Understanding Stablecoins’ Role in Payments and the Need for Legislation (U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion)

Hearing	Understanding Stablecoins’ Role in Payments and the Need for Legislation
Committee	U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion
Date	April 19, 2023

 

Hearing Takeaways:

• Development of Stablecoin Legislation: Subcommittee Chairman French Hill (R-AR) stated that the hearing’s purpose was to resume the Committee’s efforts to develop bipartisan payment stabelcoin legislation. Stablecoins are cryptocurrencies that have their values backed by reference assets (such as the U.S. dollar). Most Subcommittee Members and the hearing’s witnesses expressed interest in working to develop such legislation to provide clear rules for stablecoin issuers and to protect consumers. Mr. Chervinsky also contended that stablecoin legislation would constitute a good first step for establishing a more comprehensive regulatory framework for digital assets.
  • Stablecoin Legislative Proposal from the 117th Congress: During the previous 117th Congress, then-Full Committee Chairman Maxine Waters (D-CA) and then-Full Committee Ranking Member Patrick McHenry worked to develop a bipartisan legislative proposal addressing payment stabelcoins. This proposal would have required stablecoins to be backed on a 1:1 basis by high quality liquid assets held in reserve. This proposal would have also imposed redemption requirements, monthly attestation and disclosure requirements, and risk management standards on stablecoin issuers. Subcommittee Republicans stated that this legislative proposal should serve as a foundation for developing future stablecoin legislation. Subcommittee Democrats argued however that the legislative proposal from the 117th Congress had not achieved consensus and stated that subsequent problems within the cryptocurrency and financial sector necessitate that the Subcommittee start anew in developing stablecoin legislation.
  • State Pathways for Becoming a Stablecoin Issuer: Subcommittee Chairman Hill, Subcommittee Vice Chairman Warren Davidson (R-OH), Rep. Ritchie Torres (D-NY), Superintendent Harris, Mr. Campbell, and Mr. Disparte argued that there should exist a state pathway for becoming a stablecoin issuer. They stated that the U.S. already has a history of effectively regulating financial services at both the federal and state levels and that this approach supports state-level innovations. However, Subcommittee Ranking Member Stephen Lynch (D-MA), Rep. Brad Sherman (D-CA), Rep. Sean Casten (D-IL), and Ms. Reynolds Hand raised concerns that a state-based regulatory approach could result in regulatory arbitrage and called for robust federal standards for stablecoin issuers. Rep. Casten further asserted that federal oversight of cryptocurrency issuers is necessary given how the U.S. Federal Reserve will be expected to backstop state-issued stablecoins. 
  • Proposal to Empower the U.S. Federal Reserve to Regulate Stablecoins: Rep. Bill Foster (D-IL) and Rep. Mike Flood (R-NE) argued that the U.S. Federal Reserve should have regulatory authority over stablecoin issuers to address the run risks, fraudulent minting, and monetary policy implications associated with stablecoins. Subcommittee Ranking Member Lynch stated however that U.S. Federal Reserve oversight of stablecoin issuers would allow the issuers to access U.S. Federal Reserve programs, including the Discount Window, master accounts, and payment services. He expressed concerns that this access could lead problems within the digital assets space to migrate over to the traditional financial services space.
  • Requirements for Stablecoin Issuers: Subcommittee Ranking Member Lynch, Rep. Flood, and Ms. Reynolds Hand raised concerns over proposals to permit non-bank entities to issue stablecoins and commented that these proposals could leave consumers without proper protections. Rep. Torres and Mr. Chervinksy argued however that stablecoin issuers should not be subject to banking requirements as they have no fractionalization of reserves and no lending functions. 
  • Ability to Adjust Stablecoin Transactions: Rep. Foster and Ms. Reynolds Hand asserted that consumers must be able to prevent, cancel, replace, or override stablecoin transactions and commented that the inability to take these actions will leave consumers without recourse in the event of fraud or theft. Mr. Campbell suggested that these capabilities could be supported through monitoring services (which currently exist), “freeze and seize” capabilities, and regulated stablecoins.
  • Stablecoin Reserve Assets Standards: Subcommittee Vice Chairman Davidson, Rep. Torres, Superintendent Harris, and Mr. Campbell expressed support for requiring stablecoins to hold high quality reserve assets and to make their reserve asset holdings transparent. Vice Chairman Davidson called it “essentially impossible” for a stablecoin to lose all of its value if they are backed by level 1 high-quality liquid assets or physical custody of a commodity.
• Current Regulation of Stablecoins: The hearing also considered the U.S.’s current regualtory system for stablecoins. Several Subcommittee Members and the hearing’s witnesses expressed concerns that the U.S.’s regulatory approach to stablecoins is incoherent, which can create challenges for stablecoin issuers and other stakehodlers.
  • State-Based Regulatory System: A key area of interest during the hearing involved how states are currently regulating stablecoins. In particular, the hearing largely focused on New York’s virtual currency regulatory framework. Superintendent Harris noted how virtual currency entities in New York are subject to custody and capital requirements designed for industry-specific risks. She testified that virtual currency entities under New York’s regulatory and supervisory framework must hold their virtual currencies in the same type and amount on a 1:1 basis that is owed and obligated to a customer. She stated that the New York State Department of Financial Services creates detailed supervisory agreements for virtual currency companies that meet the “rigorous” standards to be licensed or chartered. She commented that these agreements are tailored to the specific risks of each virtual currency company. She indicated that virtual currency companies must obtain approval from the New York State Department of Financial Services for material changes in business, including for new product offerings and stablecoin issuance. She also noted how virtual currency companies are subject to ongoing supervision and are regularly examined for compliance with regulations and their supervisory agreements.
  • Regulatory Conflict between the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC): Subcommittee Chairman French Hill (R-AR), Rep. Willian Timmons (R-SC), Rep. Ritchie Torres (D-NY), Mr. Campbell, and Mr. Disparte expressed frustration with the contradictory statements coming from the SEC and the CFTC regarding their regulatory authorities over stablecoins. They warned that this interagency conflict creates uncertainty for the private sector, other regulators, and stablecoin issuers and stated that legislation could help to resolve these conflicts.
  • Impact on the U.S.’s Global Competitiveness and National Security: Subcommittee Members, Mr. Campbell, Mr. Chervinsky, and Mr. Disparte raised concerns that the U.S.’s failure to provide regulatory certainty to the stablecoin space is causing stablecoin development and innovation to move offshore. They highlighted how over jurisdictions, including the European Union (EU), the United Kingdom (UK), the United Arab Emirates (UAE), Singapore, Japan, and Australia, have already developed more advanced regulatory frameworks for stablecoins, which is leading these jurisdictions to attract stablecoin development activity and innovation. They warned that this movement of stablecoin activity abroad could allow bad actors to dominate the stablecoin space and limit the ability of U.S. regulators to oversee and influence the space.
  • Impact on the U.S. Dollar: Subcommittee Chairman Hill, Rep. Wiley Nickel (D-NC), Mr. Campbell, Mr. Chervinksy, and Mr. Disparte warned that the movement of stablecoin activity abroad could undermine the U.S. dollar’s status as the world’s reserve currency. They stated that foreign stablecoin innovation could result in stablecoins that are not backed by U.S. dollars, which would reduce global demand for U.S. dollars.
• Other Policy Issues and Concerns: Subcommittee Members and the hearing’s witnesses further used the hearing to discuss policy areas of interest and concern related to stablecoins. 
  • Actual Use of Stablecoins: Subcommittee Ranking Member Stephen Lynch (D-MA) asserted that stablecoins are rarely used for payments and are instead used to facilitate speculative cryptocurrency trading and investments. Mr. Disparte stated however that Circle’s U.S. Dollar Coin (USDC) has supported more than $10 trillion in cumulative transactions on the internet and that USDC-enabled wallets support a global payment network in over 190 countries. He mentioned how Circle, the Stellar Development Foundation, and MoneyGram International had recently partnered with the United Nations High Commissioner for Refugees (UNHCR) to enable USDC to serve as a form of digital U.S. dollar cash assistance for war-displaced Ukrainian refugees. 
  • Impact of Stablecoins on Vulnerable Communities: A key area of debate during the hearing involved whether stablecoins are supporting financial inclusion or facilitating exploitation. Ms. Reynolds Hand expressed concerns that cryptocurrency companies are targeting vulnerable communities through advertisements and kiosks to peddle highly volatile products. Rep. Wiley Nickel (D-NC) and Rep. Ritchie Torres (D-NY) suggested however that stablecoins could enable more people to participate in the formal financial system because they offer faster, less expensive, more reliable, and more transparent payments infrastructure.
  • Use of Stablecoins in Illicit Activities: Rep. Brad Sherman (D-CA) asserted that the purpose of cryptocurrencies is to facilitate tax evasion and illicit activities through avoiding know your customer (KYC) and anti-money laundering (AML) requirements. Mr. Campbell commented however that blockchain-based transactions are public in nature, which enables law enforcement bodies to better monitor and identify illicit transactions. 
  • Recent Impact of Banking Problems on Stablecoin Issuers: Full Committee Ranking Member Maxine Waters (D-CA), Rep. Frank Lucas (R-OK), and Rep. Sean Casten (D-IL) raised concerns over how recent banking problems have created issues for stablecoin issuers. Rep. Lucas and Rep. Casten noted how the recent collapse of Silicon Valley Bank had temporarily caused Circle’s USDC to fall under its $1 peg. Mr. Disparte stated that this experience had taught Circle about the need to protect its business from banking risks. He indicated that Circle had been able to promise to make redemptions at par shortly following the collapse of Silicon Valley Bank. He remarked that Congress should be cognizant of the potential impact that uninsured bank deposits could have on stablecoins and their use in payments. Full Committee Ranking Member Waters also raised concerns over the recent failure of Signature Bank, which she stated had significant ties to the cryptocurrency industry. Superintendent Harris asserted however that the failure of Signature Bank had not been related to cryptocurrencies. She stated that Signature Bank had suffered a bank run and that most of the depositors that had left this Bank were not cryptocurrency-related parties.
  • Potential Anonymity of Stablecoin Transactions: A key area of debate during the hearing involved the extent to which people should be able to transact anonymously with stablecoins. Subcommittee Vice Chairman Warren Davidson (R-OH) and Mr. Chervinksy called it key for stablecoins to obtain the attributes of cash, which involve the ability to facilitate permissionless peer-to-peer transactions. Rep. Bill Foster (D-IL) asserted however that cryptocurrency transactions must have tracible identities associated with them to prevent illicit activity. He stated that these identities can be hidden and can require a warrant to be revealed.

Hearing Witnesses:

1. The Hon. Adrienne A. Harris, Superintendent, New York State Department of Financial Services
2. Mr. Dante Disparte, Chief Strategy Officer and Head of Global Policy, Circle
3. Mr. Austin Campbell, Adjunct Assistant Professor of Business, Columbia Business School
4. Mr. Jake Chervinsky, Chief Policy Officer, the Blockchain Association
5. Mrs. Delicia Reynolds Hand, Director, Financial Fairness, Consumer Reports

Member Opening Statements:

Subcommittee Chairman French Hill (R-AR):

• He remarked that the hearing marks the official resumption of the U.S. House Committee on Financial Services’s efforts to enact legislation addressing payment stablecoins.
• He mentioned how the Committee had previously worked during the 117th Congress to develop bipartisan legislation to address payment stablecoins.
  • He commented that Congress had run out of time to further pursue their bipartisan payment stablecoin legislation because of the 2022 midterm elections.
• He indicated that the stablecoin legislative proposal developed during the 117th Congress remains under consideration at the current hearing.
  • He also stated that the Committee would consider how this legislative proposal could address the benefits and risks identified in the President’s Working Group on Financial Markets’ (PWG) Report on Stablecoins.
• He mentioned how the U.S. Financial Stability Oversight Council (FSOC) has recommended that Congress pass a legal framework for addressing payment stablecoins and expressed his commitment to pursue such legislation in a bipartisan manner.
• He noted how the legislative proposal developed during the 117th Congress would require stablecoins to be backed on a 1:1 basis by high quality liquid assets held in reserve.
  • He commented that this backing would mitigate run risks.
• He also noted how this legislative proposal would require stablecoin issuers to comply with redemption requirements, monthly attestations and disclosures, and risk management standards.
• He remarked however that this legislative proposal for payment stablecoins can still be improved and expressed hope that the legislation will provide different ways for stablecoin issuers to maintain and come into compliance.
  • He advocated that the U.S. provide multiple pathways for becoming a stablecoin issuer.
  • He stated however that there must exist appropriate protections to protect against regulatory arbitrage or a “race to the bottom.”
• He also expressed interest in exploring New York’s current regulatory framework for stablecoins during the hearing.
• He then called it critical for Congress to advance payment stablecoin legislation and highlighted how recent reports have indicated that digital asset developers are leaving the U.S. to go to countries with more established regulatory frameworks for digital assets.
  • He commented that this situation is not good for U.S. innovation, jobs, or consumer protection.
• He lastly criticized the “ongoing turf war” between the SEC and the CFTC as unhelpful and unsustainable.
  • He commented that this conflict between the agencies fosters regulatory uncertainty and asserted that federal legislation is necessary to resolve this conflict.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• He remarked that the last several months have marked the “effective collapse” of much of the cryptocurrency industry following the abrupt demises of Terra Luna, FTX, Silvergate Bank, and various other cryptocurrency-related companies.
  • He also mentioned how the U.S. has experienced the failures of Silicon Valley Bank and Signature Bank (which was a prominent provider of financial services to the cryptocurrency industry).
• He stated that the Subcommittee should provide oversight for stablecoins, especially given how stablecoins intend to be non-volatile digital assets.
  • He mentioned how the PWG Report on Stablecoins had concluded that properly regulated stablecoins could support faster, more efficient, and more inclusive payment options.
• He noted however that the PWG Report on Stablecoins had also found that stablecoins present a variety of risk factors that are not currently subject to robust regulatory standards and cohesive oversight.
• He discussed how stablecoins are a type of cryptocurrency that the issuers assert is pegged to a stable reserve asset (such as the U.S. dollar).
  • He noted how stablecoin issuers claim that stablecoins facilitate payments and increase access to financial services.
• He asserted however that stablecoins are rarely used for payments and are instead used to facilitate speculative cryptocurrency trading and investments.
  • He also stated that stablecoins contain structural fragilities that make them vulnerable to runs and that pose risks to monetary policy, national security, financial stability, and fair competition.
• He remarked that the Subcommittee should consider whether stablecoins are necessary if stablecoins are not used for their intended purposes.
  • He stated that if the Subcommittee seeks to improve the U.S.’s payment system and financial inclusion, then the Subcommittee should consider advancing public sector options, such as the FedNow Service and a publicly issued digital U.S. dollar.
• He questioned the Subcommittee’s decision to consider the stablecoin legislative proposal from the previous 117th Congress and called this proposal outdated and structurally flawed.
  • He added that the proposal did not consider the recent problems within the cryptocurrency industry.
• He also raised concerns over proposals that would permit states to regulate stablecoins and commented that a state-based regulatory approach would enable stablecoin issuers to evade federal oversight.
  • He warned that these stablecoin issuers would seek out more permissive states to engage in their activities.
• He then mentioned how the stablecoin legislative proposal from the previous 117th Congress would make the U.S. Federal Reserve the primary regulator for stablecoins.
• He also noted that this legislative proposal would allow for stablecoin issuers to use U.S. Federal Reserve programs, including the Discount Window, master accounts, and payment services.
  • He commented that these programs are typically reserved for banks, which are heavily regulated.
• He then criticized the stablecoin legislative proposal from the previous 117th Congress for failing to address the risks associated with the co-mingling of customer funds and for failing to prescribe management practices for conflicts of interest.
  • He further raised concerns over the prospects of permitting non-bank entities (like stablecoin issuers) to issue bank-like products.
• He concluded that the U.S. should separate cryptocurrencies from its banking system and warned that the stablecoin legislative proposal from the previous 117th Congress would increase the connections between the two.

Full Committee Chairman Patrick McHenry (R-NC):

• He remarked that payment stablecoins constitute an important part of the digital assets ecosystem and have the potential to become a “cornerstone” of the modern payments system.
• He mentioned how had worked with Full Committee Ranking Member Maxine Waters (D-CA), Committee Members, the U.S. Department of the Treasury, and the U.S. Federal Reserve to develop stablecoin legislation during the 117th Congress.
  • He commented that this work should serve as the foundation for the Committee’s future work on stablecoins.
• He acknowledged that there have occurred several developments since the Committee had developed its stablecoin legislative proposal and stated that the Committee should now work to build upon this proposal.
• He stated that the U.S. must establish a federal regulatory regime for governing stablecoins and commented that such legislation would benefit the U.S. both domestically and internationally.

Full Committee Ranking Member Maxine Waters (D-CA):

• She stated that her negotiations with Full Committee Chairman Patrick McHenry on stablecoin legislation had not been completed during the 117th Congress and noted that there have been several developments within the cryptocurrency space in the interim.
  • She asserted that the legislative proposal from the 117th Congress should therefore not be viewed as complete.
• She raised concerns over the news that Committee Republicans had developed brand new stablecoin legislation and warned that such legislation could undermine the prospects of future negotiations.
  • She stated that Committee Democrats will draft their own stablecoin legislation if Committee Republicans seek to pursue their own stablecoin legislation.
  • She indicated that these new bills would serve as the starting points in negotiations for new bipartisan stablecoin legislation.
• She reiterated her assertion that the legislative proposal from the 117th Congress does not reflect a final bipartisan consensus.
• She stated that the Committee is “starting from scratch” regarding its efforts to develop stablecoin legislation and asserted that Congress must develop federal stablecoin legislation.
  • She expressed optimism regarding the Committee’s ability to develop such legislation.

Subcommittee Chairman French Hill (R-AR):

• He expressed the receptiveness of Committee Republicans to legislative proposals addressing stablecoins from Committee Democrats.
• He remarked that Committee Republicans have sought to improve upon the stablecoin legislative proposal from the previous Congress and stated that this proposal should not be considered the final product.

Witness Openning Statements:

The Hon. Adrienne A. Harris (New York State Department of Financial Services):

• She remarked that strengthening the U.S.’s regulatory oversight of virtual currencies is critical for protecting consumers and ensuring the safety and soundness of financial institutions.
• She noted how the New York State Department of Financial Services has been a prudential regulator of virtual currencies since 2015.
  • She commented that the Department’s virtual currency regulatory framework has been the most comprehensive in the U.S. and accounts for the unique characteristics of the banking industry.
• She stated that New York’s virtual currency regulatory framework has protected the state’s consumers, has kept virtual currency entities safe and sound, and has held bad actors accountable.
• She discussed how the New York State Department of Financial Services possesses various tools for regulating the virtual currency industry, including licensing, supervision, examination, and enforcement tools.
• She stated that the core provisions of New York’s regulatory and supervisory framework for virtual currencies are robust capital and financial standards, strong consumer protections, sophisticated cybersecurity requirements, and strong AML provisions.
  • She noted how virtual currency entities in New York are subject to custody and capital requirements designed for industry-specific risks.
• She testified that virtual currency entities under New York’s regulatory and supervisory framework must hold their virtual currencies in the same type and amount on a 1:1 basis that is owed and obligated to a customer.
  • She highlighted how this holding requirement is distinct from the traditional fractional reserve banking system.
• She stated that the New York State Department of Financial Services creates detailed supervisory agreements for virtual currency companies and indicated that the companies must meet the “rigorous” standards to be licensed or chartered.
  • She commented that these agreements are tailored to the specific risks of each virtual currency company.
• She indicated that virtual currency companies must obtain approval from the New York State Department of Financial Services for material changes in their business, including for new product offerings and stablecoin issuance.
• She also noted how virtual currency companies are subject to ongoing supervision and are regularly examined for compliance with regulations and their supervisory agreements.
  • She commented that regulated entities that are found to be out of compliance with New York State Department of Financial Services rules can be subject to penalties, will be forced to remediate their issues, and will be required to return lost funds to customers.
• She testified that the New York State Department of Financial Services was the first agency to provide regulatory clarity to stablecoins through its June 2022 guidance for U.S. dollar-backed stablecoins.
  • She indicated that this guidance requires U.S. dollar-backed stablecoins to have reserve asset backing on a 1:1 basis with cash or cash equivalents, redemption fulfillment within two business days, and public independent audits to confirm reserves.
• She recommended that the Committee build upon the dual banking regulatory system in its development of federal stablecoin legislation.
  • She asserted that federal legislation that preempts states in their regulation of innovative financial services would be harmful to existing regulatory regimes and would hamper the ability of state regulators to respond nimbly to financial developments.

Mr. Austin Campbell (Columbia Business School):

• He first remarked that many assets are incorrectly being referred to as stablecoins and called for the establishment of a clear definition for stablecoins.
  • He asserted that properly defined and designed stablecoins would constitute mundane financial instruments.
• He stated that successful regulatory frameworks for stablecoins (such as the one developed by the New York State Department of Financial Services) treat stablecoins as conservative banks or government money market funds.
  • He noted that the U.S. has extensive experience regulating these types of financial instruments.
• He also stated that existing financial regulatory structures can inform the U.S.’s regulatory approach to stablecoins, such as whether stablecoins should be regulated at the federal or state level.
  • He suggested that states could regulate small and medium-sized stablecoins while the federal government should regulate larger stablecoins given their systemic risks.
• He described the U.S.’s current regulatory approach towards stablecoins as “chaos” and remarked that stablecoin issuers face challenges in determining whether they are subject to regulation from states, banking regulators, the SEC, or the CFTC.
• He stated that the current uncertainty surrounding stablecoin legislation is causing stablecoin activity to move offshore.
  • He testified that he is currently advising his stablecoin issuer clients to move their operations abroad as a result of the U.S.’s regulatory uncertainty.
• He remarked that this movement of stablecoin activity abroad harms U.S. jobs, the strength of the U.S. dollar, the U.S. dollar’s status as the world’s reserve currency, and national security.
• He also mentioned how blockchain-based transactions are public in nature, which enables law enforcement bodies to monitor and identify illicit transactions.
  • He commented that the U.S.’s failure to embrace stablecoins undermines the ability of the U.S. to realize this benefit.
• He stated that the greatest beneficiary of the U.S.’s lack of regulatory structure for stablecoins is Tether and noted how Tether is an offshore stablecoin issuer.
  • He alleged that Tether facilitates illicit activity and commented that Tether can facilitate this activity because it operates outside of the U.S.’s regulatory sphere.
• He further discussed how foreign countries are seeking to move into the stablecoin space and mentioned how Russia is reportedly considering its own cryptocurrency legislation.
  • He warned that the U.S.’s failure to engage with cryptocurrencies would lead other countries to fill this void.
• He called on the Subcommittee to pass some form of stablecoin legislation and emphasized that other countries are already pursuing legislation in this area.
  • He also asserted that federal stablecoin legislation would improve global access to the U.S. dollar, help the U.S. fund its deficit, bolster the U.S. dollar’s reserve currency status, and ensure that the U.S. dollar would dominate future blockchain technology innovation.

Mr. Jake Chervinsky (The Blockchain Association):

• He remarked that Congress must pass stablecoin legislation and asserted that stablecoins could revolutionize the payments system and reinforce the U.S. dollar’s dominance.
• He described the U.S. financial system as outdated and stated that this system is constrained by intermediaries.
  • He noted that while the global economy operates on a 24/7 basis, he commented that the U.S. payment system is slow, inefficient, unreliable, and inaccessible to many Americans.
• He asserted that public blockchains could address the aforementioned problems within the U.S. financial system and stated that U.S. dollar stablecoins are one of the best applications of blockchain technology.
  • He commented that U.S. dollar stablecoins would enable anyone with an internet connection to send any amount of U.S. dollars to anywhere in the world nearly instantly and with very low transaction fees.
• He remarked that stablecoins are safer, faster, cheaper, more reliable, and more accessible than legacy payment rails.
  • He contended that new legislation would be necessary to maximize the benefits of stablecoins, as well as to protect consumers and to ensure that the financial system is safe and sound.
• He then stated that the status of the U.S. dollar as the world’s reserve currency is under threat from foreign adversaries (such as China).
• He asserted that the best way for the U.S. to maintain the U.S. dollar’s dominance worldwide would be to globally proliferate stablecoins.
• He then remarked that Congress’s failure to pass stablecoin legislation would cause the U.S. to cede a competitive advantage to its adversaries and to lose entrepreneurs and innovators to more welcoming jurisdictions.
  • He identified Europe, the UK, Singapore, Japan, and Australia as jurisdictions with more advanced regulatory frameworks for digital assets.
• He stated that regulatory uncertainty is already driving stablecoin innovation abroad and contended that the adoption of U.S. stablecoin legislation will help the U.S. to retain its domestic blockchain industry.
  • He urged the Committee to continue its work on stablecoin legislation on a bipartisan basis.

Mr. Dante Disparte (Circle):

• He noted how his company, Circle, is the issuer of the stablecoin USDC, which is a U.S. dollar digital currency.
• He discussed how there are growing fears of “de-dollarization” and the rise of alternative payment systems that are non-conversant with U.S. values and broader norms within the rules-based financial system.
• He remarked that Circle, USDC, and U.S. dollar-denominated payment stablecoins could support the U.S. dollar’s continued status as the global currency of reference.
  • He added that these payment stablecoins could ensure the U.S. dollar’s influence on the internet.
• He stated that Circle has always aspired to a “regulation first” approach throughout its existence and commented that this approach is based on trust, transparency, accountability, and financial integrity.
  • He indicated that the first USDC was issued five years ago and emphasized that the USDC could be considered a U.S. dollar-denominated payment stablecoin.
• He testified that USDC has supported more than $10 trillion in cumulative transactions on the internet and that USDC-enabled wallets support a global payment network in over 190 countries.
  • He indicated that more than 75 percent of all USDC in circulation are held in digital wallets and smart contracts (rather than on digital asset exchanges).
• He remarked that there is a “Cambrian explosion” of use cases and responsible innovation resulting from the programmable, composable, trusted, and open nature of USDC.
  • He stated that the U.S. is experiencing growing acceptance of USDC as a U.S. dollar settlement option for major financial services firms, including Visa, MoneyGram International, and Worldpay.
• He then discussed how more than 132 billion of stablecoins in circulation reference the U.S. dollar, albeit to varying degrees of prudential regulatory standards.
  • He stated that USDC has embraced transparency since its inception and testified that Circle has adopted macroprudential risk standards and transparency.
• He noted how there exist diverse enterprise use cases for USDC, including treasury management and cross border payments.
  • He recounted how Circle, the Stellar Development Foundation, and MoneyGram International had recently partnered with the UNHCR to enable USDC to serve as a form of digital U.S. dollar cash assistance for war-displaced Ukrainian refugees.
• He remarked that Circle has always operated under the highest prevailing regulatory standards for electronic stored value and money transmission in the U.S.
• He noted that while other countries regulate payments and electronic payments activity at a national level, he indicated that the U.S. framework empowers state banking and money transmission supervisors to foster, develop, and regulate the payments industry at the state level.
  • He commented that while this approach may be subject to potential operating and regulatory gaps, he asserted that this approach has produced an economic development model that has enabled companies to start up and scale across the U.S.
• He remarked that the U.S. should not view financial innovation, inclusion, and protecting the financial system’s integrity as competing objectives.
• He noted how Circle is comprehensively licensed as a state-supervised money and electronic stored value company across 48 states and mentioned how Circle had been the first company to receive a BitLicense from the New York State Department of Financial Services.
  • He testified that Circle remains a registered money services business that conforms with the U.S. Financial Crimes Enforcement Network’s (FinCEN) guidance on combating illicit financial activity.
  • He further stated that Circle has strong prospects and desires to become a U.S.-listed company.

Mrs. Delicia Reynolds Hand (Consumer Reports):

• She remarked that cryptocurrencies can be appealing to retail consumers whom traditional finance has never appropriately served.
  • She mentioned how a 2022 Consumer Reports survey had found that African Americans own cryptocurrencies at a higher rate relative to other ethnic groups.
  • She commented that African Americans have never been a priority of the traditional banking system and are more likely to live in credit and intergenerational wealth deserts.
  • She further noted how the cryptocurrency industry has sought to target these consumers through Super Bowl advertisements, influencers, and cryptocurrency kiosks.
• She stated that consumers are being trapped in a “vicious cycle” of boom and bust of cryptocurrency experimentation.
  • She lamented how the U.S. lacks any uniform or meaningful regulatory frameworks for cryptocurrencies.
• She described the risks posed by cryptocurrencies as significant.
  • She indicated that these risks include an unlimited supply of tokens and coins serving as collateral for loans, rigid and self-executing smart contracts, non-existent reserve requirements, a lack of interoperability requirements, a lack of meaningful disclosures, and the creation of debtor-creditor relationships.
• She remarked that the legislative proposal for stablecoins from the 117th Congress does create some concerns.
• She expressed concerns that this legislative proposal creates the potential for regulatory arbitrage.
  • She noted how the proposal does not include any requirements for federal regulatory review of state stablecoin licenses.
• She also expressed concerns that this legislative proposal does not require non-bank stablecoin issuers to be insured depository institutions.
  • She commented that this policy would create confusion and reduce protections for consumers that choose to purchase stablecoins.
• She noted that while the legislative proposal establishes a regime to approve issuers of payment stablecoins, she stated that this proposal does not outline how payment activities conducted or facilitated by the issuers or the coins will have adequate consumer protections.
  • She asserted that consumers must possess the ability to prevent, cancel, replace, or override transactions and commented that these abilities are key to ensuring that payment systems and operators can conduct chargebacks and resolve payment disputes.
• She also expressed concerns that this legislative proposal does not require interoperable technology protocols for stablecoins.
  • She acknowledged however that the proposal does call for the development of interoperability standards for stablecoins.
• She remarked that the absence of robust interoperability technology protocols for stablecoins could impede financial access for consumers and result in a siloed payments system.
• She then stated that the Committee needs to augment its legislative proposal for digital assets by including language to address custodial wallets.
  • She asserted that the law should prevent a creditor-debtor relationship from being formed in custodial wallets and that there should exist disclosures around this issue.
• She also recommended the legislative proposal move the U.S. away from an “outdated” notice and disclosure system, impose prohibitions on the co-mingling of funds, provide a 24-hour calendar day redemption requirement, and ensure that a consumer’s use of a stablecoin would not create a creditor-debtor relationship.

Congressional Question Period:

Subcommittee Chairman French Hill (R-AR):

• Chairman Hill discussed how the SEC and the CFTC are currently taking contradictory positions in court about whether one of the most utilized stablecoins should be classified as a security or a commodity. He stated that this interagency conflict creates uncertainty for the private sector, other regulators, and stablecoin issuers and called it impossible to comply with federal securities and commodities laws simultaneously. He remarked that the Committee’s stablecoin legislation under development seeks to resolve this regulatory uncertainty. He asked Mr. Disparte to discuss the impact of the conflict between the SEC and the CFTC.
  • Mr. Disparte remarked that the interagency conflict on stablecoin regulation is not helpful. He stated that virtually every country treats payment stablecoins under an equivalent national regime that would conform with electronic money rules and as a payments and banking innovation (rather than as securities or commodities innovation). He noted that while stablecoins might be used in digital assets trading, he commented that the core function of stablecoins is to address buyer’s and spender’s remorse in digital asset transactions.
• Chairman Hill asked Mr. Campbell to indicate whether non-interest-bearing payment stablecoins should be considered securities.
  • Mr. Campbell answered no. He stated that non-interest-bearing payment stablecoins work like money and operate like banking products.
• Chairman Hill then discussed how state regulators and FinCEN are currently most responsible for overseeing stablecoins. He commented that state regulatory frameworks for stablecoins provide critical consumer protections and regulatory oversight. He called it critical for the U.S. to retain multiple pathways for payment stablecoin issuers as part of any federal regulatory framework for stablecoins. He asked Superintendent Harris to address the role that state regulators should play in overseeing payment stablecoin issuers.
  • Superintendent Harris remarked that state regulators can play an “incredibly important” role in overseeing payment stablecoin issuers. She mentioned how the New York State Department of Financial Services works closely with FinCEN and other federal regulators to oversee payment stablecoin issuers. She stated that the Department has been able to “nimbly” respond to all changes in the marketplace. She highlighted how the Department had provided a flexible licensing and charter regime, engaged in supervisory agreements with each of its licensed entities, provided regular examinations of its licensed entities, and brought enforcement actions when necessary. She remarked that the Department’s actions are based on a banking supervision model. She asserted that the U.S. should apply the dual regulatory framework being used in banking to cryptocurrencies and stablecoins.
• Chairman Hill asked Superintendent Harris to confirm that the New York State Department of Financial Services prioritizes consumer and investor protections.
  • Superintendent Harris answered affirmatively. She testified that the New York State Department of Financial Services requires robust disclosures about fees and risks for regulated entities. She also mentioned how the Department imposes 1:1 reserve asset holding requirements for stablecoin issuers and requires stablecoin issuers to make attestations about their reserve holdings. She further stated that the Department does not permit stablecoin issuers to lend consumer assets and requires stablecoin issuers to segregate their customer assets.
• Chairman Hill then mentioned how he had previously introduced the 21st Century Dollar Act with Rep. Jim Himes (D-CT). He explained that this legislation asks the U.S. Department of the Treasury to develop recommendations for maintaining the U.S. dollar’s global preeminence. He stated that the U.S. dollar’s global preeminence has benefited both the U.S. and the world. He remarked that regulatory certainty would enable the U.S. to maintain domestic innovation and the U.S. dollar’s status as the world’s reserve currency. He asked Mr. Disparte to address the role that stablecoins could play in supporting the U.S. dollar’s global dominance.
  • Mr. Disparte mentioned how USDC has processed $10 trillion in internet native payments over the previous five years. He stated that these activities would not be possible under any other means. He noted how most of the world’s payments systems are very siloed and cannot easily interact with one another.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• Ranking Member Lynch discussed how the value of the stablecoin market has decreased in recent months due to the failure of some stablecoin issuers. He stated that the recent market downturns have revealed complex risks associated with stablecoins, including their lack of stable values and the risk exposures that stablecoins can pose to the banking system. He asked Ms. Reynolds Hand to identify additional risks posed by stablecoins. He also asked Ms. Reynolds Hand to discuss how the legislative proposal for stablecoins from the 117th Congress would not address current stablecoin vulnerabilities and risks.
  • Ms. Reynolds Hand raised concerns over the growing acceptance of USDC by financial institutions and stated this growing acceptance opens up the traditional financial sector to instability and volatility. She stated that legislation must impose clear activity limitations on the comingling of customer funds, self-dealing, and undisclosed conflicts of interest. She further stated that legislation must prevent creditor-debtor relationships between stablecoin holders and stablecoin issuers.
• Ranking Member Lynch then raised concerns that the legislative proposal for stablecoins from the 117th Congress would provide stablecoin issuers with access to the U.S. Federal Reserve’s Discount Window. He noted how FTX had not been tied to the traditional banking system, which meant that FTX’s collapse did not trigger widespread banking problems. He asked Ms. Reynolds Hand to discuss the risks associated with permitting stablecoin issuers to act like banks without being subject to the same regulatory framework.
  • Ms. Reynolds Hand discussed how the National Bank Acts of 1863 and 1864 came in response to a series of bank failures and runs and the U.S.’s absence of federal oversight of banks. She remarked that the U.S. could not treat non-bank entities like banks without the equivalent restrictions on consumer access. She also stated that the U.S. must ensure that non-bank entities issuing stablecoins possess substantive consumer protections.

Rep. Frank Lucas (R-OK):

• Rep. Lucas noted how stablecoins attempt to provide a relatively stable value through pegging their value to real world assets. He asked Mr. Campbell to elaborate on the different categories of underlying assets that can back stablecoins.
  • Mr. Campbell remarked that there exist three categories of stablecoins: fiat currency-backed stablecoins, cryptocurrency-backed stablecoins, and algorithmically-backed stablecoins. He explained that algorithmically-backed stablecoins are based on a mathematical relationship. He stated that fiat currency-backed stablecoins have been “marginally successful” while cryptocurrency-backed and algorithmically-backed stablecoins are highly experimental financial products. He commented that the adjective “stable” should probably not be applied to cryptocurrency-backed and algorithmically-backed stablecoins. He recommended that Congress restrict the definition of stablecoins to fiat currency-backed stablecoins and impose strong reserve guidelines and consumer protections on stablecoins.
• Rep. Lucas then asked Superintendent Harris to elaborate on the specific risks presented by stablecoin firms that could be addressed through supervisory agreements.
  • Superintendent Harris first noted how New York maintains a licensing regime and a chartering regime, which provides companies with the flexibility to choose a regulatory regime that matches their business model without sacrificing any regulatory rigor. She indicated that companies that have received a license or charter from New York then must subject themselves to a supervisory agreement with the state. She commented that this approach enables New York to tailor its oversight to the specific risks of a given company. She posited a hypothetical scenario in which a stablecoin issuer wants to offer a stablecoin on two different protocols. She stated that New York’s supervisory framework enables the state to require separate disclosures, enhanced cybersecurity controls, and enhanced Bank Secrecy Act (BSA) and AML controls for this specific issuer. She further mentioned how New York pre-approves every new product and material change in business that a licensee seeks to offer.
• Rep. Lucas then mentioned how Circle’s USDC coin had fallen under its $1 peg during the recent banking downturn stemming from the collapse of Silicon Valley Bank. He noted how Circle had used Silicon Valley Bank to manage its cash reserves. He asked Mr. Disparte to discuss the lessons learned from the recent collapse of Silicon Valley Bank and to address how this collapse could have impacted USDC.
  • Mr. Disparte remarked that the recent failures of three banks (including Silicon Valley Bank) had taught Circle about the need to protect its business from banking risks. He indicated that Circle had been able to promise to make redemptions at par shortly following the collapse of Silicon Valley Bank. He remarked that Congress should be cognizant of the potential impact that uninsured bank deposits could have on stablecoins and their use in payments.

Full Committee Ranking Member Maxine Waters (D-CA):

• Ranking Member Waters asked Superintendent Harris to indicate whether New York maintains a regulatory framework for stablecoins.
  • Superintendent Harris answered affirmatively. She stated that New York’s framework for stablecoins is robust and exists in regulation, supervisory agreements, and recently issued guidance.
• Ranking Member Waters expressed support for developing federal stablecoin legislation. She then mentioned how New York recently experienced a significant bank failure. She asked Superintendent Harris to discuss this bank failure and the role that cryptocurrencies played in the failure.
  • Superintendent Harris asserted that there exists a misconception that the recent failure of Signature Bank had been related to cryptocurrencies. She stated that Signature Bank had experienced a bank run and indicated that the outflow of deposits came from a broad depositor base, including wholesale food vendors, fiduciaries, trust accounts, and law firms. She stated that the outflow of cryptocurrency assets from Signature Bank had been in exact proportion to their representation in the depositor base overall. She indicated that some of these cryptocurrency deposit outflows had been preplanned. She concluded that the failure of Signature Bank had not been related to cryptocurrencies.
• Ranking Member Waters asked Superintendent Harris to explain why there exists a perception that Signature Bank’s failure had been related to cryptocurrencies. She asked Superintendent Harris to indicate how she could dismiss the role of cryptocurrencies in Signature Bank’s failure.
  • Superintendent Harris noted that about 20 percent of Signature Bank’s depositors had been cryptocurrency-related companies. She indicated that Signature Bank had previously announced that it would be derisking from the cryptocurrency space prior to its collapse. She stated however that most depositors that had left Signature Bank were non-cryptocurrency-related depositors. She asserted that the instability of cryptocurrency deposits had therefore not caused Signature Bank to collapse. He indicated that the cryptocurrency depositors that had left Signature Bank had been in exact proportion to the Bank’s depositor base. She concluded that Signature Bank had suffered a bank run and stated that Silicon Valley Bank’s collapse had spurred this collapse.
• Ranking Member Waters indicated that the Committee would continue to investigate and hold hearings on these recent bank collapses. She then discussed how a major concern involving cryptocurrencies and stablecoins involves whether these assets are credible. She asked Superintendent Harris to discuss what the New York State Department of Financial Services has learned about ensuring the credibility of assets.
  • Superintendent Harris first mentioned that New York had not provided licenses to FTX, Voyager, and Celcius and commented that these cryptocurrency firms had failed to meet the state’s standards. She noted how New York requires that stablecoin issuers back their stablecoins on a 1:1 basis with cash and cash equivalents, provide redemption to their customers within two business days, and provide public and independent attestations of their reserve mixes on their websites. She also mentioned how New York maintains “robust” capital requirements for stablecoin issuers based on a sophisticated formula. She asserted that no New York-licensed cryptocurrency entities have gone bankrupt because of these requirements.
• Ranking Member Waters asked Superintendent Harris for recommendations to the Committee for determining the credibility of assets.
  •  Superintendent Harris remarked that New York’s cryptocurrency framework constitutes a “very good” model and urged the Committee to duplicate this model. She also called on the Committee to enable states to pursue their own regulations for cryptocurrencies so that nimble regulators can continue to police this space appropriately.
• Ranking Member Waters then asked Ms. Reynolds Hand to discuss the extent to which states should be permitted to regulate payment stablecoins on their own. She asked Ms. Reynolds Hand to indicate whether a federal agency (such as the U.S. Federal Reserve) should approve payment stablecoins.
• Note: Ranking Member Waters’s question period expired here. Ms. Reynolds Hand indicated that she could submit her answer to Ranking Member Waters’s question in writing.

Subcommittee Vice Chairman Warren Davidson (R-OH):

• Vice Chairman Davidson applauded New York for its proactive establishment of a regulatory framework for stablecoins. He called it “essentially impossible” for a stablecoin to lose all of its value because stablecoins are backed by level 1 high-quality liquid assets or physical custody of a commodity. He asked Superintendent Harris to identify the key elements of New York’s guidance that provides consumers with confidence that stablecoins have their promised backing.
  • Superintendent Harris testified that New York requires stablecoins to be backed by level 1 high-quality liquid assets or physical custody of a commodity. She also indicated that New York has not approved any algorithmically-backed stablecoins for issuance or listing. She emphasized that New York requires stablecoins to have 1:1 backing, prohibits the comingling of stablecoin funds, prohibits stablecoin issuers from engaging in rehypothecation lending, requires trade date plus two days (T+2) settlement, and maintains auditing and reporting requirements for stablecoin issuers.
• Vice Chairman Davidson stated that a federal regulatory framework for payment stablecoins could still permit states to oversee stablecoins. He commented that this dual regulatory structure exists in other areas of the financial services sector. He asked Superintendent Harris to indicate whether a federal regulatory structure would be compatible with New York’s stablecoin regulatory structure.
  • Superintendent Harris answered affirmatively.
• Vice Chairman Davidson then discussed how Tether is the world’s largest stablecoin and is headquartered in Hong Kong. He asked Mr. Campbell to discuss the implications of Tether being headquartered offshore and to address how Tether has been able to grow its influence.
  • Mr. Campbell attributed Tether’s growth to its first mover advantage and noted how Tether had started in 2014. He stated that the U.S.’s inaction on stablecoin policy is causing entrenched incumbents to dominate the cryptocurrency space. He also remarked that Tether did not face the same regulatory uncertainty as other stablecoins and was not subject to robust regulatory requirements. He commented that Tether is not transparent, has questionable reserves, and puts people at risk. He asserted however that Tether’s availability makes people willing to overlook the aforementioned risks because Tether constitutes the main option for transacting U.S. dollars over a blockchain.
• Vice Chairman Davidson described Tether as a “time bomb” because it lacks transparency and disclosure requirements. He called on Congress to create legal clarity for stablecoins and thanked Full Committee Chairman Patrick McHenry (R-NC) and Full Committee Ranking Member Maxine Waters (D-CA) for their work on stablecoin legislation. He lastly asked Mr. Chervinsky to indicate whether stablecoins need to retain the attributes of cash if they are to eventually be used as a medium of exchange. He commented that these attributes of cash involve the ability to facilitate permissionless peer-to-peer transactions.
  • Mr. Chervinsky called it “absolutely critical” for stablecoins to retain the attributes of cash. He remarked that the U.S. is becoming a cashless society and stated that the U.S. could either pursue a currency with surveillance features or reproduce the benefits of cash. He commented that stablecoins could enable the U.S. to realize the benefits of cash within the digital space.
• Vice Chairman Davidson asserted that stablecoins would need to have cash-like attributes if stablecoins are to be trusted.
• Note: Vice Chairman Davidson’s question period time expired here.

Rep. Bill Foster (D-IL):

• Rep. Foster asked the witnesses to indicate whether every cryptocurrency transaction should be traceable to a secure digital identity that is issued by a country with which the U.S. maintains an extradition treaty. He commented that this approach could ensure that cryptocurrencies are not used for ransomware attacks or for other illicit activities.
  • Mr. Chervinsky stated that there will exist technological solutions that will prevent cryptocurrencies from being used for illicit activities without requiring cryptocurrency transactions to be traceable to a secure digital identity.
• Rep. Foster interjected to assert that Mr. Chervinsky’s response is unacceptable. He asked Mr. Chervinsky to indicate whether there currently exists a technology that would both allow for self-custody on anonymous transactions and prevent ransomware attacks.
  • Mr. Chervinsky stated that many companies are working to address Rep. Foster’s concerns.
• Rep. Foster interjected to emphasize that these solutions currently do not exist. He also stated that there are many companies that are currently working to facilitate illicit transactions. He asserted that cryptocurrency transactions must be associated with digital identities to prevent ransomware attacks. He then posited a scenario in which a bad actor forces a person to transfer all of their digital assets to them. He asked the witnesses to indicate whether the person who has had all of their digital assets stolen in this scenario has any form of recourse.
  • Mr. Campbell remarked that many existing stablecoins (including the Paxos stablecoin) have a solution for the scenario posited by Rep. Foster. He stated that stablecoins that exist on public blockchains should have “freeze and seize” capabilities in the event of illicit actions. He also stated that blockchain surveillance tools (such as Chainalysis, Elliptic, and Inca Digital) could help to address illicit cryptocurrency transactions.
• Rep. Foster interjected to comment that the use of increasingly anonymous cryptocurrencies could defeat these blockchain surveillance tools.
  • Mr. Campbell stated that blockchain surveillance tools have proven effective in monitoring regulated stablecoin transactions.
• Rep. Foster interjected to ask Mr. Campbell to clarify whether he is advocating for mandatory transparency so that regulators could see the true identities behind the participants in transactions.
  • Mr. Campbell commented that mandatory transparency would constitute one option for addressing illicit transactions. He also stated that the current lack of regulatory clarity around stablecoins prevents many regulated financial institutions from operating within the stablecoin space. He commented that this situation has led many bad actors to operate within the stablecoin space. He remarked that the creation of regulatory framework that required the use of regulated stablecoins could prevent illicit transactions.
• Rep. Foster interjected to remark that the U.S. needs the equivalent of license plates for digital wallets. He stated that the identifying feature of a digital wallet could be anonymous (similar to a license plate) and that the identity could be uncovered through a warrant.
  • Mr. Campbell stated that digital wallet address information was sufficient for resolving thefts in “freeze and seize” regimes for stablecoins. He commented that the identity of the beneficial owner of a digital wallet is not necessary for resolving a theft in these cases.
• Rep. Foster asked Mr. Campbell to clarify that “freeze and seize” regimes involve governance bodies that can overpower a blockchain.
  • Mr. Campbell answered affirmatively.
• Rep. Foster lastly suggested that the U.S. require that an issued stablecoin be associated with an account at the U.S. Federal Reserve. He also suggested that the U.S. deem no stablecoin issuance to be valid until it is accompanied by an attestation from the U.S. Federal Reserve that the total amount that has been issued is less than what is on reserve at the U.S. Federal Reserve. He commented that these policies would help to address the run risks, fraudulent minting, and monetary policy implications associated with stablecoins. He asked the witnesses to indicate whether these policies have any problems. He asked the witnesses to provide their answers to this question for the hearing’s record.

Rep. William Timmons (R-SC):

• Rep. Timmons noted how $6 billion has been transferred from USDC to foreign stablecoins over the previous few weeks. He commented that this money has left the U.S. economy and is no longer subject to AML and KYC standards. He asked Mr. Disparte to opine on this transfer of USDC and its implications for U.S. national security. He asked Mr. Disparte to indicate whether this transfer could be attributed to the U.S.’s lack of regulatory clarity for stablecoins.
  • Mr. Disparte remarked that many stablecoin users prioritize opacity and commented that there is currently occurring a “race to the bottom” in the digital assets market. He stated that the U.S.’s lack of regulatory clarity is contributing to the movement of stablecoin activity abroad. He also remarked that there is global stablecoin competition and raised concerns that the U.S.’s failure to participate in this competition could lead less savory companies to become the dominant players in financial infrastructure. He commented that many of these less savory companies are operating with impunity outside of the perimeter of major jurisdictions (including the U.S.).
• Rep. Timmons then remarked that the contradictory statements from federal regulators underscore the need for Congress to pass stablecoin legislation. He noted how many stablecoin projects are fleeing the U.S. for countries that have established clear frameworks for payment stablecoin issuance. He warned that these projects would flee the U.S. at a greater pace if the U.S. continued its inaction on the issue. He asked Mr. Chervinsky to project the impacts of Congress’s failure to advance stablecoin legislation.
  • Mr. Chervinsky remarked that Congress’s failure to address stablecoins will cause stablecoins to be issued in other countries. He commented that there exists a “clear desire” for stablecoin technology and for its applications for national currencies. He stated that other jurisdictions are adopting “workable” frameworks for stablecoins. He remarked that the foreign development of stablecoins would prevent the U.S. from ensuring that stablecoin issuers are adhering to U.S. principles. He also warned that the foreign development of stablecoins could result in more stablecoins that are not backed by U.S. dollars. He commented that this situation would undermine the U.S. dollar’s global dominance.
• Rep. Timmons then mentioned how the stablecoin legislative proposal from the previous 117th Congress would require stablecoin issuers to produce information, such as financial inclusion reports annually. He asked Mr. Campbell to identify items that are helpful to know about a stablecoin issuer. He asked Mr. Campbell to indicate whether financial inclusion reporting is materially important enough to be statutorily required.
  • Mr. Campbell first remarked that stablecoins should primarily be considered banking products, which necessitates a prioritization of safety and soundness. He stated that there should exist transparency around stablecoin reserve assets and the composition of these assets. He commented that this transparency would foster faith in the usability of stablecoins and would provide assurances that the stablecoins possess adequate backing. 

Rep. Ritchie Torres (D-NY):

• Rep. Torres first remarked that he would not support any federal stablecoin legislation that preempts the work of the New York State Department of Financial Services or otherwise encroaches on the sovereignty of New York. He stated that the U.S. has a long regulation of dual regulation within the finance space and asserted that there should exist federal and state options for stablecoin issuance. He commented that the federal government could provide minimum standards for stablecoin insurance to protect against regulatory arbitrage. He asked Superintendent Harris to indicate whether the stablecoin legislative proposal from the previous 117th Congress creates a “genuine” system of dual regulation.
  • Superintendent Harris remarked that improvements could be made to the stablecoin legislative proposal from the previous 117th Congress. She noted that while the proposal contains language stating that it will not preempt states, she commented that the legislation contains several provisions that would provide federal regulators with veto authority over state regulators. She commented that these provisions are counterproductive and would discourage companies from pursuing state options for stablecoin issuance.
• Rep. Torres asked Superintendent Harris to indicate whether stablecoin issuers should be fully reserved and that their reserves should consist entirely of cash or cash equivalents.
  • Superintendent Harris answered affirmatively. She remarked that New York requires stablecoin issuers to be fully reserved and to hold 100 percent of their reserves in cash or cash equivalents.
• Rep. Torres asked Superintendent Harris to indicate whether stablecoin reserves should be verified by both self-attestation and a third-party audit.
  • Superintendent Harris responded affirmatively. She remarked that New York maintains such verification requirements for stablecoin reserves.
• Rep. Torres then mentioned how the PWG Report on Stablecoins had proposed banking regulation for stablecoin issuers. He noted however that stablecoin issuers have no fractionalization of reserves and no lending functions. He stated that stablecoin issuers operate differently than banks and should therefore be regulated differently. He asked Mr. Chervinsky to indicate whether he agreed with this position.
  • Mr. Chervinsky expressed agreement with Rep. Torres’s position that stablecoin issuers should be regulated differently than banks. He remarked that the U.S. could design reasonable and tailored regulations for non-bank entities seeking to issue stablecoins without sacrificing safety and soundness.
• Rep. Torres noted how SEC Chairman Gary Gensler had asserted that an alternative regulatory framework would undermine 90 years of U.S. securities law. He mentioned however that New York already segregates cryptocurrency regulation from securities regulation. He indicated that the New York State Department of Financial Services regulates cryptocurrencies while the Office of the New York State Attorney General regulates securities. He asked Superintendent Harris to indicate whether New York’s separate regulatory framework for cryptocurrencies undercut the state’s regulation of securities.
  • Superintendent Harris remarked that the authorities of the New York State Department of Financial Services are not dependent on determining whether an asset constitutes a security, a commodity, or a currency. She stated that the Department has blanket authority over virtual assets and that the Department exercises this authority. She also mentioned how some New York cryptocurrency companies are subject to registration requirements with the Office of the New York State Attorney General. She stated that New York’s approach to cryptocurrency regulation has proven successful.
• Rep. Torres asked Superintendent Harris to indicate whether New York’s separate licensing regime for cryptocurrencies had forced New York to sacrifice the rigor of its financial regulatory regime.
  • Superintendent Harris answered no.
• Rep. Torres called the New York State Department of Financial Services the most rigorous regulator of cryptocurrencies in the U.S.
  • Superintendent Harris asserted that the New York State Department of Financial Services is the most rigorous regulator of cryptocurrencies in the world.
• Rep. Torres noted how the New York State Department of Financial Services had been the first agency to raise concerns about the insufficient reserves of Tether. He disputed the assertion that a separate regulatory framework for cryptocurrencies would undermine the U.S.’s securities laws. He then discussed how the legacy financial system has high fees and long delays. He asserted that these fees and delays particularly impact vulnerable Americans (including people of color). He asked Mr. Campbell and Mr. Disparte to indicate whether the combination of stablecoins and blockchain technology could create a faster and cheaper payments system.
  • Mr. Campbell answered affirmatively and highlighted how blockchains treat all users equally. He also stated that blockchains are accessible to all users, regardless of how much money they have.
  • Mr. Disparte also stated that the combination of stablecoins and blockchain technology could create a faster and cheaper payments system.

Rep. Erin Houchin (R-IN):

• Rep. Houchin expressed concerns over the lack of regulatory clarity around digital assets and over how federal agencies are taking a restrictive and overly burdensome approach toward digital assets. She stated that the constant threat of regulation by enforcement has harmed U.S. businesses and innovators and has driven innovators abroad. She mentioned how Circle had recently announced that it would open its European headquarters in Paris. She asked Mr. Disparte to discuss the EU’s regulatory environment for stablecoins.
  • Mr. Disparte discussed how the EU has embarked on a whole of region framework for digital assets since 2019 and indicated that this effort is known as the Markets in Crypto-Assets (MiCA) framework. He noted that the EU had initially pursued this framework in response to competition fears from large technology companies and geopolitical actors. He stated that the MiCA framework has evolved into the world’s most comprehensive regulatory framework for digital assets. He noted how the MiCA framework views stablecoins as electronic money tokens and would provide EU-wide licenses for stablecoins. He mentioned how Circle has just announced the submission of two licenses in Europe. He indicated that these licenses are an electronic money license and digital asset service provider license. He also testified that Circle has filed for a similar type of license in Singapore as a major payments institution.
• Rep. Houchin asked Mr. Disparte to discuss how the MiCA framework compares to the stablecoin legislative proposal from the previous 117th Congress.
  • Mr. Disparte remarked that the MiCA framework is broader in nature than the stablecoin legislative proposal from the previous 117th Congress. He noted how the MiCA framework contemplates digital assets trading, which types of assets pose systemic risks, and definitional issues around market conduct. He stated however that the MiCA framework and the stablecoin legislative proposal from the previous 117th Congress do have comparable aspects. He noted how both frameworks require the prudential treatment of stablecoin reserves, the segregation of funds, and various disclosures.
• Rep. Houchin noted how the EU is not the only foreign jurisdiction that is pursuing new regulatory framework for stablecoins. She asked Mr. Campbell and Mr. Disparte to discuss how other countries are regulating stablecoins and to identify what foreign regulatory frameworks for stablecoins require of issuers. She expressed concerns over how the U.S. is not the first mover in the stablecoin space and how this impacts the dynamics of the overall stablecoin ecosystem.
  • Mr. Campbell mentioned how other countries are starting to develop laws that deal specifically with fiat currency-backed stablecoins. He stated that no countries are embracing cryptocurrency-backed stablecoins or algorithmically-backed stablecoins. He remarked however that Singapore, the UAE, the UK, and the EU all maintain stablecoin regulatory frameworks that are “substantially similar” to the stablecoin legislative proposal from the previous 117th Congress. He contended that the U.S. could develop a better regulatory framework for stablecoins and commented that the U.S.’s financial regulation and systems are more robust than the aforementioned jurisdictions. He warned that the U.S.’s failure to pursue stablecoin legislation would lead stablecoin innovators to move to jurisdictions with clearer regulatory frameworks.
  • Mr. Disparte noted that while stablecoin innovators now have more choices regarding where to pursue innovation, he stated that the U.S. remains the best option for starting innovative companies. He highlighted however that the U.S. has become a net exporter of stablecoin operating and business models. He stated that the U.S. must therefore pay attention to foreign jurisdictions competing with the U.S. to attract stablecoin innovators. He also noted how Japan will soon issue broad and comprehensive stablecoin guidance and how Hong Kong has reemerged as an attractive jurisdiction for stablecoin innovation. He further remarked that city-states (including New York, Hong Kong, and Singapore) are increasingly shaping the path for digital assets.
• Rep. Houchin raised concerns that the U.S. could lose its leading role in digital assets without proper action. She highlighted how many stablecoin projects are fleeing the U.S. for countries that have established clear regulatory frameworks for payment stablecoin issuance. She warned that the U.S.’s failure to issue guidance to payment stablecoin issuers would exacerbate current trends.

Rep. Brad Sherman (D-CA):

• Rep. Sherman discussed how there is currently a lot of money in the cryptocurrency space and stated that the cryptocurrency industry’s profitability is based on its issuance of tokens. He noted how the cryptocurrency industry previously had a market capitalization of $3 trillion and that the cryptocurrency industry’s market capitalization had fallen to $1.2 trillion. He stated however that this $1.2 trillion amount is still significant and that the industry maintains well-funded lobbying and public relations operations. He remarked that the U.S. maintains a “very good” payments system and an excellent currency. He commented the current U.S. payments system is better than the current cryptocurrency payments system. He asserted that cryptocurrencies seek to facilitate tax evasion and illicit activities through avoiding KYC and AML requirements. He dismissed concerns that other countries are outcompeting the U.S. in terms of cryptocurrencies and reiterated his contention that the chief objective of cryptocurrencies is to facilitate tax evasion and illicit activities. He then asked Ms. Reynolds Hand to indicate whether there exist any constraints on states seeking to develop stablecoin regulatory systems that advantage tax evaders.
  • Ms. Reynolds Hand remarked that there are no constraints on the ability of states seeking to develop stablecoin regulatory systems that advantage tax evaders. She warned that this situation could lead states to pursue a “race to the bottom” in terms of regulatory standards.
• Rep. Sherman warned that states might seek to develop favorable stablecoin regulatory regimes to attract capital at the expense of federal tax revenues. He then reiterated his criticisms that the stablecoin market does not have KYC and AML requirements and asserted that the purpose of stablecoins is to evade taxes and U.S. laws.

Rep. Mike Flood (R-NE):

• Rep. Flood mentioned how he had helped to pass the Nebraska Financial Innovation Act, which permits Nebraska’s state-chartered banks to custody digital assets. He asked Superintendent Harris to address why it is important for state regulators to have a robust role in regulating digital assets.
  • Superintendent Harris remarked that the U.S.’s dual regulatory framework for banking has proven successful and contended that the U.S. should replicate this regulatory framework for stablecoins. She stated that the chief benefit of this dual regulatory framework is that it acknowledges the nimbleness with which state regulators can respond to new developments. She highlighted how this nimbleness is exemplified by New York’s adoption of 1:1 reserve requirement for stablecoins.
• Rep. Flood asked Stuperindent Harris to indicate which other states are at the forefront of stablecoin regulation.
  • Superintendent Harris mentioned how Illinois had recently announced that they would duplicate New York’s regulatory framework for stablecoins. She added that other states have indicated that they are exploring their own regulatory frameworks for stablecoins.
• Rep. Flood then called it important for there to remain a pathway for new entrants to become stablecoin issuers. He asked Mr. Disparte to indicate whether the pathway for non-banks to become stablecoin issuers under the legislative proposal for stablecoins from the 117th Congress would foster new entrants into the stablecoin space.
  • Mr. Disparte remarked that the U.S. is an outlier internationally in that it lacks a federal payments system charter. He noted how other payments companies (including PayPal, Stripe, and Apple Pay) are subject to state oversight. He stated that the next “breakthrough” for the U.S. payments system will involve fungibility and interoperability of different payments systems. He remarked that preserving a bank and non-bank pathway for digital currency issuance would be “really critical.”
• Rep. Flood then noted how banks possess many protections and stated that allowing non-bank entities to access the federal payments system would constitute a significant development. He commented that the U.S. Federal Reserve and the U.S. Federal Deposit Insurance Corporation (FDIC) will need to oversee entities involved with the federal payments system. He asked Mr. Dipsarte to respond to concerns regarding the allowance of non-bank entities into the federal payments system.
  • Mr. Disparte remarked that the U.S. Federal Reserve’s inability to provision federal services to non-bank entities puts the U.S. at a competitive disadvantage to other countries and jurisdictions (including the UK, EU, and Singapore). He discussed how there are 114 central banks around the world that represent 95 percent of the world’s gross domestic product (GDP) that are pursuing digital currency policies. He commented that these efforts could involve central bank custody for cash reserves. He noted that the U.S. is about to launch its FedNow Service and asserted that this Service will need to be provisioned to non-bank actors if it is going to work. He also stated that banks have no incentives to derive their revenues from items beyond fees and interests. He added that banks impose the highest fees on the most vulnerable populations and enjoy a public backstop. He remarked that payments competition is therefore critical and that legitimizing this competition at the federal level would merely create a “level playing field” between the U.S. and other countries.
• Rep. Flood expressed concerns that permitting non-bank entities to enjoy the same benefits as banks without being subject to the same regulatory requirements could lead to a banking crisis.

Rep. Sean Casten (D-IL):

• Rep. Casten noted how Mr. Disparte had previously attributed Circle’s USDC coin’s recent temporary dip below its $1 peg to Circle’s exposure to the banking sector. He highlighted however that no money market funds had dipped below their pegs during the recent banking sector turmoil and commented that these money market funds are similarly exposed to the banking sector. He asked Mr. Disparte to confirm that Circle had $40 billion in cash deposits on March 9, 2023 and that $3.3 billion of these cash deposits had been held at Silicon Valley Bank.
  • Mr. Disparte answered affirmatively.
• Rep. Casten asked Mr. Disparte to discuss how Circle has worked to reduce its risk exposure to the banking sector since the collapse of Silicon Valley Bank.
  • Mr. Disparte asserted that Circle operates the safest U.S. dollar settlement infrastructure on the internet.
• Rep. Casten interjected to ask Mr. Disparte to indicate whether Circle has taken measures to increase the diversity or liquidity of its U.S. dollar holdings since the collapse of Silicon Valley Bank.
  • Mr. Disparte answered affirmatively. He testified that the cash component of USDC is held at a large cash custodian New York bank. He stated that the remainder of USDC’s reserves are held in short-dated U.S. Treasuries of 90 days or less. He indicated that the share of USDC’s reserves held in short-dated U.S. Treasuries tends to be around 80 percent of total reserves.
• Rep. Casten asked Mr. Disparte to indicate whether Circle had experienced significant trading losses before it had regained its $1 peg.
  • Mr. Disparte testified that USDC had lost about $10 billion of circulation during the period where it had temporarily lost its $1 peg. He noted that while the three recent bank failures had connections to the digital assets industry, he stated that the digital assets industry did not cause these bank failures.
• Rep. Casten then posited a hypothetical scenario in which all of the witnesses are state treasurers that face the impending bankruptcy of their state’s largest city. He asked the witnesses to indicate whether they would support legislation that would permit states to issue paper money pegged to the U.S. dollar without any approval from the U.S. Federal Reserve to avoid this city’s bankruptcy. He added that the U.S. Federal Reserve would need to back this issued paper money under his scenario.
  • Mr. Campbell suggested that policymakers consider applying the regulatory framework of prepaid credit cards and money market funds to Rep. Casten’s hypothetical scenario.
• Rep. Casten interjected to comment that his hypothetical scenario would create a moral hazard. He noted how Sec. 103 of the legislative proposal for stablecoins from the 117th Congress would permit a stablecoin issuer to obtain approval from a state and that the U.S. Federal Reserve would then have to approve this issuance within 60 days. He remarked that this provision would enable states to avoid financial problems through approving stablecoins that would receive backing from the U.S. Federal Reserve.
  • Mr. Campbell noted how the legislative proposal for stablecoins from the 117th Congress contains reserve guidelines that govern the creation of new stablecoins.
• Rep. Casten interjected to contend that if Congress is going to obligate the U.S. Federal Reserve to backstop state-issued stablecoins, then U.S. Federal Reserve should have to approve the issuance of these stablecoins. He stated how money market funds had not experienced challenges during the recent banking sector turmoil because these funds are backstopped by the U.S. Federal Reserve. He asked Ms. Reynolds Hand to address how Congress could improve the legislative proposal for stablecoins from the 117th Congress to remove moral hazard concerns.
  • Ms. Reynolds Hand remarked that the U.S. Federal Reserve must provide a backstop for stablecoins and have the ability to reject stablecoin applications.
• Rep. Casten expressed hope that Congress could improve the legislative proposal to provide the federal government with the ability to reject stablecoin applications.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel remarked that the U.S. must ensure robust consumer protections for digital assets and expressed his interest in working to develop bipartisan stablecoin legislation. He stated that there remains a lack of clarity in stablecoin regulation, which is impacting the digital assets industry. He expressed concerns that this lack of clarity could drive stablecoin activity abroad, which would prevent the U.S. from policing the space. He asked Mr. Chervinsky to address how effective stablecoin legislation would bring more clarity to the way that digital assets are regulated.
  • Mr. Chervinsky remarked that federal stablecoin legislation would provide clear “rules of the road” for stablecoin issuers as to how they can open businesses and market their products within the U.S. He stated that this stablecoin legislation would subject stablecoin issuers to U.S. principles, such as the need to freeze assets to keep bad actors out of the cryptocurrency ecosystem. He also remarked that federal stablecoin legislation would signal to international developers that the U.S. is amenable to digital assets development and innovation. He commented that many U.S. regulators have repelled digital assets activity from the U.S. through their policies. He contended that federal stablecoin legislation would constitute a good first step for establishing a regulatory framework for digital assets.
• Rep. Nickel then remarked that stablecoins could provide the U.S. with an opportunity to reinforce the U.S. dollar’s dominance as the world’s reserve currency. He commented that the U.S. dollar’s global dominance is currently under threat from foreign adversaries, such as China and Russia. He asked Mr. Disparte to provide examples of how stablecoins have improved cross-border transactions and have empowered people living in economically disadvantaged countries. He also asked Mr. Disparte to explain how stablecoins may enable individuals and businesses throughout the world to transact in U.S. dollars.
  • Mr. Disparte mentioned how Circle had recently partnered with the UNHCR, the Stellar Development Foundation, and MoneyGram International to design a digital cash assistance program for Ukrainian refugees. He noted how foreign aid and disaster assistance are traditionally moved through pallets of physical cash, which makes them vulnerable to corruption, bribery, and fraud. He remarked that this recent program had provided device-centric money that was corruption-resistant, near instant, and auditable. He stated that USDC had been key to supporting this innovative program.
• Rep. Nickel then discussed how anyone in the world with an internet connection can access public blockchains and commented that public blockchains are faster, less expensive, more reliable, and more transparent than legacy payment rails. He noted however that cryptocurrencies tend to have more volatile values than the U.S. dollar. He asked Mr. Chervinsky to discuss how stablecoins differ from other types of cryptocurrencies.
  • Mr. Chervinsky remarked that stablecoins combine the benefits of the traditional financial system and public blockchains. He stated that stablecoins combine the benefits of public blockchains (including efficiency, security, reliability, and accessibility) with stable values. He noted how many digital assets (such as cryptocurrencies) are volatile relative to the U.S. dollar. He asserted that digital assets that are stable against a national currency (such as stablecoins) are best suited for payment purposes. He commented that this stable value ensures that people feel confident enough to transact and not face sudden price swings.