable. She also asked Under Secretary Liang to indicate whether the FDIC and the NCUA had committed to provide deposit insurance to newly chartered institutions that seek to issue stablecoins.
  • Under Secretary Liang noted that while the PWG Report on Stablecoins had called for stablecoin issuers to be insured depository institutions, she remarked that this recommendation did not necessitate that stablecoins have deposit insurance. She stated that a stablecoin’s need for deposit insurance would be dependent on the stablecoin’s backing and functionality.
• Sen. Lummis asked Under Secretary Liang to identify what types of stablecoin backing assets would adequately protect consumers.
  • Under Secretary Liang remarked that consumers could be protected by reserve assets that were “truly high quality.” She commented that these types of reserve assets would reduce run risk. She also stated that oversight of the entities that enabled stablecoin transactions and redemptions (such as custodial wallet providers) would help to protect consumers.
• Sen. Lummis asked Under Secretary Liang to indicate whether the PWG had considered allowing 100 percent reserve banks with tailored holding company supervision to issue stablecoins.
  • Under Secretary Liang expressed support for bringing stabecoins into an insured depository institution regulatory framework and commented that this framework could be adjusted to account for the risks of a given stablecoin issuer. She stated that Sen. Lummis’s proposed stablecoin issuer would be feasible.
• Sen. Lummis expressed her pleasure with Under Secretary Liang’s response and stated that this approach would ensure stablecoin competition. She then asked Under Secretary Liang to indicate whether the U.S. Department of the Treasury had a timeline for issuing guidance to define brokers for digital assets under the IIJA.
  • Under Secretary Liang testified that the U.S. Department of the Treasury was working “very actively” on this guidance. She stated that the IIJA’s tax provisions were meant to collect owed taxes and not to stifle crypto asset activities.

Sen. Chris Van Hollen (D-MD):

• Sen. Van Hollen noted how the Federal Deposit Insurance Act ensured that consumer bank deposits were protected up to a certain threshold if their banks were to fail. He asked Under Secretary Liang to indicate whether consumers had any protections if their stablecoins were to fail.
  • Under Secretary Liang remarked that the quality of the assets backing a stablecoin dictated the extent to which the consumers would be protected in the event of a stablecoin failure. She noted however that stablecoins did not have deposit insurance.
• Sen. Van Hollen asked Under Secretary Liang to indicate whether there currently existed any standards for stablecoin reserves.
  • Under Secretary Liang stated that there currently did not exist any standards for stablecoin reserves.
• Sen. Van Hollen asked Under Secretary Liang to confirm that stablecoin holders could lose all their holdings if the stablecoin issuers did not have the reserves to back the stablecoins.
  • Under Secretary Liang confirmed Sen. Van Hollen’s statement.
• Sen. Van Hollen then discussed how consumers had protections from payment errors, fraud, and unauthorized payments when they transacted with credit and debit cards. He asked Under Secretary Liang to indicate whether consumers had similar protections when they transacted with stablecoins.
  • Under Secretary Liang noted how stablecoins were currently licensed under state money transmitter regimes and stated that these regimes did include consumer protections. She remarked however that these consumer protections varied by state and did not necessarily apply to stablecoins.
• Sen. Van Hollen asked Under Secretary Liang to indicate whether the Executive Branch currently had the authority to protect consumers from stablecoin failures and the aforementioned payments issues.
  • Under Secretary Liang remarked that new legislation was required to address stablecoin run risks and stablecoin payments system disruptions.
• Sen. Van Hollen asked Under Secretary Liang to identify areas where the Executive Branch currently had the authority to address stablecoins.
  • Under Secretary Liang remarked that each regulatory agency would take actions that were consistent with their mandates to address stablecoins. She stated however that the authorities of these agencies were not sufficient considering the run risks and payments issues associated with stablecoins. She noted that while FSOC possessed tools to respond to stablecoin risks, she asserted that FSOC could not provide a consistent and comprehensive regulatory framework for stablecoins. She stated that FSOC could merely respond to risks as they arose and contended that new legislation was preferable for addressing broader stablecoin risks.
• Sen. Van Hollen expressed interest in working to develop consumer protections for stablecoins.

Sen. Steve Daines (R-MT):

• Sen. Daines expressed interest in pursuing bipartisan legislation to address stablecoins and stated that the U.S. ought to take a “light touch” approach to regulation. He commented that such bipartisan legislation would provide stablecoin users and market participants with policy certainty, which would help to support innovation. He remarked that increasing the use of stablecoins would make payments faster and cheaper. He asked Under Secretary Liang to identify the federal agencies that would be most likely to issue stablecoin regulations if Congress did not pass legislation on the topic. He also asked Under Secretary Liang to identify the statutes that would serve as the bases for these potential stablecoin regulations.
  • Under Secretary Liang stated that she would need to defer to individual federal regulatory agencies regarding their interpretations of their authorities and their regulatory strategies. She remarked that the SEC and the CFTC were currently approaching crypto assets more broadly to prevent fraud and manipulation. She stated that the banking regulatory agencies were issuing guidance to banks about cryptocurrency banking activities. She remarked that no federal regulatory agencies currently possessed the authority to address stablecoin run risks and prevent disruptions in the payments system.
• Sen. Daines asked Under Secretary Liang to indicate whether the adoption of a clear regulatory framework for digital assets could support more widespread adoption of digital assets.
  • Under Secretary Liang remarked that a consistent and comprehensive regulatory framework for digital assets could support digital assets innovation. She stated that digital assets need regulatory clarity.
• Sen. Daines remarked that a bipartisan regulatory framework for digital assets that took a “light touch” approach could accelerate digital assets innovation.
  • Under Secretary Liang highlighted how stablecoin issuers were currently pursuing bank-like charters and were engaging in conversations with banking regulators about innovative models.
• Sen. Daines asked Under Secretary Liang to address whether the U.S.’s failure to provide a clear regulatory framework for digital assets would lead digital assets activity to move abroad.
  • Under Secretary Liang stated that digital assets businesses would tend to migrate to jurisdictions with clearer regulatory frameworks. She remarked however that the U.S. dollar’s status as the global reserve currency made the U.S. an attractive location for digital assets innovation. She concluded that a clear regulatory framework for digital assets would make the U.S. a more attractive location for digital assets activity.

Sen. Catherine Cortez Masto (D-NV):

• Sen. Cortez Masto asked Under Secretary Liang to indicate whether there were currently any federal regulatory agencies that were responsible for ensuring that stablecoin issuers held adequate reserves for their stablecoins.
  • Under Secretary Liang noted how stablecoin issuers were currently regulated by either state money transmitter license or state charters. She indicated that there were no federal regulatory agencies responsible for ensuring that stablecoin issuers held adequate reserves for their stablecoins.
• Sen. Cortez Masto asked Under Secretary Liang to indicate whether stablecoins and cryptocurrencies needed to register as money services businesses under FinCEN’s federal regime.
  • Under Secretary Liang answered affirmatively.
• Sen. Cortez Masto mentioned her efforts to pass the FinCEN Improvement Act of 2019 and called it important for FinCEN to have authority over cryptocurrencies. She asked Under Secretary Liang to indicate whether FinCEN possessed a robust framework to prevent and sanction illicit finance within the context of stablecoin and cryptocurrency activity.
  • Under Secretary Liang noted how registering as a money services business under state money transmitter license systems would trigger many FinCEN regulations. She indicated that these regulations included anti-money laundering (AML) rules and combating the financing of terroirsm (CFT) rules. She stated that FinCEN had been working to address illicit finance within the digital assets space for years and noted how FinCEN had first issued virtual assets guidance in 2014. She also mentioned how FinCEN led some of the international work to address the use of digital assets in illicit finance. She called this an area of “strong focus” for FinCEN and highlighted how FinCEN was working with FATF to address foreign digital asset exchanges with inadequate practices. She further remarked that the Biden administration was working to more broadly address digital assets and indicated that the administration would be announcing more work on this issue in the coming weeks.
• Sen. Cortez Masto then noted how the PWG Report on Stablecoins had called for addressing systemic risk and the concentration of economic power within the context of stablecoins. She mentioned how the Report had called for regulators to have authorities to implement standards to promote interoperability among stablecoins. She asked Under Secretary Liang to elaborate on this interoperability recommendation.
  • Under Secretary Liang noted how one of the prudential risks that the PWG Report on Stablecoins had identified involved the concentration of economic power. She discussed how payments systems were prone to network effects, which could result in the concentration of economic power. She stated that this concentration of economic power could be mitigated through the promotion of interoperability among stablecoin issuers. She commented that this interoperability would allow for consumers to more easily exchange stablecoins, which would prevent the creation of “closed loop” systems.
• Sen. Cortez Masto predicted that Congress will need to standardize certain stablecoin features if it wants the U.S. to achieve stablecoin interoperability.
  • Under Secretary Liang expressed agreement with Sen. Cortez Masto’s prediction.

Sen. Kyrsten Sinema (D-AZ):

• Sen. Sinema noted how the PWG Report on Stablecoins had called on Congress to pass legislation to prevent runs on stablecoins and ensure consumer protections. She asked Under Secretary Liang to elaborate on how the Report balanced the need for consumer protections with the objective of not imposing onerous regulatory requirements on stablecoin issuers.
  • Under Secretary Liang remarked that the PWG Report on Stablecoins sought to promote payments system innovation and competition while also protecting consumers. She contended that a more clear, consistent, and comprehensive regulatory framework would promote innovation and provide choices for consumers. She stated that these goals were dependent on stablecoins being stable and providing their promised payments services. She noted that the Report made recommendations for ensuring such stability and reliability.
• Sen. Sinema then remarked that decentralized finance (DeFi) and Web 3 had the potential to make transactions faster, safer, simpler, and more affordable for consumers. She stated that policymakers must assess the workings of DeFi and Web 3 applications and create “common sense” policies that would provide certainty for stakeholders within the DeFi and Web 3 space. She asked Under Secretary Liang to indicate whether she and the Biden administration were taking a similar approach to the DeFi and Web 3 space.
  • Under Secretary Liang remarked that DeFi was growing rapidly and could provide many potential benefits. She stated that the Biden administration was interested in supporting “responsible” DeFi innovation while also ensuring that investors and consumers would be protected.
• Sen. Sinema then mentioned how she had recently received a response from U.S. Department of the Treasury Assistant Secretary for Legislative Affairs Jonathan Davidson to a bipartisan inquiry about the IIJA’s implementation of cryptocurrency provisions. She expressed discouragement with aspects of the response. She asserted that cryptocurrency miners, stakers, and parties that sold hardware or software to allow individuals to control private cryptocurrency keys should not be considered brokers under the IIJA. She asked Under Secretary Liang to provide the commitment of the U.S. Department of the Treasury to consider a notice of proposed rulemaking (NPRM) to ensure that the IIJA’s cryptocurrency provisions were implemented in accordance with Congressional intent.
  • Under Secretary Liang remarked that the U.S. Department of the Treasury did not intend to destroy digital assets and was instead focused on collecting owed taxes. She stated that the U.S. Department of the Treasury (and its Office of Tax Policy) would be willing to work with Sen. Sinema on this specific issue.

Sen. Jon Ossoff (D-GA):

• Sen. Ossoff asked Under Secretary Liang to identify the main risks that were posed by the growth of the stablecoin market.
  • Under Secretary Liang remarked that the potential for stablecoins to be used for payments in the non-cryptocurrency market was increasing. She mentioned that the PWG Report on Stablecoins had found that stablecoins could pose run risks and disrupt the payments system. She also noted that the Report had found that stablecoins were prone to higher levels of market concentration, which would pose market risks. She stated that the Report had concluded that current regulations did not address the aforementioned risks.
• Sen. Ossoff also noted how the PWG Report on Stablecoins had stated that stablecoins could be considered derivatives, commodities, or securities depending on the context. He asked Under Secretary Liang to discuss why existing regulatory authorities were insufficient for addressing the risks posed by stablecoins.
  • Under Secretary Liang stated that she would defer to the SEC and the CFTC as to whether stablecoins should be considered securities or commodities. She indicated that the PWG Report on Stablecoins had focused on the use of stablecoins as a payments mechanism.
• Sen. Ossoff asked Under Secretary Liang to identify regulatory actions for addressing stablecoins that were currently not feasible due to a lack of statutory authority.
  • Under Secretary Liang noted how stablecoin issuers were currently licensed under state money transmitter laws and state trust charters. She indicated that the main recommendation from the PWG Report on Stablecoins was to require stablecoin issuers to be insured depository institutions. She stated that this requirement would better match the regulation and supervision of stablecoin issuers to their risks and activities.
• Sen. Ossoff asked Under Secretary Liang to identify the most common mechanisms that stablecoin issuers used to peg the value of their stablecoins to the U.S. dollar. He also asked Under Secretary Liang to identify the mechanism that presented the most risks (and would therefore require prudential regulation).
  • Under Secretary Liang remarked that there currently existed a wide variety of stablecoin issuers. She stated that the predominant type of stablecoin issuer pegged the value of their stablecoins to the U.S. dollar. She explained that these issuers held reserve assets in U.S. dollars that could theoretically be redeemed upon request. She remarked however that there remained uncertainty regarding whether stablecoin issuers could fulfill their redemption obligations. She asserted that the insured depository institution framework would help to guarantee the fulfillment of stablecoin reserve asset redemption requests.
• Sen. Ossoff asked Under Secretary Liang to indicate whether federal regulators could impose reserve requirements or other prudential requirements on stablecoin issuers to ensure that the issuers could fulfill their redemption obligations.
  • Under Secretary Liang stated that there did not exist any regulations that would require stablecoin issuers to hold certain levels of reserve assets so that they could fulfill their redemption obligations.