[House Hearing, 117 Congress] [From the U.S. Government Publishing Office] DIGITAL ASSETS AND THE FUTURE OF FINANCE: THE PRESIDENT'S WORKING GROUP ON FINANCIAL MARKETS' REPORT ON STABLECOINS ======================================================================= HYBRID HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTEENTH CONGRESS SECOND SESSION __________ FEBRUARY 8, 2022 __________ Printed for the use of the Committee on Financial Services Serial No. 117-68 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] __________ U.S. GOVERNMENT PUBLISHING OFFICE 47-106 PDF WASHINGTON : 2022 ----------------------------------------------------------------------------------- HOUSE COMMITTEE ON FINANCIAL SERVICES MAXINE WATERS, California, Chairwoman CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina, NYDIA M. VELAZQUEZ, New York Ranking Member BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York BILL POSEY, Florida DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri AL GREEN, Texas BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri ED PERLMUTTER, Colorado ANDY BARR, Kentucky JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas BILL FOSTER, Illinois FRENCH HILL, Arkansas JOYCE BEATTY, Ohio TOM EMMER, Minnesota JUAN VARGAS, California LEE M. ZELDIN, New York JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia AL LAWSON, Florida WARREN DAVIDSON, Ohio MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio RITCHIE TORRES, New York JOHN ROSE, Tennessee STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin ALMA ADAMS, North Carolina LANCE GOODEN, Texas RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas JESUS ``CHUY'' GARCIA, Illinois SYLVIA GARCIA, Texas NIKEMA WILLIAMS, Georgia JAKE AUCHINCLOSS, Massachusetts Charla Ouertatani, Staff Director C O N T E N T S ---------- Page Hearing held on: February 8, 2022............................................. 1 Appendix: February 8, 2022............................................. 65 WITNESSES Tuesday, February 8, 2022 Liang, Hon. Nellie, Under Secretary for Domestic Finance, U.S. Department of the Treasury..................................... 4 APPENDIX Prepared statements: Liang, Hon. Nellie........................................... 66 Additional Material Submitted for the Record Waters, Hon. Maxine: Written statement of the American Bankers Association........ 72 Written statement of the Bank Policy Institute............... 79 Written statement of the Chamber of Digital Commerce......... 87 Written statement of Creative Investment Research............ 104 Written statement of the Credit Union National Association... 115 Written statement of the Electronic Transactions Association. 116 Written statement of the Independent Community Bankers of America.................................................... 118 Written statement of the National Association of Federally- Insured Credit Unions...................................... 121 Written statement of the North American Securities Administrators Association, Inc............................ 123 Liang, Hon. Nellie: Written responses to questions for the record from Chairwoman Maxine Waters.............................................. 128 Written responses to questions for the record from Representative Anthony Gonzalez............................ 153 Written responses to questions for the record from Representative French Hill................................. 148 Written responses to questions for the record from Representative Nikema Williams............................. 146 DIGITAL ASSETS AND THE FUTURE OF FINANCE: THE PRESIDENT'S WORKING GROUP ON FINANCIAL MARKETS' REPORT ON STABLECOINS ---------- Tuesday, February 8, 2022 U.S. House of Representatives, Committee on Financial Services, Washington, D.C. The committee met, pursuant to notice, at 10:01 a.m., in room 2128, Rayburn House Office Building, Hon. Maxine Waters [chairwoman of the committee] presiding. Members present: Representatives Waters, Velazquez, Sherman, Meeks, Scott, Green, Cleaver, Perlmutter, Himes, Foster, Beatty, Vargas, Gottheimer, Lawson, Axne, Casten, Torres, Lynch, Adams, Tlaib, Dean, Garcia of Illinois, Garcia of Texas, Williams of Georgia, Auchincloss; McHenry, Lucas, Posey, Luetkemeyer, Huizenga, Wagner, Barr, Williams of Texas, Hill, Emmer, Zeldin, Loudermilk, Mooney, Davidson, Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil, Timmons, and Sessions. Chairwoman Waters. The Financial Services Committee will come to order. Without objection, the Chair is authorized to declare a recess of the committee at any time. Before I begin, I will call up the two resolutions noticed for today's hearing, reauthorizing the Committee's Task Forces on Artificial Intelligence and Financial Technology, and ask unanimous consent that the resolutions be adopted. Without objection, it is so ordered. Today's hearing is entitled, ``Digital Assets and the Future of Finance: The President's Working Group on Financial Markets' Report on Stablecoins.'' I now recognize myself for 5 minutes to give an opening statement. Today's hearing is part of this committee's ongoing review of digital assets. This committee has been at the forefront of congressional oversight of cutting-edge technology in financial services. Through our Task Forces on Artificial Intelligence and Financial Technology, and our Digital Assets Working Group of Democratic Members, we have continued to explore how emerging technologies impact our financial system, including the emergence of cryptocurrencies. Soon after learning of Facebook's plans to launch a global stablecoin in 2019, I asked Facebook to immediately pause its work until regulators and Congress had an opportunity to review the project. I invited Mark Zuckerberg to testify at a hearing where we scrutinized their plans, and I led a bipartisan delegation to Switzerland to meet with officials to discuss their plans to oversee the Libra Association, which was later rebranded as Diem. After deep scrutiny from me, the members of this committee, and our nation's regulators, Diem relented and recently sold its assets, effectively, and, I hope, permanently ending Facebook's misadventures in cryptocurrency. I am pleased that our committee's leadership on this issue has made an impact, including helping to focus the attention of regulators on these issues. Last December, the committee convened a first-of-its-kind hearing with a panel of cryptocurrency CEOs, building on earlier subcommittee hearings to understand where crypto products, services, and technologies were heading and how they should comply with applicable financial regulations. From the start, our committee has recognized that the explosive growth of digital assets presents a variety of risks and opportunities for our economy and communities, especially communities of color that have been left behind by our financial system. Their voices must be heard in the decision-making and regulatory process. Today's hearing focuses on stablecoins, which are a subset of cryptocurrencies pegged to a reserve asset such as the U.S. dollar. Stablecoins are primarily used in the United States to facilitate trading, lending, or borrowing of other cryptocurrencies. Troubling investigations have shown that many of these so-called stablecoins are not, in fact, fully backed by reserved assets. Moreover, due to speculative trading and a lack of investor protections, stablecoins could even threaten U.S. financial stability. The President's Working Group on Financial Markets (PWG) published its report on stablecoins, reviewing the regulatory landscape of this fast-growing type of cryptocurrency. The report outlined various risks that stablecoins may present to market integrity, investor protection, and illicit finance. The report also highlighted systemic risk concerns due to the threat of stablecoin runs when they are not fully backed, including concentration of economic power concerns, and regulatory gaps in effectively overseeing the stablecoin market. These risks could harm both ordinary users of these products, as well as our financial system overall, and the PWG recommended that Congress take action. As more people invest in and use cryptocurrencies, including stablecoins, the committee will continue its efforts to look at how they are affecting many aspects of our lives and our financial system. In particular, regulators and policymakers must work to ensure that any innovation in this space is responsible, that it provides robust consumer and investor protection, that it mitigates environmental impact, and that financial inclusion is front and center. We will also continue to investigate the development of a U.S. central bank digital currency (CBDC) that may provide a safe, stable, and secure method of instantaneous digital payment. I thank the ranking member for his recent letter on this committee's approach on digital assets, and I hope to continue working with him in a bipartisan way as we move forward. I now recognize the ranking member of the committee, the gentleman from North Carolina, Mr. McHenry, for 5 minutes. Mr. McHenry. Thank you, Madam Chairwoman. I do welcome that bipartisan approach, and I am grateful that we are undertaking these hearings to learn more before we seek to take action. Under Secretary Liang, thank you, and I appreciate your participation in today's hearing on behalf of the Presidential Working Group on Financial Markets. What is clear is that we need legislation. We agree on that. Regardless of what some may believe, it is our job on Capitol Hill to develop legislation to direct regulatory action, if there is to be regulatory action. And let me be clear, it is specifically the House Financial Services Committee that will lead this legislative effort and bring clarity to this ecosystem. Currently, there is no Federal law to address digital assets. With nearly a quarter of American adults now investing in crypto, we must move quickly to put in place a framework that clearly defines the rules of the road. The good news is that Financial Services Committee Republicans have already laid the foundation for the work that must be done to maintain the U.S. as a leader in digital assets and the digital asset revolution. In fact, committee Republicans released a set of principles on the central bank digital currency question, one of which emphasized the potential that stablecoins hold if issued under a thoughtful regulatory framework. The Working Group's report outlines a model that could be pursued. However, it does not take into account the full picture and the array of options available to us. So, let's break that down. We know that the Democrat debate here in Washington has been focused in the last decade on de-risking the financial services arena. Beginning with the Dodd-Frank Act, they have talked about de-risking banks in particular. And as you state in the President's Working Group report here, and as I expect many Democrats will say today, stablecoins are viewed as extremely risky. So, what is the solution of this Working Group? How do they mitigate this alleged risk? Well, they make them all banks. They regulate them all as banks, and they give them a Federal taxpayer backstop, which is completely the opposite direction we have been moving in for the last decade in Washington. We are trying to de-risk, not add risk to the Federal taxpayer. So, that doesn't make any sense to me. Now, let me be clear, I am not saying that there is zero risk, but Washington's knee-jerk reaction to regulate out of fear will not allow stablecoins to achieve their full potential and the myriad of solutions that they may be able to present. This new technology, like all financial technology, deserves appropriate and thoughtful regulatory approaches. The report also includes an analysis of the stablecoin market. Yet in this analysis, in this paper, there was absolutely no discussion of existing regulatory frameworks for stablecoin issuers at the State level. These issuers are subjected to a comprehensive set of supervisory regimes, including reserve requirements, examinations, compliance with anti-money laundering (AML) rules. And that is being done in a couple of States. We should be examining all existing regulatory frameworks and structures for best practices and taking advantage of the lessons learned from those operating on the forefront at the State level. Another critical component missing from this report was the potential benefits of stablecoins, not just the risks, but the potential benefits. In this committee, we have witnessed the payments industry address shifts in customer and consumer demand and the never-ending race to move money faster, cheaper, and better. Digital currencies like stablecoins are a natural continuation of the same issues we have addressed in this committee over the years and, I might add, in a bipartisan way. We cannot regulate out of fear of the future. It is Congress' role to seek solutions that directly address the risks at hand and ensure that the benefits are also part of those discussions. Requiring stablecoins to only be issued by banks would be a major obstacle for us to continue to foster innovation within this nascent industry. My friends across the aisle would like to force new products into unfitting and often inappropriate existing regulatory structures. I think we need to move forward and think of this in a new approach. And while I recognize the Working Group's inclination to do what has been Democrat orthodoxy, I hope that today we can think bigger and more comprehensively and discuss the potential benefits of increased use of stablecoins. The policies we develop must promote private sector innovation and foster competition to build a resilient product without creating risk in other areas. We should not, as this report does, limit our focus to only the risks, and we should not focus only at a Federal structure. We should understand what is being done at the State level as well. But to only focus on the risks would be shortsighted and would not allow us to realize the potential to the digital ecosystem of stablecoins and what the consumers want. Madam Chairwoman, thank you. Thank you for this undertaking, and I hope we can have a thoughtful discussion about what is a really important subject matter for so many Americans and for us here on Capitol Hill. I look forward to working with you in the months to come. Chairwoman Waters. Thank you, Ranking Member McHenry. At this time, I want to welcome our distinguished witness, the Honorable Nellie Liang, who is the Under Secretary for Domestic Finance at the United States Department of the Treasury. You will have 5 minutes to summarize your testimony. You should be able to see a timer that will indicate how much time you have left in your testimony. And without objection, your written statement will be made a part of the record Under Secretary Liang, you are now recognized for 5 minutes to present your testimony. STATEMENT OF THE HONORABLE NELLIE LIANG, UNDER SECRETARY FOR DOMESTIC FINANCE, U.S. DEPARTMENT OF THE TREASURY Ms. Liang. Thank you very much for having me today. Chairwoman Waters, Ranking Member McHenry, and members of the committee, thank you for the opportunity to testify this morning on the stablecoin report by the President's Working Group on Financial Markets (PWG). The PWG is chaired by the Secretary of the Treasury, and is composed of the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. It was formed by a Presidential Executive Order in response to the 1987 stock market crash, and regularly produces reports on financial market issues for the President, which may include recommended legislative changes. For the stablecoin report, the PWG was joined by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. stablecoins are part of an emerging set of digital assets, activities, and services that could have profound implications for the U.S. financial system and economy. The distinguishing feature of stablecoins, as compared to other digital assets, is that they are designed to maintain a stable value relative to a reference asset, often the U.S. dollar. Stablecoins have grown rapidly from a market capitalization of roughly $5 billion at the start of 2020, to approximately $175 billion today. The PWG report focused on stablecoins because the offer of a stable value means they have the potential to be widely used as a means of payment by households, businesses, and financial firms. This potential use could create significant benefits for stablecoin users and payments transactions, but it could also pose risks. The PWG report focused on three prudential risks associated with the use of stablecoins for payment. First, run risk, a scenario in which loss of confidence in the stablecoin triggers a wave of redemptions, which could have broader spillover effects for the financial system. Second, payment risk, including operational issues that could interfere with the ability of users to store stablecoins or use them to make payments. And third, concerns related to concentration of economic power, for example, if a stablecoin provider scaled quickly and gained market power as a provider of payments. The PWG report found significant gaps in authority that would address these prudential risks. Some of the largest stablecoin issuers operate with limited regulatory oversight, raising significant questions about whether their stablecoins are adequately backed. Even where a stablecoin issuer is subject to oversight, supervisors may not have sufficient visibility into the broader operations that support the use of stablecoins, which may be distributed among multiple entities. Neither State money transmitters nor securities law requirements were designed to address the financial stability, payment system, or concentration of economic powers for a payment instrument that is based on new distributive ledger technology. To fill this regulatory gap, the PWG report recommended legislation to ensure that stablecoins are subject to a consistent and comprehensive framework that is proportionate to the risks posed. Such legislation would complement existing authorities with respect to market integrity, investor and consumer protection, and illicit finance. Specifically, the report recommended limiting issuance of stablecoins to insured depository institutions, giving supervisors of stablecoin issuers visibility into the broader stablecoin arrangement and the authority to set risk management standards for critical activities related to the use of stablecoins for payment, and certain measures to reduce concerns about concentration of market power. In developing this recommendation for stablecoin issuers to be insured depository institutions, the PWG report relied on the flexibility that the banking agencies would have to adjust for differences between stablecoin issuers and traditional commercial banks and to adjust to new products and structures that may emerge over time. As noted at the beginning of my testimony, stablecoins are a subset of a larger and quickly evolving digital assets market. The Treasury Department supports responsible innovations from digital assets but is also committed to protecting against risk to users, the financial system, and the broader economy. The Biden Administration continues to work across the agencies to develop a comprehensive strategy for all digital assets, with the goals of ensuring that cryptocurrency is not used for illicit finance, addressing risks related to financial stability and consumer investor protection, and furthering financial inclusion and our continued leadership in the global financial system. We look forward to partnering with Congress on these critical issues as we make progress, and I appreciate the committee's leadership in this area. Thank you again for the opportunity to testify this morning. I would be happy to answer any questions from the committee. [The prepared statement of Under Secretary Liang can be found on page 66 of the appendix.] Chairwoman Waters. Thank you, Under Secretary Liang. I now recognize myself for 5 minutes for questions. Ms. Liang, after much scrutiny from this committee, as well as from regulators, the Diem Association, which was founded by Facebook, announced last month that it had sold its stablecoin project to a bank, effectively exiting the cryptocurrency market. Facebook attempted many times to enter the cryptocurrency market, including in 2019 when Facebook formed the Libra Association in Switzerland to create a stablecoin. However, Facebook slowed down its activities after this committee held hearings and raised significant concerns leading to a number of Libra Association members pulling out. To address systemic risk and concentration of economic power concerns, the President's Working Group report, among other things, recommends that stablecoin issuers should be required to restrict their activities to limit affiliation with commercial entities, similar to the separation we impose between banking and commerce. In your view, does that mean technology companies such as Facebook that have access to huge amounts of sensitive personal data should not be allowed to create their own stablecoin or other cryptocurrencies? And if they do, should they be subject to heightened scrutiny? Ms. Liang. Thank you, Chairwoman Waters, for that question. I would answer that in two parts. I think the first question is, should technology companies be allowed to issue stablecoins? The report recommends that stablecoins be issued by insured depository institutions. And in that sense, we would not recommend that stablecoins be issued by technology companies. This is the issue of the separation of banking and commerce, and it has been an issue that Congress has grappled with for many years. In this case, we believe stablecoins, as a payment instrument, should not be issued by a technology firm. Second, there is a question of whether technology providers could be providers of other parts of the stablecoin arrangement, including custodial wallet providers and providing some of the other services involved with the use, the storage, and the transfer of stablecoins for payments. The recommendation in the report is for Congress to consider this particular issue as to whether commercial entities could be providers. A more targeted solution that was included in the report is to consider restrictions on what wallet providers can do with the customer transactions data that they would have access to, and whether there are limitations on privacy and security that could address the concerns about concentrations of economic power if commercial companies were involved in the stablecoin arrangement. Chairwoman Waters. Thank you. Stablecoins have grown at an incredible rate in the past year, going from $30 billion late last year, to over $170 billion today. However, simply labeling something as stable or overly relying on one-to-one ratio does not, in itself, mean it maintains a stable value. We learned that lesson painfully when money market funds crashed in 2008 and needed a Federal bailout to protect investors and markets. Recently, some stablecoin issuers transitioned from having their stablecoins being backed by various forms of debt securities to now supposedly being backed only by the U.S. dollar and short-term U.S. Treasuries. Do you think this is enough to address the systemic risks and the run risk concerns of stablecoins that the President's Working Group report highlighted? Ms. Liang. Thank you for the question. The stablecoins that the PWG report focused on, focused on the function that they could provide because of their stable value to be widely used as a means of payment by households, businesses, financial firms, and governments. We identified three risks, and one is the run risk that you referred to, and that is the ability, if investors were to lose confidence in the quality of the assets backing the stablecoin, there could be a run, which has potential systemic risk consequences. But in addition, stablecoin is not just the creation and redemption of the stablecoin. It is also, as a payment mechanism, involved in the operations that involve the storage, and the transfer of stablecoins for payments. And that is what the President's Working Group added to the conversation, that that part of the arrangement is also important for supervisors to have some visibility to and to establish some risk management standards to ensure that the payment system retains its integrity. So, while an insured depository institution allows for sufficient confidence in the value of the assets backing the stablecoin, the supervision also allows some oversight of the overall payment arrangement. Chairwoman Waters. Thank you very much. The gentleman from North Carolina, Mr. McHenry, the ranking member of the committee, is now recognized for 5 minutes. Mr. McHenry. Thank you, Chairwoman Waters. And Under Secretary Liang, thank you. Thanks for your engagement and for running points on this report, and I do appreciate the conversation that we have had and that you have had actively on Capitol Hill, on both sides of the aisle. I think that is very good. But just so we are on the same page, I want to make sure that we are looking at this in a similar fashion. Is there current Federal law that governs stablecoins or, frankly, digital assets, for that matter? Ms. Liang. There are Federal laws that apply to various aspects of stablecoins that address illicit finance, address stablecoins as an investment asset, and consumer protection laws would apply to stablecoins. Mr. McHenry. But nothing that is explicitly about stablecoins? Ms. Liang. Nothing explicitly, but the function, yes. Mr. McHenry. And that's what we try to address, right? So, yes, of course. And by that same measure, something 100 years in the future, we currently have laws for, so that is a pretty expansive response you have given me. But there is no notion of a stablecoin in current law or digital assets in current law that is explicit about those things. This question wasn't meant to be a, ``gotcha.'' The answer is no. Ms. Liang. I do not believe so. I don't believe so, yes. Mr. McHenry. Right. That is it. I'm sorry. This was supposed to be the easy question. Ms. Liang. Absolutely. Mr. McHenry. And I think we can have some consensus here on how we get ahead, but one area that I think this committee should examine is the current State regulatory frameworks. Did the Working Group consult with State regulators on their existing frameworks? Ms. Liang. Yes, the Working Group did consult and talk to State regulators, and a number of State regulators have increased their expertise in this area. The PWG report believes that a more consistent, less fragmented framework is preferred. Mr. McHenry. And does that also mean that the President's Working Group would think that we shouldn't have State- chartered credit unions or banks? By that same notion, that would be like saying we should only have Federal banks. To that point, you consulted with these regulators, but there was no mention of the existing State regulatory framework. Why was that? Why did the President's Working Group make that decision to not mention existing frameworks and lessons learned from those existing State frameworks? Ms. Liang. The Working Group proposed a consistent framework-- Mr. McHenry. I understand what you proposed. Ms. Liang. --built on the State regulators. So, a proposal for an insured depository institution (IDI) could be a State- chartered or a Federal-chartered bank. Mr. McHenry. But what I am asking is a separate question. Look, this is not an adversarial conversation. I think the fact that the Administration has put out this report is a welcome thing, and you have given one solution to a really complex set of industries. But there was no mention of any State regulatory framework. We know that New York is the most active, and they have a very safe, but very robust set of regulations and disclosures. But there is no mention of New York. There are no lessons learned from the States included in this report, and I was interested in why that was, not the question of what you reported. I have read the report. So why not understand the lessons learned from the States, and why was that not included in the report? Ms. Liang. Right. There is no explicit reason for why it was not included. It was certainly considered as an alternative. The principal reason is that the State regulatory system is fragmented. There is an issuer, and then there are the custodial wallet providers, the other parts of the arrangement that are subject to different kinds of regulations. There was no plenary oversight of the entire arrangement. Mr. McHenry. Thank you. I appreciate your response. By that same notion, you would like to have a single regulator at the Federal level for all financial institutions. That didn't succeed in the Dodd-Frank Act. I do want to ask about de-risking, though. In the report, you outlined that this is an extremely risky proposition of stablecoins. But the conclusion here is that you should put them in a federally-insured depository institution. With Dodd- Frank, we attempted to de-risk those institutions. And what you are adding to explicitly with this report is a riskier aspect that would have a Federal backstop and a Federal taxpayer backstop in the unwinding authority granted under Dodd-Frank for these institutions and specifically this product. Shouldn't we be in the game of de-risking rather than adding to the risk of a Federal bailout or, yes, for these products? Ms. Liang. I think in the current environment, regulators are in a bit of an uncomfortable position. Stablecoins are increasing. They have grown rapidly, as you have said. There are risks. Its regulation is about where those risks should reside and how to protect users and investors. If stablecoins are backed by high-quality assets, their risk is quite low, and they can form a building block, a cornerstone of a payment system. But if they are not supported, and there are questions about the quality of the assets in the reserve pool backing them, then they create risk. Mr. McHenry. Madam Chairwoman, I appreciate the extended time we both got to share on this. Chairwoman Waters. Yes. Mr. McHenry. I do think we can learn a lot from the State regulatory framework, what they have done well, and the things that we can do better. Chairwoman Waters. Thank you, Mr. McHenry. Mr. McHenry. I appreciate the engagement, and I yield back the balance of my time. Chairwoman Waters. Thank you. The gentlewoman from New York, Ms. Velazquez, who is also the Chair of the House Committee on Small Business, is now recognized for 5 minutes. Ms. Velazquez. Thank you, Chairwoman Waters, and welcome, Under Secretary Liang. I would like to ask you about the investigation that was conducted by New York Attorney General Letitia James last year, which revealed that starting in 2017, the stablecoin, Tether, deceived clients and markets by failing to hold reserves to back their Tethers in circulation, which was contrary to their representations. The President's Working Group report highlights the lack of standards of reserve assets as a concern and recommends legislation which requires stablecoin issuers become insured depository institutions. Can you elaborate on this recommendation and why it could create standards regarding the composition of the reserve assets and information issuers make to the public? Ms. Liang. Yes. Thank you for your question. The issues that you raise are extremely pertinent to the first risk that the PWG report identified, which is the risk of runs on a stablecoin arrangement because the quality of the assets, the composition of the assets backing the coin are not, in fact, able to offer stable value perhaps in periods of stress. That is, the current market regulators have authorities to promote market integrity and to protect investors. The proposal for an IDI is to bring the quality and composition of assets under a supervisory framework where there is a regulator who can attest to the quality of those assets backing a stablecoin, and there is a regulator and a supervisor who can also oversee the entire arrangement for a stablecoin to be used for payment. So, that is the core of the approach. We believe it provides clarity to stablecoin issuers in terms of a consistent framework versus State-level regulations and money transmitter licenses in 49 States and allows for beneficial innovation. In our outreach, the industry really asked for clarity so they could move forward and believed it would facilitate innovation. Ms. Velazquez. Thank you, Under Secretary, for that answer. Secretary Liang, Puerto Rico has become a favorite location for cryptocurrency speculators and investors from the Mainland. And the Mainland media--Bloomberg, Rolling Stone, CNN, Data Report, Wall Street Journal, and other reports--so at the heart of this situation is Puerto Rico's Individual Investors Act, which enables wealthy Mainlanders who establish themselves as Puerto Rican residents to pay zero tax on capital gains, dividends, and interest, making the island particularly attractive for cryptocurrency investors. Would additional legislative authority from Congress be helpful to go after these crypto investors who are attempting to use Puerto Rico as a tax shelter and evade IRS reporting? Ms. Liang. Congresswoman, I am not familiar with that particular Act, the Individual Investors Act. But the Treasury Department does believe and works by the principle that taxpayers should pay the taxes they owe. I believe maybe Treasury officials and the IRS are looking at that issue quite closely with respect to crypto transactions, and we would be happy to follow up further on this particular situation. Ms. Velazquez. Thank you. I yield back. Chairwoman Waters. Thank you. The gentlewoman from Missouri, Mrs. Wagner, is now recognized for 5 minutes. Mrs. Wagner. Thank you, Madam Chairwoman. Under Secretary Liang, the Financial Stability Board (FSB) included high-level recommendations to provide for supervision and oversight of global stablecoin arrangements, and I am going to highlight all four of them: one, a comprehensive governance framework with a clear allocation of accountability for the functions and activities; two, effective risk management frameworks with regard to reserve management, operational resilience, and cybersecurity safeguards; three, transparent information necessary to understand the functioning of these arrangements; and four, the legal clarity for users on the nature and enforceability of any redemption rights and the process for redemption, among others. These recommendations seek to address one of the critical issues, which is the potential for fraud and the mismanagement of reserves. In December, a number of CEOs discussed their operations before this committee, and it seems that based on certain issuers' existing regulatory structures at the State level, the requirements would meet these high-level recommendations and address a number of the risks highlighted in the report. Under Secretary Liang, do you share that same view? Ms. Liang. Thank you, Congresswoman. I think the principles that you laid out under the FSB are exactly the principles that the PWG report believes its recommendations are trying to meet. I think under the current regulatory framework, it does not meet all of those criteria at this point in the United States. Mrs. Wagner. The CEOs who came before us really, as to regulatory structures that they set up and were working with, especially at the State level, met these high-level recommendations and addressed a number of these risks that were highlighted in the report. Do you want to-- Ms. Liang. We have talked to some of the States and have talked to supervisors, and I believe that while they believe they--under some of the licenses, they have oversight of the issuers. And a different look through a different lens at the wallet providers and the other kinds of entities that are involved in storing, transferring, and allowing stablecoins to be used as payment--that is a different set of regulations under the money transmitters licenses. And there is not plenary oversight of the overall arrangement. And if stablecoins are going to be used widely as a payments mechanism, there is a concern of trying to make sure that they can actually perform their function, that there is oversight of operations for cyber-- Mrs. Wagner. Let me just say this. It seems to me that we should be examining the best practices under State frameworks instead of pretending that they do not exist. Applying a uniform regulatory framework to stablecoin issuers will discourage innovation and push stablecoin activity and jobs out of the United States. We must, I think, ensure that any Federal regulatory framework provides clarity and also ensures that the regulation fits the activity rather than simply overlaying traditional banking regulation over stablecoins. Under Secretary Liang, in your opinion, how can stablecoins reduce barriers to financial inclusion and lower transaction costs? Ms. Liang. I think the potential for digital assets and stablecoins to improve financial inclusion are high. It can reduce the costs of payment, and it can help individuals who are unbanked or underbanked if they are more comfortable conducting payments on their iPhone than going into a banking office. So I think there is quite a bit of potential, and there are pilot programs to test the use of stablecoins for cross-border remittances. And I think that is a very positive, favorable development. Mrs. Wagner. I would agree with you, and I thank you for your testimony. I have run out of time, and I yield back, Madam Chairwoman. Chairwoman Waters. Thank you. The gentleman from California, Mr. Sherman, who is also the Chair of our Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, is now recognized for 5 minutes. Mr. Sherman. Thank you, Madam Chairwoman, and thank you for having that hearing where we had Mr. Zuckerberg come before us, and we pretty much stopped the Libra, which would have been a cryptocurrency that had so much money and power behind it with Facebook and others that it could have emerged as an everyday currency. The ranking member talks about State regulation. I will just point out that, imagine if we didn't have any Federal regulation of State-chartered banks. The FDIC didn't propose any capital rules. The FDIC didn't do any audits. It would only be a matter of time before there was a race to the bottom, and we would have banks operating in my State chartered by some other small State, and those banks would be going bankrupt because they would have found the jurisdiction that had the lowest capital requirements. We are told to look at the benefits of these digital systems, but it is really just a potential or hoped-for benefit. I want a more efficient way to buy a burger. Right now, I use a credit card, and the burger company, the seller, has to pay a 2- or 3-percent fee, or a debit card might cost 50 cents. But it is unfair to compare the alleged potential of crypto to the actuality or current system that we have now. If you are going to compare things, you have to compare current with current. Currently, if I want to buy a burger with a stablecoin or a crypto coin, I have to find an Uber, and get them to drive me to the one burger stand that is rumored to exist in Cleveland, Ohio, where you can use a stablecoin or a crypto coin to buy a burger. But I can't find a burger here in Washington, D.C. We are told about the risks to investors, and they are substantial, and where the stablecoin invests in cryptocurrency, you have a joining of two risks. You have all of the stablecoin risk with an unstable coin, and then all of the risks of the underlying crypto investment. But we can't just look at investors. We have to look at the risk posed to our payment system, and that is why I am glad, Madam Under Secretary, that your report focused on how stablecoins and cryptocurrencies are undermining the U.S. Anti- Money Laundering (AML) and Know Your Customer (KYC) rules. I sense sometimes what I call patriotic anarchists, who wave the American flag and cheer whenever law enforcement or tax enforcement is thwarted. Madam Under Secretary, you have a tough job to get a bill through Congress, because all of the money and power is on the other side. You don't have a political action committee (PAC). You don't have gangs of lobbyists. You don't have the arena in my city named, ``enforce anti-money laundering dot-com.'' No, it's called Crypto.com. What you do have is the credibility of knowing that the Treasury Department and your affiliated agencies are putting the national interests over the pecuniary interests of certain investors. But for that credibility to translate into legislation, you represent the Working Group, and so I am going to ask you to do more work. Can you come before us and offer specific statutes that you think that we should adopt, rather than just a few sentences of explanation? Because if you don't do that, then anything that does pass will be considerably weaker than what you are recommending. Ms. Liang. Thank you. We would, of course, be happy to work with the Congress on any proposals, and I believe that proposals that include an IDI as an option are in the appropriate direction. Mr. Sherman. I hope that--and I will make the request formal--you will take your recommendations and turn them into something very close to or actually statutory language so that we know specifically what you are proposing. I am told that cryptocurrencies enjoy significant investment by those in disenfranchised and minority communities. Of course, that was also true of subprime lending. Are you concerned that low- and moderate-income people in our country, particularly those of color, will be left holding the bag if we see a collapse in cryptocurrency or stablecoin? Ms. Liang. Of course. Crypto assets broadly, digital assets broadly, have the potential for benefits, as you mentioned, but there are currently too many incidents of fraud, misleading advertising, and the member agencies, as part of the PWG--the SEC, the CFTC--are taking actions to try to protect investors and consumers. Mr. Sherman. Thank you, Madam Chairwoman. Chairwoman Waters. Thank you very much. The gentleman from Missouri, Mr. Luetkemeyer, is now recognized for 5 minutes. Mr. Luetkemeyer. Thank you, Madam Chairwoman, and thank you for being here, Ms. Liang. In 2019, the average daily turnover value of the U.S. dollar constituted 88 percent of the foreign exchange market transactions globally. This dominance by the dollar in the global marketplace is a key reason why the dollar remains the reserve currency of the world. Existence of hundreds of different types of privately- established cryptocurrency, in my view, presents a threat to the dollar's status in global transactions. However, I believe that stablecoins backed by the U.S. dollar present a unique opportunity to ensure that the U.S. remains the reserve currency of the world as the financial services industry adapts to new technologies of blockchain cryptocurrencies. Despite this critical aspect of stablecoins, the President's Working Group on Financial Markets' Report on Stablecoins does not mention global competitiveness as a key aspect of stablecoin development. I think that is a striking oversight. I have a couple of questions here. Do you have any concern about the number of these cryptocurrencies and how they are being established and how they are working? And with respect to stablecoins, do you see an opportunity to be able to actually help protect the reserve currency status and enhance the U.S. dollar? Where would you stand on some of those issues, and can you elaborate, please? Ms. Liang. Yes. I believe the importance of the U.S. dollar and its position in the global financial system is incredibly important for the economic well-being of the United States. I believe the recommendations to require stablecoin issuers, backed by the U.S. dollar, to be put within a regulatory framework which ensures that they are, in fact, stable, is the best way to promote the U.S. dollar. Currently, stablecoins are being issued with limited regulatory oversight or outside the regulations backed by the U.S. dollar, so they are claiming stable value without any assurance that they can provide stable value. I do strongly believe the PWG recommendations are highly supportive of ensuring the position of the U.S. dollar in the global system. Mr. Luetkemeyer. Well, short of regulating and forcing them to do this, is there a way to incentivize these stablecoins to use dollars as the medium to be matched against, in your view? I am not a big fan of regulation. But by the same token, I think we have to understand--I think there is a threat here with these cryptocurrencies being utilized in a way, fortunately, right now everybody will either turn around and go back to dollars or the natural currency of their country to eventually be able to get their investments back monetized. But is there a way we can incentivize the stablecoin folks to use dollars, or have you looked into that at all? Ms. Liang. I think, currently, they have a natural incentive to use the U.S. dollar because it is the global currency. I believe the incentives we need to put in place are to ensure that it remains the global currency. And I think the role of the U.S. dollar is based on the country's respect for the rule of law, the strength of its institutions, its economic potential, and the depth and breadth of the financial markets, not the technology, per se. But it is important, so the critical element is the fundamental strength of the dollar, and the technology can reinforce it. Mr. Luetkemeyer. It is interesting that you make that comment, and I appreciate the fact that you believe that in order for stablecoins to be successful, we have to have a stable economy, and we have to have a stable currency in this country. And that is the incentive. So, it makes sense for us to continue to work hard to maintain our reserve currency and the stability of our money and our country's economy. Thank you for that. You talked a little bit about, theoretically, a run on stablecoins and cryptocurrencies. Has there ever been a run on one at this point? Ms. Liang. I believe there have been on some smaller stablecoins. As you know, this market is evolving very rapidly. At times, there could be 50 or 60 different stablecoins pegged to the dollar or to another reference asset that might mimic the dollar. I believe there has been maybe one or two, but these have not been large stablecoins at this point. Mr. Luetkemeyer. Very good. My time has expired, Madam Chairwoman. Thank you very much. I yield back. Chairwoman Waters. Thank you very much. The gentleman from Georgia, Mr. Scott, who is also the Chair of the House Agriculture Committee, is now recognized for 5 minutes. Mr. Scott. Thank you. First of all, both Chairlady Waters and Ranking Member Patrick McHenry raised some of my concerns as well. Under Secretary Liang, there is a significant portion of our nation's population--Blacks, Hispanics, Asians, and White people as well--who are lacking basic access to banking services, payment technologies, and financial literacy. So, Madam Under Secretary, can you explain how stablecoins connect nontraditional banking populations to the broader financial system? And what are the guardrails, if there are any that exist, to protect these consumers? Ms. Liang. Thank you, Representative Scott. I believe that stablecoins can promote financial inclusion by reducing the cost of payments, by making them faster and cheaper. If users are interested, more interested and more willing to use technology on, say, their iPhone for payments than they would be going to a bank and using a bank. So, I believe the costs can be cheaper, and the execution can be faster. And I think the pilot programs for using stablecoins for cross-border remittances is a good example of how stablecoins could potentially be used for payments in a significant way and in a way that reduces costs and-- Mr. Scott. But my specific point is, where are the guardrails? Do you have any guardrails currently in existence to protect these consumers? Because, Under Secretary, wouldn't you agree with me that absent a robust legal and regulatory framework, one with clear and effective consumer protections, there is a very real possibility that without that, the entire market could collapse before our very eyes? Ms. Liang. The recommendations of the PWG report try to get to exactly that risk, that stablecoins as a payment mechanism, in fact, offer stable value and can provide a strong operational payment structure. And that is the best approach to protecting consumers. Mr. Scott. Okay. And you sort of opened the door here to this President's Working Group report. Tell me, what are their recommendations? Where in this report are their recommendations to specifically ensure that as stablecoins are adopted into our more mainstream market, that there are corresponding increases in protections so that ordinary users don't fall through the cracks? Ms. Liang. In fact, the recommendations are built on the idea, on the premise that stablecoins will be growing, continue to grow rapidly, and that the guardrails need to be put in place to protect users and, in fact-- Mr. Scott. Okay. In my short time left, what are these recommendations? Ms. Liang. One is to build on existing securities and consumer protection laws. There are complements to those laws that exist. But to require stablecoin issuers to be insured depository institutions, to require that the custodians--the wallet providers, those who manage the reserve assets--to also be subject to supervisory oversight to ensure the integrity of the payment operations. Those are, in my view, and in the President's Working Group's view, the best way to protect both consumers and users and the payment system. Mr. Scott. And do you have that enforcer and target in process to enforce these recommendations? Ms. Liang. That would be the role of the regulatory and supervisory framework. Chairwoman Waters. Thank you very much. The gentleman from Michigan, Mr. Huizenga, is now recognized for 5 minutes. Mr. Huizenga. Thank you, Madam Chairwoman, and I appreciate you being here, Under Secretary Liang. Under Secretary, I am assuming you may be familiar with this, but I just want to make sure. At the end of last year, the House Financial Services Republicans released a principles position to guide Congress' evaluation of potential proposals for a U.S. central bank digital currency, and in that document, Committee Republicans noted, ``If Congress contemplates authorizing the use of a Fed-issued digital currency, it should not impede the development and utilization of stablecoins, both those currently in circulation and those yet to be developed.'' In short, we need to make sure that the private sector is leading the way. That is one of the concerns that many of us have had. And I will continue to advocate for that because I think it is important to remember that issue as we continue this discussion on digital currencies. I want to move on to my questions here. The SEC is a member of the Presidential Working Group on Financial Markets, correct? Ms. Liang. Correct. Mr. Huizenga. Okay. Just about a month or so before the release of the report, SEC Chair Gensler stated in an interview that stablecoins, ``may have attributes of investment contracts, have some attributes like banking products, but the banking authorities right now don't have the full gamut of what they need and how we work with Congress to sort through that.'' While that may not be the most clear statement of intent, it does suggest that the Chair believes that Congress needs to act in order for most or all stablecoins to fall under the SEC's regulatory authority. Yet during his testimony to the Senate, Chair Gensler stated, in a somewhat contradictory way, that, ``some of these tokens have been deemed to be commodities and many of them are securities.'' So, I am curious, will you be able to explain why the report did not include any analysis of policy issues under the securities laws as they pertain to stablecoins, and was it discussed? And again, given that the SEC is a member of the Working Group, if it wasn't discussed, why not? Ms. Liang. Yes, of course. The President's Working Group was convened to review stablecoins as a possible way to improve the payment system, and the mandate was to identify whether this new possible payment instrument, based on a new technology, would have the appropriate regulatory framework, and the goal was to identify gaps in regulation. As I mentioned in my testimony, this proposal builds on existing laws and regulations that apply, including SEC regulations that apply to stablecoins as an investment asset or a security. Mr. Huizenga. Did I miss something? It doesn't look like there was any analysis that was actually done on that. Ms. Liang. We did not include what the existing securities were, but-- Mr. Huizenga. Hold on. I'm sorry. It is unclear already, so why would you not do that analysis? If we don't have a clear picture, why would you not have done that analysis? Ms. Liang. I think I would need to defer to the SEC for its strategies about how to address stablecoins. But its authorities are for market integrity and investor protection related to the redemption and creation of stablecoins, not for their use as a payment instrument. Mr. Huizenga. I have 1 minute left, and while I want to revisit that, I need to move on to this quickly, because I need to have your opinion. In your written testimony this morning, you indicated that, ``Some have suggested that stablecoins could be regulated either as securities or as money market mutual funds.'' Assuming that stablecoins satisfy the definition of securities or MMFs, there is a further question as to whether these regimes would effectively address the prudential risks of stablecoins. And in your view, what are the parallels between MMFs and stablecoins and what considerations would be helpful for us to consider? Ms. Liang. Yes. Thank you for this question. Let me start with money market funds that invest in government securities, high-quality securities, as if that was the pool of assets backing a stablecoin. Investors purchase those with the expectation of earning the yield on the underlying assets. It is an investment asset. A stablecoin can be purchased and used for payments, not necessarily investment, and that is what makes stablecoins unique. They are that bank-like product that the SEC Chair referred to as well as an investment-like product. And that is why we believe there was a regulatory gap for which a new framework should be considered. Chairwoman Waters. The gentleman's time has expired. The gentleman from Texas, Mr. Green, who is also the Chair of our Subcommittee on Oversight and Investigations, is now recognized for 5 minutes. Mr. Green. Thank you. Madam Chairwoman, I greatly appreciate you having this hearing, as well as the ranking member, and to the witness, I have always appreciated you, and I thank you so much for what you have shared with us over the years. Let's talk for just a moment about a particular coin. As you have explained, I understand that this is not one of the stablecoins, but let's talk about Doge, D-o-g-e, if I am pronouncing it correctly. Would you agree that is not a stablecoin? Ms. Liang. That is not a stablecoin. Mr. Green. And one of the things that I have noticed is how it has fluctuated. At one time, it had a high, in terms of its capitalization, of over $80 billion, and now it is down to around $20 billion. And it seems that this was initiated as a point of amusement for some persons and it became an investment tool for some other persons. What do you see as the foundation for this cryptocurrency? What is the foundation for it? What is it resting on? Ms. Liang. I believe first, I would say that the digital asset marketplace is evolving very rapidly. It is changing. It is ongoing change for a while. But it is built around a new technology that has the potential to radically change how different financial services will be provided. There are a lot of products being offered, and services being provided that investors can evaluate. They should, in my view, have the information needed and evaluate the risks they take if they choose to invest in them. And they also should have the protections that current laws would apply to investors. But I think it is difficult for us--for regulators and policymakers--to anticipate what this digital asset landscape will look like many years from now. Mr. Green. Let me ask this question: What are you investing in when you invest in this particular piece of cryptocurrency? What are you investing in? Ms. Liang. Not speaking about any particular product, but I believe that people may be investing in the adaptation of this new digital technology, this distributed ledger technology, to all kinds of services, and its application. And I think there is a view in the industry that the more people invest in these kinds of assets and get comfortable with them, the potential for them to develop new applications continues to grow. So I think it is a very open question, which of the products currently being provided will be lasting and durable, but it is in the position right now that regulators and policymakers think it is very difficult to prejudge who the winners and losers will be. Mr. Green. I concur with your notion that it is difficult to prejudge, but I would add this commentary: If you invest in nothing, there is a good likelihood that at some point you will get what you pay for. And that causes me a good deal of concern, because a good many people have assumptions that are not necessarily going to be comparable to the facts. And people who are investing in coins that have no fiat currency associated with them--I know of very little associated with some of them--those investments are at a higher risk than some others, and that causes me a lot of concern. I do believe that at some point we are going to have to look at certain coins literally as being without the law. They will be without the law, because we cannot allow certain things to happen. We just can't allow people to invest in nothing. Investing in nothing does not end well, it seems to me. There may be some rare occasion where you will get some great benefit, but usually you will get what you pay for. And I am so grateful to you. Thank you so much. Chairwoman Waters. Thank you so very much. The gentleman from Oklahoma, Mr. Lucas, is now recognized for 5 minutes. Mr. Lucas. Thank you, Madam Chairwoman. Under Secretary Liang, could you discuss the differences between the types of reserve assets that stablecoins hold? Ms. Liang. As I mentioned, there are many stablecoins that are being offered that are tied to the value of, say, the U.S. dollar predominantly. Some of them are backed by Treasury securities, and bank deposits. Some of them are backed by short-term liabilities such as commercial paper, corporate debt, or others. These are self-reported assets, which I believe are subject to audit by a private firm. They are not confirmed by any regulators. But there is a mix of the reserve assets backing stablecoins, and not all of them, we believe, would be able to deliver a dollar in stress conditions. Mr. Lucas. Which takes me to my next question, if there is such a thing, what would a typical assortment of reserve assets be? You mentioned every one of these is unique in itself, but is there such a thing as a typical assortment of assets in these pools? Ms. Liang. I think the desired asset pool would be high- quality assets that could deliver a dollar even under stress conditions. But I think the current mix varies across the different stablecoin issuers. As I mentioned, there may well be 50 or 60 different stablecoin issuers out there right now. The largest, however, has some corporate, short-term liabilities that has not proven to be able to deliver a dollar in the past, under stress conditions. Mr. Lucas. Exactly, and that takes me to my last question in this line of logic, thinking about my predecessor from Texas's comments. That mixture of reserve assets, of course, would impact a user's ability to redeem stablecoins at some future point, correct? Ms. Liang. Absolutely. Mr. Lucas. So, one would need to be thoughtful. Ms. Liang. Absolutely. Mr. Lucas. Second question, Under Secretary. The CFTC has shown through enforcement action that it has some authority over stablecoins. Is it the Working Group's view that the Commodity Exchange Act gives the CFTC the full authority to audit stablecoins to ensure that the assets backing stablecoins are fully accounted for? Ms. Liang. I would definitely need to refer you to the CFTC on that. The PWG did not try to come to a conclusion about the applicability of the securities and the commodities laws. That is something their agencies are working on. And as I understand it, there are enforcement cases in the courts that are addressing this issue. The PWG was looking for gaps in existing regulations related to stablecoins as a payment instrument. Mr. Lucas. The report touches on how many stablecoins aspire one day to be widely used by retail users to pay for goods and services and other uses. Can you discuss the current barriers stablecoins might face in becoming widely adopted, and in your view, would the wide adoption of stablecoins be a positive development for the consumer? Ms. Liang. I think the potential for stablecoins to be widely used is that there are potential benefits, again, in faster and cheaper payments. The current barriers would--in our outreach, when we were doing this study, we spoke to 40 to 50 market participants. And one thing that was a common theme was that greater clarity about the regulatory structure would be helpful to developers and innovators on stablecoins. I also think it is at the beginning of adoption. I think adoption of technology can scale up very quickly. There are quite a few companies now considering whether to issue stablecoins and how to do so. I think the potential is there to really improve the payment system. Mr. Lucas. With that, Madam Chairwoman, I yield back the balance of my time. Chairwoman Waters. Thank you very much. The gentleman from Missouri, Mr. Cleaver, who is also the Chair of our Subcommittee on Housing, Community Development, and Insurance, is now recognized for 5 minutes. Mr. Cleaver. Thank you, Madam Chairwoman, and Under Secretary Liang, thank you for being here today and for being so candid with us. I am following along the same lines that many of my colleagues have raised during this discussion. Madam Under Secretary, I am suffering from, ``Ponzi paranoia.'' I know you probably haven't heard of that disease, but when I start thinking about and discussing this whole issue, I think of Bernie Madoff and how easy it would be for us to have some kind of devastating economic problem as it relates to this whole new digital currency, digital dollars. And let me just find out if there is any kind of antipsychotic regime that is put in place by you or other doctors. You are a Ph.D., right, so you are a doctor. I need a doctor on this anyway. What protects the American public right now, at this very moment, from being taken in? Ms. Liang. I think that the issues that you raise are of serious concern, that consumers and investors need to be protected. The digital asset space, while built on a new technology and while offering the potential for innovation that is beneficial to the economy and consumers also carries some risks to consumers and users and investors. The market regulators, the CFPB and the bank agencies, to the extent that their entities are involved, are taking actions to try to protect consumers and investors, and I expect these actions will continue. And they address fraud, misleading advertising, and manipulation. So, I think those are the protections in place. From a broader financial stability perspective, there is ongoing monitoring, following developments and whether leverage might be used in some trading of digital assets that could increase the potential for a much more serious fall in asset prices. So, I think the regulators are very much focused on protecting investors and consumers. The PWG report focused on stablecoin, which has a much more stable value because that is its offer, so it doesn't have quite that level of concern about the volatile asset prices that come along with the other assets. But I believe the regulatory community is very much focused on these issues you are raising. Mr. Cleaver. Yes, I am sure they are, but the private sector is setting up whole divisions right now, crypto divisions and corporations. They are ahead of us. And the reason I mentioned Bernie Madoff and Ponzi scams, which is investment fraud, is that all you need is a constant flow of new money to thrive. And when you face the reality that there are probably unlicensed sellers out there, and they are not registered with the Securities and Exchange Commission, it frightens me. Do you have any such concerns? Ms. Liang. Absolutely. I think new developing technologies, rapidly growing markets with an unclear, inconsistent regulatory framework is not appropriate. And the PWG report tried to start the conversation of what the regulatory framework should be for stablecoins, which is a subset of the digital asset space. And as I mentioned in my testimony, the Administration has an ongoing effort to take a more comprehensive strategy across all kinds of digital assets, including concerns about user protection and financial stability. Mr. Cleaver. Thank you, Madam Chairwoman. Chairwoman Waters. You are welcome. The gentleman from Florida, Mr. Posey, is now recognized for 5 minutes. Mr. Posey. Thank you, Madam Chairwoman. Under Secretary Liang, one of the reasons for prudential supervision of banks and deposit insurance is to ensure that our payment system can redeem its deposit liabilities at par, or dollar for dollar. This is essential for bank deposits functioning as money that can be redeemed even in periods of stress. In this regard, a number of questions have arisen in the stablecoin realm about asset quality. Let me use Tether as an example. Can you tell us if Tether is backed by a dollar or cash equivalent? Ms. Liang. My understanding from their public documents that they post is that their reserve assets include assets that are not credit risk free. Mr. Posey. Okay. Does Tether have investments in Chinese commercial paper or any other illiquid assets that might threaten the redeemability of stablecoins? Ms. Liang. I understand they hold commercial paper of private firms, which is not a credit-free asset. Mr. Posey. Okay. Has a Tether been issued that is not fully collateralized? Ms. Liang. I'm sorry. Could you repeat that question? Mr. Posey. Has a Tether been issued that is not totally or fully collateralized? Ms. Liang. I expect that is the case. They are not regulated. They publish data, but based on what I understand, they may not be able to deliver a dollar. They are not fully collateralized under all conditions. Mr. Posey. Okay. Thank you. Do you have concerns about Tether's opaqueness and its impact on consumers? Ms. Liang. I do have concerns about the opacity of the reserve assets of stablecoin issues. That is, in fact, one of the reasons for our first risk that we identified, the run risk, and the potential that could have for other short-term funding markets if investors were to become concerned about the quality of the assets underlying a stablecoin. Mr. Posey. As we move forward, I hope we can find a path that provides for protection of consumers and investors in the stablecoin realm, but which also permits our economy to realize the benefits of the newer innovations. The President's Working Group explored regulatory alternatives to doing this. The conclusion that the group reached seemed to be that stablecoins ought to look more like banks and deposits, including deposit insurance. Can you share with us the alternative regulatory regimes for providing adequate disclosure that would make sure the consumers of stablecoins are not perfect substitutes for cash or bank deposits, as they are currently structured, to anybody? Ms. Liang. As I mentioned in my testimony, the IDI proposal, that issuers be IDIs, really did rely on the flexibility of supervision and regulation under that proposal, that a stablecoin issuer that only issued stablecoins for payments and did not make commercial loans like a commercial bank, a traditional commercial bank, would be subject to a very different supervisory regime. So, I think there is a degree of flexibility within the proposal that we put forward. The PWG report also did not make a statement about deposit insurance. Depending on the quality of the assets and the capital and liquidity standards that could be applied to a stablecoin issuer, they may not need deposit insurance. So I think there is also a possibility that within that one framework of IDI, there is a range of ways that could be applied. Mr. Posey. Okay. And you have covered part already, but I am wondering what the current Administration policy proposal for addressing stablecoins is in our financial system? Ms. Liang. Currently, the PWG report recognize that there are gaps in the current system, that there are securities laws, and there are consumer protection laws, and there are illicit finance laws to address stablecoins and other virtual assets. But there is not a regulatory framework at the Federal level that builds on State-level regulations that would apply to stablecoins as a use of payment by households and businesses and financial firms and governments, if it became widely used. Mr. Posey. I thank you for your forthright answers, and I see my time has expired. I yield back, Madam Chairwoman. Chairwoman Waters. Thank you. The gentleman from Colorado, Mr. Perlmutter, who is also the Chair of our Subcommittee on Consumer Protection and Financial Institutions, is now recognized for 5 minutes. Mr. Perlmutter. Thanks, Madam Chairwoman, and thank you, Under Secretary Liang, for joining us today. This is a very interesting conversation because it is almost like we are trying to talk about the nature of money or the nature of an investment or the nature of commodities. So even though there is a glossary of new terms dealing with digital assets, we are dealing with some things that are very basic to an economic system. For me, I just see there is a spectrum here, and you are trying to figure out where on the spectrum these stablecoins fall. The first part of the spectrum would be, you go buy something, it is a stupid purchase, you should never have bought it, but we have caveat emptor, buyer beware. Why did you buy that dumb thing? But then, say, 10,000 people buy it, and you say, okay, and it falls apart, well, you guys got defrauded. Maybe, let's take a look at it. You move further ahead and a million people invest in something. Now, all of a sudden, you have other questions you have to ask. Is it a currency? Is it a medium of exchange that so many people are using? And I want to thank Mr. Davidson, who convened a group a couple of days ago on cryptocurrency. It was a very interesting conversation. Here, it reminds me of money markets. It also reminds me of silver certificates. It is not like we have not had in history something backed by what was thought to be a stable reserve, silver, but then there was a crash of the silver market and those silver certificates were absolutely worthless. In this instance, in this spectrum, these stablecoins, what do you consider, based on the review of the group--what would you consider the most secure of the stablecoins that have been developed? And not to the point where they are a currency, a medium of exchange that a million people are using back and forth, but more like an investment. Can you see this sort of spectrum that I am talking about? Ms. Liang. Yes, of course, and I think you highlighted the particular uniqueness of stablecoins, that it can be both the investment and it can serve as a payment mechanism. And the PWG report was focused on the future of stablecoins, the near future of stablecoins as a payment mechanism. But as an investment contract there are, I believe, stablecoins that are backed by high-quality assets, and if they were not used as payments and there were not issues of concerns about operational risks of storage, transfer, and the actual use as payments, then the PWG recommendations are not applicable. The PWG recommendations are focused on those that could be used for payments and how to convert convertibility and operational risks as well. Mr. Perlmutter. Let's talk about that. This is where it gets to money markets. Ms. Liang. Yes. Mr. Perlmutter. And we broke the buck, the reserve, whenever it was, we broke the buck. And Mrs. Wagner and Mr. McHenry were sort of saying, well, why are we trying to make this a Federal issue? Let's just go State by State. We saw with money markets that even though we didn't back them because so many people used them as currency or as a payment medium, we ended up backing them. Ms. Liang. Right. Mr. Perlmutter. The question is, do we want to do this before something goes to heck or after it goes to heck? That seems to me to be the question. Ms. Liang. Right. The PWG report would suggest before. Mr. Perlmutter. Okay. I think this is a great education on sort of an economic system and the payment system, and I wish you very good luck in trying to come up with a good answer. Thank you. Ms. Liang. Thank you very much. Chairwoman Waters. Thank you very much. The gentleman from Kentucky, Mr. Barr, is now recognized for 5 minutes. Mr. Barr. Thank you, Madam Chairwoman, and thank you, Under Secretary Liang, for your testimony. I want to follow up on the questions from Mr. Luetkemeyer a little bit about protecting the dollar as the world's reserve currency. As innovations in digital assets advance, it is vitally important that we maintain the dollar's position as the world's reserve currency. Given that major stablecoins are denominated in dollars, the adoption would likely not compromise the dollar as the world's reserve currency. Under Secretary, first, do you agree with that, and second, do you agree that as dollar-backed stablecoins such as USDC are adopted, the threat to the dollar from cryptocurrencies and other central bank digital currencies is diminished? Ms. Liang. I agree with your statement that it is important to preserve the value of the dollar. I believe stablecoins that are stable and can deliver a stable value tied to the dollar would benefit the U.S. dollar. Mr. Barr. Great. The Fed is exploring a digital dollar and recently released its long-awaited CBDC report. We don't want the development of a Fed CBDC to quash private sector innovation, including in the stablecoin space. Do you believe that stablecoins issued within a clear regulatory framework may be able to coexist with a Fed-issued CBDC? Ms. Liang. Yes. In my view, regulating stablecoins tied to the dollar does not in any way preclude anything with respect to the introduction of a CBDC. It is hard to know what the future will look like, but one could imagine they could coexist. One could imagine a CBDC that supplants private stablecoins. But I don't see any reason that creating a regulatory framework for U.S. stablecoins would foreclose any avenues on the digital dollar. Mr. Barr. One editorial comment--and I am still developing my opinions on this--but it does seem to me that the dollar- backed stablecoin concept solves the problem of protecting the dollar as the world reserve currency and perhaps diminishes the case for a Fed central bank digital currency. Let me ask another question. I want the United States to be competitive and the leader in stablecoins, and one of the key recommendations of the PWG is that Congress pass a law requiring stablecoins to be issued only by insured depository institutions, bringing stablecoins within the banking regulatory regime. I do worry that this could push crypto talent innovation and stablecoin issuers overseas to other jurisdictions, and I also worry that it is inconsistent to take the position that only banks should be allowed to issue stablecoins, but then fail to grant bank charters to the largest issuers of stablecoins. As you think about American competitiveness and making sure that we are on the cutting edge and the leaders in this space, can you address these concerns in the context of the PWG's recommendation that we bring stablecoin issuance into the bank regulatory regime? Ms. Liang. The proposal for issuers to be insured depository institutions is designed to make them stable, and I think stability is probably the key attribute of a good stablecoin. So, I think stability and leadership in this space are not in conflict. Mr. Barr. Under Secretary, that is a fair point, and if I may interject with limited time, if you have an audit, if you have oversights of the integrity of audits to ensure that stablecoins truly are stable, that diminishes the likelihood of runs, run risk for example, that, to me, solves the problem without requiring stablecoin issuance to be done through insured depository institutions. Why is that wrong? Ms. Liang. The first risk that we identified in the report was run risk. The second risk was risk to the payment system, and that I do not think the disclosure or the money market fund type regulations are designed to address. Mr. Barr. Thank you for your work on this. I look forward to continuing to be an advocate for innovation and American leadership in this space, and I yield back. Ms. Liang. Absolutely. Chairwoman Waters. Thank you. The gentleman from Connecticut, Mr. Himes, who is also the Chair of our Subcommittee on National Security, International Development and Monetary Policy, is now recognized for 5 minutes. Mr. Himes. Thank you, Madam Chairwoman, and thank you, Madam Under Secretary, for being with us. Like Mr. Perlmutter, I think this is an interesting conversation. I want to just start by level-setting, because I think it is important that we move on beyond what we have been doing, in a constructive way, and understanding these implements, to realizing that like every other innovation that the Congress has faced, probably for centuries, there is a potential upside, and a potential downside. My guess is that 110 years ago, when we were presented with the concept of the automobile, we never imagined that 35,000 Americans would die every single year on the roads because of the automobile. But nobody is proposing that we do away with the automobile. I suspect that is true for air travel, for the internet, and for all of the innovations that we see every single year. So the question really is not, should we allow it or not, because it is already here. And the question is, just as it was with the automobile and with the internet and with everything else, how do we regulate it in a way that allows for innovation and the benefit but protects the consumers, et cetera? And, by the way, I will just remind my colleagues that we famously did a number of hearings on GameStop back in February. Had Grandma bought GameStop in February, at $350 a share, Grandma would be out two-thirds of her money today. And we don't say we should stop trading in GameStop. We say it should be transparent, it should be disclosed, all of the risks, and when that happens, we trust American consumers to take informed risks. That leads me, Madam Under Secretary, to my question, which is, I think you would agree with me that there is a radical difference between a stablecoin which is fully-backed, dollar for dollar, with reserves that are not leverageable, where there is redemption at par, where there is no maturity transformation--there is a radical difference between that and what Mr. Green so memorably called investing in nothing. Correct? Ms. Liang. Agreed. Mr. Himes. Dogecoin. And I think we have an opportunity here to recognize that by saying that if a stablecoin is dollar-for-dollar backed with currency, it is redeemable at par, there is good transparency, we can regulate it in a way that is different than a much more risky instrument. And we have talked about this, but I wonder whether you would agree that full IDI regulation, bank charter may not be necessary in that former case? Ms. Liang. I agree there are important distinctions between stablecoin and the unbacked digital assets. I also agree the full set of bank regulations do not need to be applied to a stablecoin issuer that does only stablecoin issuance. There is flexibility within the IDI framework to not focus on credit risk in making loans, because the stablecoin issuers do not make loans. They do not engage in fractional reserve banking. But they do have payments, and there are operational and convertibility risks that are associated with that, over which you would like some oversight to ensure that the payment system continues to operate well, which is a public service to the financial system. And that is the core of the PWG recommendation. Mr. Himes. I appreciate that, and I appreciate the way--and we have had a couple of conversations about this--you are thinking flexibly, because I really do think our sole job right now is to figure out how to adequately regulate instruments which can be very, very safe or potentially very, very risky, and that is actually an exciting endeavor, I think. Let me use my last minute, Under Secretary Liang, on something I have not thought too much about, but I would love to hear you on for a minute, which is systemic risk. It doesn't feel to me like you have quite the market cap yet, or leverage--and I really highlight the word, ``leverage''--to create the kind of systemic risk. And I am a refugee of 2009, 2010. But give us a minute on what we need to watch for, vis-a- vis the development of systemic risk in this space? Ms. Liang. I think you have identified one of the key things you would watch for systemic risk. It is an asset which the value becomes increasingly based on more leveraged positions. The regulators, including the Financial Stability Oversight Council (FSOC), have been monitoring developments in digital assets, looking for leverage. Leverage is a fundamental vulnerability that increases risk to financial stability. Others are, whether they become much more interconnected with the traditional financial system. Currently, crypto assets, digital assets have pretty tenuous links to the traditional financial system. The banking regulators have raised capital requirements on any crypto asset holdings. They are cautiously issuing guidance for how banks can get involved in this category. That is another thing that, if you were monitoring for emerging systemic risks you would look for greater connections with the traditional system and you would look for leverage, increasing leverage. Chairwoman Waters. Thank you very much. The gentleman's time has expired. The gentleman from Texas, Mr. Williams, is now recognized for 5 minutes. Mr. Williams of Texas. Thank you, Madam Chairwoman. Cryptocurrencies have shown great promise to fill many shortcomings with the traditional financial services marketplace. They are offering new ways to reach unbanked communities and are making it easier to send payments anywhere in the world, and are making oracles that transfer real-time data to blockchain networks. Stablecoins play an integral part in making this entire ecosystem function by allowing people to remove the volatility that is often associated with crypto, so you can preserve value without the need to transfer digital coins back into fiat currencies. Your report suggests that we should treat all stablecoin users as banks. This would give a massive advantage to all of the institutions who are most skeptical about cryptocurrencies in the first place, and leave behind the entrepreneurs who have worked to make cryptocurrencies more mainstream. It would guarantee that the largest banks in the country have a built-in advantage over another market participant who may not have the resources to comply with the minimum regulations that are coming. So, this would give the largest banks an even greater advantage in this developing space over every other entrepreneur who may have been doing this for much longer. So, Ms. Liang, how did the Working Group balance the effect on innovation as they came up with these recommendations? Ms. Liang. Thank you for the question. Of course, the group was very focused on balancing the benefits for financial innovation with reducing the risks to users and the broader financial stability of stablecoins. I believe that stablecoins, because they offer stability, should be held accountable to actually be able to provide that stability when demanded, and that requires more regulation than they currently are under. While the proposal was for stablecoins to be issued by insured depository institutions, the proposal also relied on the fact that regulation and supervision of IDIs can be quite flexible, and that stablecoin issuers that have those simple business models of holding high-quality reserve assets and issuing liability such as stablecoins, would be subject to a very much less stringent type of supervision and regulation than would a traditional commercial bank. So I think that we, the PWG, came out balancing the risks that could be reduced by that framework while providing clarity and consistency and safety that would be beneficial for innovation. Mr. Williams of Texas. As you developed this report, you have sought the input of regulators, academics, and private sector participants, and as a business owner myself, I value the input of the private sector. I think it is the most important. And since most people who took risks to build these new products and provide service are in the private sector, they are the ones who took risks and have the most to lose if the government gets this regulation wrong. So in closing, can you describe your work in consulting the private sector as you developed this report, and do you think their voices were adequately accounted for? Ms. Liang. We did reach out to many stakeholders, including academics, regulators, and the private sector. We talked to many in the industry to hear their concerns, to learn more about the actual business and the problems that they face. I think many of them are comfortable with the idea of an IDI bank charter. Some are pursuing it. Some are already within the regulatory parameter, even on their own. So I think, again, we are balancing innovation with safety, trying to find the right balance. I think this recommendation is one path forward. Of course, Congress will determine how it wants to write legislation. We believe this element could be very beneficial to the system. Mr. Williams of Texas. I yield back. Thank you. Chairwoman Waters. Thank you very much. The gentleman from New York, Mr. Meeks, who is also the Chair of the House Committee on Foreign Affairs, is now recognized for 5 minutes. Mr. Meeks. Thank you, Madam Chairwoman. Madam Under Secretary, as mentioned, a core recommendation of the President's Working Group is to require stablecoin issuers to be insured depository institutions. So my question is, to what extent was this recommendation analyzed through the context of the President's Executive Order on promoting competition, as well as his Executive Order on racial equity? It occurs to me that limiting stablecoin issuers to insured depository institutions, which have a high barrier to entry, could limit competition. Furthermore, given the disproportionate number of people of color who gravitate to nonbank financial institutions, such recommendations could have a racial equity impact. So what I want to know is, did the Working Group consider this recommendation's impact on both competition and racial equity, and if so, please explain? Ms. Liang. Thank you. The group did consider the impact on competition. I think the view is that the current regulatory framework is inconsistent and fragmented, and that a more consistent, comprehensive framework would benefit competition. It also believes that financial innovation is important and tried to provide clarity, which is something that the industry has asked for, and also that competitive advantages should not arise from differences in how standards are implemented across different regulators. So, my view is that it balanced competition by providing more clarity, and more consistency. In terms of meeting equity goals and meeting the needs of the unbanked or underbanked, I think stablecoins have the potential to help by lowering costs, and if those who choose not to go to banks are more comfortable using the technology of the stablecoin. And so, I think that is the potential to improve financial inclusion and address some of the equity goals of this Administration. Mr. Meeks. Thank you for your answer, and there are certainly areas of regulatory gap when it comes to this new type of payment system and technology. And there are also tremendous ways we can use stablecoins to help underbanked communities. And as Chairwoman Waters said, I am the Chair of the House Committee on Foreign Affairs, so it also could help communities abroad who may be facing turmoil in their home countries. Ms. Liang. Yes. Mr. Meeks. And we are hearing about NGOs who can assist refugees with assessing their cash in their new country through the use of stablecoin, where the population of a country in distress can access a mobile crypto wallet and the government cannot get to it, making it a great use case for humanitarian aid and relief. So, how can the Treasury assist some of those NGOs in partnership with stablecoin issuers to help get humanitarian aid out to these populations safely and efficiently? And is there anything that Congress can do to assist in this area? Ms. Liang. The examples you cite of being able to provide aid to other countries is exactly some of the benefits that could come from this new technology. The President's Working Group recommendations are to make that service more stable, so that it functions as needed without raising other risks to financial stability. And that is exactly an example of the beneficial effects of a new technology in allowing innovation. Mr. Meeks. Thank you for that. And I am pretty pleased to see that the industry is interested in using stablecoins to help citizens of some foreign countries, and a lot of them are going through the necessary steps to ensure that there is proper Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures in place. But in peer-to-peer transactions, that doesn't have a formal broker. The Financial Crimes Enforcement Network's (FinCEN's) jurisdictional reach is limited, and many crypto users value the autonomy aspect, and therefore a great number of transactions don't require the same level of KYC procedures that others may do. And I know I am out of time, but my question would be, what role can the Financial Action Task Force (FATF) and FinCEN play when it comes to combatting these bad actors while also ensuring that good use cases like humanitarian aid and simple cross-border payments are not stifled or made more complicated? Ms. Liang. Treasury is leading the Financial Action Task Force (FATF), and trying to improve the implementation of standards in countries that may be lagging in their implementation. This is a high priority for them. Chairwoman Waters. Thank you very much. The gentleman from Arkansas, Mr. Hill, is now recognized for 5 minutes. Mr. Hill. Thank you, Madam Chairwoman. Thanks for convening this hearing. I appreciate the comments of the ranking member as well. And Madam Under Secretary, thanks for sitting there patiently with all of these Members asking questions. My sense, listening today to Chairwoman Waters, is that there is a fair amount of agreement between Democrats and Republicans on stablecoins, starting with the belief in their potential to improve the efficiency, speed, and cost of payments, especially cross-border payments, as just noted by Chairman Meeks, expand financial access, and facilitate the use and adoption of digital assets due to the role of the stablecoin as being sort of an onramp to the greater crypto developing ecosystem. I would say a very fledgling, but developing ecosystem. And, as noted by Mr. Himes and Mr. Barr, maintaining the U.S. as a preferred currency, is obviously important to all of us--Mr. Himes and I have our U.S. dollar legislation pending about working on that--but also, the U.S. is a preferred place for innovation and a host country for financial technology. So as Congress considers legislating, I think we ought to focus on permissible reserve assets, their credit quality, and the collateral requirements, liquidity and redemption requirements, risk management and other governance issues, including audit and transparency controls and privacy, irrespective of what the use case is. And this is something, Madam Under Secretary, this issue of whether it acts as a money market mutual fund or a payment system, I think we ought to be neutral on that. I don't think we should preempt that. I think we ought to have narrowly crafted legislation that simply determines, as I have just outlined, what is a good stablecoin, from a consumer or business point of view. Do you agree that we should focus on that definition above all, after working on the output of the Working Group? Ms. Liang. Representative Hill, thank you for that question. It is a thoughtful question. I think regulations should follow the function of the product or the service. Mr. Hill. Yes, I agree with that. It is just that my time is short. I am an activities-based person as opposed to jamming everything through entity regulation, particularly in an innovation, and the jury is out for me on whether these have to be issued by a depository institution, for example. I don't think you are wrong to suggest that, but would you support a Federal money transmission license, or a national payment provider license that would be a national license similar to what we see in the EU? Is that an alternative that you would accept? Ms. Liang. I think that is a possibility definitely worth exploring. The U.S. does not have a Federal money transmitter license, so we did not build on that framework. Mr. Hill. Yes. And that gets into this issue, as Ranking Member McHenry asked, about State regulation. Are you supportive of States going ahead and defining some of these quality standards around stablecoins, as we have seen in the case of New York? Ms. Liang. I think in the current environment with stablecoins already in play and growing rapidly, the current regulators need to take actions to meet their mandates. As I understand it, some State money transmitter licenses don't even apply to digital assets, so it feels like there is probably room for different States to be revisiting their rules. Mr. Hill. Yes. Thanks. And on the subject of deposit insurance, I agreed with a lot of the comments, and I don't really think that's the right road to go down for these assets. I think defining them is a much better approach, whether they are used as a payment activity or as an investment holding activity, and that we just use activity-based regulation, based on the definition. As to whether or not they are systemically important, that seems a stretch for me at $150 billion or $170 billion, when you think about how we have $5 trillion in credit card transactions a year, and we have almost $5 trillion in money market funds. So to me, I thought that was a stretch. I encourage my colleagues to work together on a narrowly-crafted definitions bill for what is a good stablecoin. Thank you for your time, and I yield back. Chairwoman Waters. Thank you very much, Mr. Hill, and I just want to remind you that while you talk about how it appears that there is growing consensus between both sides of the aisle, do not minimize permissible reserves. That is very important. Thank you. The gentleman from Illinois, Mr. Foster, who is also the Chair of our Task Force on Artificial Intelligence, is now recognized for 5 minutes. Mr. Foster. Thank you. Under Secretary Liang, I would like to follow up regarding any specific recommendations that you might have for providing a secure and legally-traceable digital identity for participants. It seems to me that it is clear that if stablecoins, or even central bank digital currencies or other crypto assets, become generally available for consumer transactions, and we want to prevent them from being used for ransomware, money laundering, human trafficking, you name it, we must have a legally-traceable identity to the beneficial owners behind the transaction, that can be executed in a court, in a trusted jurisdiction, in a country with which we have extradition treaties. And I thought it was quite remarkable that when we had crypto billionaires in front of our committee a while ago, they pretty much agreed that was a necessary condition for preventing this kind of crime. And we can't simply just use KYC requirements as they exist today, because the fact that someone or some shell company has a bank account in Cyprus just will not cut it. What are your thoughts on how to proceed with traceable digital identity for crypto assets generally, both nationally and internationally, and do you need more specific guidance from Congress on how to proceed? Ms. Liang. Thank you for that question. I think in the context of digital assets, the principles of security and privacy can, at times, be in conflict. But privacy is very important, as is security. I think this is an area for legislation. The PWG report did not make any recommendations around this issue. But I would say that they were very aware of this potential, and I think with the role of a CBDC, these are issues as well. One area that the PWG report did touch on this topic is the potential for a stablecoin to scale rapidly, perhaps because of network effects, and there are benefits to that. But that also gives them quite a bit of information and control over a lot of customer financial transaction data. So an issue that we raised was that Congress should consider whether they would want to put some authorities around how to manage the security of that data. And I think that is an important issue to address if digital assets, as a currency, become widely used by the population, and you have a big system where everything is digital. As you know, consumer privacy is important, as well as security, and those are a balance, and I think that is an area for Congress to be doing more in, as they are, I should say. Mr. Foster. Yes. I just would, as I have done before in this committee, draw people's attention to the National Institute of Standards and Technology (NIST) standards for using a modern cellphone and a REAL ID-compliant mobile ID or driver's license as a way for consumers to prove who they are, who they say they are. Ms. Liang. Yes. I understand there are proposals to build on the real ID system that is being implemented and tying it to the iPhone or their phones as a way to ensure the identity of an individual. That would help to prevent fraud, and it would also increase security for an individual. Mr. Foster. And is this something that FinCEN would have specific recommendations on, on how to proceed? Ms. Liang. I would be happy to ask. I am sure my colleagues at FinCEN would be happy to follow up on this. Mr. Foster. Thank you. I think this is one of the really positive ways that this committee can get involved in crypto asset regulation generally. Thank you, and I yield back. Chairwoman Waters. Thank you very much. The gentleman from Minnesota, Mr. Emmer, is now recognized for 5 minutes. Mr. Emmer. Thank you, Chairwoman Waters, and thank you, Ms. Liang, for your testimony and your time today. I am going to try to be efficient with my time, so I would appreciate as concise responses as you can provide to my questions. Currently, stablecoins represent just 5 percent of the digital asset industry's total value. It is a relatively small fraction. But they, stablecoins, are facilitating more than 75 percent of trading in the entire digital asset ecosystem. That's quite significant. Clearly, stablecoins offer economic benefits that cannot be ignored. Stablecoin transfers have nearly instant settlement, and settlement can be confirmed by both parties on a public blockchain. These characteristics lead many to view stablecoins as less risky than the heavily-regulated payment rails of our current banking system. Yet, the President's Working Group report on Stablecoins focused almost solely on their perceived risks. The report doesn't even provide a definition for stablecoin. But it doesn't hesitate to assert that the risks of stablecoins are so broad and across cross-jurisdictional lines that only insured depository institutions or banks should be allowed to issue them. As you mentioned to my colleague, Mr. Huizenga, you believe stablecoins could be both a bank-like product as well as an investment-like product, which is why you believe they should only be issued by banks. I firmly contend that the stablecoin is a payment instrument and is a fundamentally different asset than an investment product. If we base the evaluation of the report in this hearing today on a narrowly-tailored definition of stablecoin, I think we might come to see that a bank-like regulatory framework would improperly regulate the asset class and inadvertently capture potential future financial products that are vastly different than what you and I think of as stablecoin. For instance, under this report a tokenized money market fund, which clearly would be a security, could fall under the same stablecoin umbrella as a fiat-backed payment token that is fully redeemable for cash. How is it that such vastly different financial products could be both defined as stablecoins, and the only institutional players that would be able to offer these vastly different products are banks? The reason I elevate this concern is because legislating and regulating in this space should not be done under such broad definitional scope, and doing so would severely limit future market growth. It is not unlikely that tokenized money market funds backed by government debt or commercial paper might seek to come to market in the future. These potential future financial products could ostensibly lower the costs of participation in the asset class while offering conservative returns to investors. Ms. Liang, do you think the same run risks and prudential risks when attached to stablecoins backed purely by U.S. Government debt or highly rated commercial paper? Ms. Liang. I believe you're raising some important issues about how quickly the technology is evolving and what the future of digital assets will be, that-- Mr. Emmer. No. That was a very specific question. How about this. Do you think U.S. Government debt that underpins U.S. Government money market funds is risky? Ms. Liang. There is no credit risk. There can be convertibility risks if-- Mr. Emmer. They are risky or they aren't? Ms. Liang. There is no credit risk. Mr. Emmer. Okay, so-- Ms. Liang. There can be liquidity risk, just in being able to execute the transactions. Mr. Emmer. In the time I have left, Under Secretary Liang, I want to thank you. Tokenized money market funds backed by government debt or highly rated commercial paper clearly would not impose prudential risks significant enough to reserve the issuance of all tokenized money market funds to banks. This is important to highlight because there is a void in the market between stablecoins and security tokens, and a tokenized money market fund could provide an attractive, low-cost financial product with conservative returns. For this reason, I am working on a nonpartisan legislation that would allow tokenized money market funds to come to market. Here is the bottom line. Banks should not be the only institutions in the ecosystem with dibs to issue the potential array of financial products that the President's Working Group report simply lumps together and ties as a stablecoin. Thank you. I yield back the remainder of my time. Chairwoman Waters. Thank you very much. The gentlewoman from Ohio, Mrs. Beatty, who is also the Chair of our Subcommittee on Diversity and Inclusion, is now recognized for 5 minutes. Mrs. Beatty. Thank you, Madam Chairwoman, and thank you for holding this hearing. And Under Secretary Liang, thank you for being our witness today. As I have listened to both sides of the aisle today, this has been very eye-opening and interesting to me. In full disclosure, at one time I probably thought this was more like the Wild Wild West of what we are doing, and now I realize that it is the future frontier. And while I don't want to overregulate to the point that it chokes off innovation, I do believe that some well-thought-out regulation would provide some legitimacy to this space and allow it to further flourish. Earlier in your testimony, Madam Under Secretary, you talked about the largest stablecoin. Were you making reference to Tether? Ms. Liang. That is the largest stablecoin. Mrs. Beatty. Okay. Recently, they settled lawsuits with, I believe it was the State of New York and the CFTC for lying about the state of reserves that back this currency. And further, they claimed that about $30 billion of its holdings are invested in commercial paper, making them the seventh- largest holder of such debt. And this is coming from an article in Bloomberg. So I guess what I want to ask you, Ms. Liang, is how important is it that stablecoin issuers are transparent-- everybody knows, whether we are talking about this or diversity and inclusion, that I am a big believer that transparency is important--so that issuers are transparent with their reserves and these reserves are audited by United States accredited firms, not Cayman Islands firms? Ms. Liang. Right. I believe transparency is important, but it alone is not sufficient to prevent runs. For example, on money market funds, the holdings are transparent, but we had runs on two money market funds when the assets backing those funds are other than government securities. So when the holdings are Treasury securities and corporate high quality, in stress investors may still run. And we saw that in 2008, and we saw that in 2020. So, transparency itself is extremely helpful, but it is not sufficient to address the issue of investor runs. Mrs. Beatty. Okay. Because of time, we will come back to that later, and maybe I can talk to some of your team. Let me ask you this: What do you believe are the consequences for financial stability when so few hold such a large percentage of these different types of tokens? Ms. Liang. I think currently the risks to financial stability, the systemic risks, are not high. They are growing. They are emerging. One issue in the broader digital asset space is the high price volatility, and as mentioned earlier if that were fueled, in part, by leverage or when prices fell it would have impacts on the traditional-- Mrs. Beatty. I am only rushing because of the time. Ms. Liang. --systemic risk. Mrs. Beatty. Congressman Meeks talked about minority communities and different communities. In full disclosure, I thought this only applied to the top 1 or 2 percent. But now, I am hearing that Black and Brown communities who are underbanked and unbanked are also playing in this space. What are the risks for them, or how, if I am underbanked or unbanked, can I put myself in something that we don't really have regulations for now? Quickly, because the clock is ticking. Ms. Liang. Yes. Here, I would like to distinguish again between digital assets and stablecoins. Stablecoins have the potential to improve payments--make them cheaper, make them faster--and we are seeing potential benefits for cross-border. Digital assets, those that are not backed by, say, a pool of reserve assets, and whose volatility, the prices are highly volatile, investors really need to understand the risks when they make those investments. There are potential losses. High- volatility stocks are not for all investors. Mrs. Beatty. So, should we be advising people to wait? That is a yes-or-no question. Ms. Liang. I think we should advise investors and consumers that they should be aware of the risks of any assets that they are purchasing for investment purposes. Mrs. Beatty. Okay. Thank you. My time is up. Thank you so much. Chairwoman Waters. Thank you very much. The gentleman from Georgia, Mr. Loudermilk, is now recognized for 5 minutes. Mr. Loudermilk. Thank you, Madam Chairwoman. Thank you for having this hearing today. One thing I have seen over my years on this earth and the time I have spent in government is the hesitancy of some people to adopt new technologies, especially when it comes to government. And I am not one to run out and just haphazardly accept anything that is new technology just because it is new, but I think it is very important for us to weigh the benefits and the other issues with any type of technology. My mind goes back to the early 1900s, when the Washington Post ran an article when the word came out that these two bicycle mechanics, the Wright brothers, were testing a controlled flight device called an airplane. And the article said men will not be able to fly and should never be able to fly, just because of the hesitancy to adopt new technology. However, when it comes to people in our positions, it is important that we have an honest weighing of the costs and the risks and the benefits of new technologies. And like Mr. Emmer had expressed, I am a little concerned and disappointed about how one-sided this report really seems to be, for us to make a good decision. Most of it focuses on the risk of stablecoins, which obviously there are some, but there is little discussion of the benefits. In fact, the report mentions risk 131 times, but only mentions benefits 2 times. So, I wish the report was more balanced, and I hope this Administration will be more ready to embrace some innovation, not just accept everything, but actually give an honest look at innovation and technology and not try to stifle it. The report also doesn't address the regulatory frameworks that many States have already established for digital assets. Banking regulators in a number of States supervise stablecoin issuers under money transmittal laws. Ms. Liang, the report calls for Congress to establish a Federal regulatory structure for stablecoins. As part of that, does the Administration intend to account for the regulatory frameworks that many States have already established for digital assets to avoid creating redundant requirements? Ms. Liang. The PWG report recommends a framework that reduces inconsistency and reduces the fragmentation of current regulations, and builds on the current State framework. It can build on the State money transmitter laws. Insured depository institutions can be Federally-chartered or State-chartered. The goal of the framework was to provide some consistency, which we believe actually is beneficial to innovation, that having State laws apply, which vary, and increase the complexity of addressing lots of different regulations is a hindrance to innovation. Mr. Loudermilk. So what you are looking at doing, to make sure I understand this, is considering State laws, but you want to avoid having contradictory State laws? Is that where one State may have one regulation, and another State, another regulation? What I am understanding you are saying is you are considering existing State regulations. Ms. Liang. Yes. It would build on existing State frameworks, as I mentioned. Insured depository institutions can be State-chartered or Federally-chartered. State money transmitter laws, as was mentioned, are at the State level. There is no Federal money transmitter license. This was an approach to try to reduce some of the fragmentation in the system, with an approach that we believe can be flexible and does not use the entire set of rules that apply to traditional banks, and they could be adapted to stablecoin issuers. Mr. Loudermilk. I think that it is important not to have fragmentation or conflicting regulations, but I also think it is important to avoid one-size-fits-all regulations specifically. We should not be broadly applying banking regulations to stablecoins. Does the Administration intend to account for the significant differences between depository institutions and stablecoin issuers in its regulatory approach? Am I understanding that? Ms. Liang. Yes, that is our understanding, that the banking regulators have flexibility to address the supervision and regulation that would account for differences between stablecoin issuers and banks that also make loans. So, it would be a different approach. Mr. Loudermilk. Thank you, and Madam Chairwoman, I yield back the balance of my time. Chairwoman Waters. Thank you very much. The gentleman from California, Mr. Vargas, is now recognized for 5 minutes. Mr. Vargas. Thank you very much, Madam Chairwoman. I want to thank you for holding this hearing, and also the ranking member. It has been very fascinating. And Madam Under Secretary, I appreciate the time you have spent with us. I do think that stablecoin and cryptocurrency has some potential advantages. Certainly, when we take a look at remittances, remittances are very important in my district, and frankly, I think a benefit to Latin America and our hemisphere, and I think that this is a real possibility. But I also think that there is real potential risk here. Just listening to the previous speaker here, he said that this Administration should be more balanced when it comes to cryptocurrency and digital assets. Are you familiar with what President Trump said about Bitcoin? Ms. Liang. I am not. Mr. Vargas. Let me tell you what he said, since you are not familiar with it. ``Bitcoin, it just seems like a scam. I don't like it because it's another currency competing with the dollar.'' Hardly seems balanced there. But anyway, I just throw that out there because certainly the last Administration had a particular point of view, and certainly the President. So when you get accused of not being balanced, I don't think that is correct. But anyway, I appreciate all of the work that you have done on this. But I do have concerns. I also heard that this is a new technology and it is new stuff that we have never seen before. The reality is that before the Civil War, banks used to issue their own paper, and they were redeemable for either silver or gold. And what you would see is that many of these banks, unfortunately, would issue more paper that was not redeemable, and then you would have a run, and you would have all sorts of chaos. That is why we had the National Bank Act of 1863, to make sure that we had the dollar, and that the dollar was backed by the full credit, and also rolls at the time of the United States of America. So it is not the notion that we have never had this before, that you haven't had people issuing coins. The reality is we have had that, and it didn't work out very well. Now, we have new technology, and that is why we have to be open-minded; I certainly am. But I do have concerns about the--and I will read here from page 2 of the report, which says, ``While stablecoins have the potential to address shortcomings, the existing payment systems such as the potential for lower-cost or real-time payments, they pose legal regulatory and oversight challenges and may present risk to monetary policy.'' I do think risk is associated there. We have been saying how small stablecoin is. I remember when we were saying how small cryptocurrency was. We used to talk about it in the billions. Now, we talk about it in the trillions. Could you talk a little bit about that risk? Ms. Liang. Yes. Sure. One of the risks that we focused on was something we would call concentration of economic power, and that is because stablecoins, as a payment mechanism, could scale up very quickly. One could imagine that you would create a closed loop, almost a private system of money, similar to what you were referring to in the late 1800s. That kind of risk is something that we think Congress should consider. The proposal in the PWG report, one possible path on that is to have supervisors require interoperability so that there would be greater competition among stablecoins and less potential for one system. That also would reduce interference with implementation of monetary policy, as you mentioned, that you have an alternative form of money system. So, that is the third prudential risk that we identified in the report. Mr. Vargas. Would some of these things be corrected if you did have the central bank digital coin? It seems to me that you would then have a possible solution there with the CBDC. Ms. Liang. Yes. CBDC, that possibility I think, as I mentioned, will depend quite a bit on the kind of features the CBDC would offer. It could be very different. The current situation, however, is that a CBDC is still being investigated by many central banks, including the United States. It could be years before it were introduced, if they made the decision to introduce it. And stablecoins are here today, and they are growing quickly. And it leaves regulators in an uncomfortable position to say, we should wait until there are decisions about a CBDC. Mr. Vargas. Thank you. Chairwoman Waters. Thank you. The gentleman from West Virginia, Mr. Mooney, is now recognized for 5 minutes. Mr. Mooney. Thank you, Madam Chairwoman. The growing popularity of stablecoins introduces some regulatory challenges but it also presents some opportunities. At a time when some regimes, for example, Communist China, are using top-down restrictions on their digital yuan to maintain totalitarian control of their populace, stablecoins have emerged as an innovative, entrepreneurial way to provide wider access to the U.S. dollar around the world. Stablecoins pegged to the U.S. dollar can help ease cross-border transactions and help maintain the dollar's status as the world's reserve currency. Ms. Liang, in your testimony you mentioned furthering the United States' continued leadership of the global financial system as a goal of the President's Working Group framework. Can you explain how the President's Working Group's recommendations aim to further America's global leadership on the world stage? Ms. Liang. I think first, the role of the dollar and the role of the U.S. in the global financial system depends primarily on the country's governing structure, its respect for the rule of law, the strength of its institutions, the strength of its economy, and the liquidity of its financial markets. Technology can play a role, but it is not the primary role. And I believe that stablecoins that are tied to the value of the U.S. dollar can help to promote the role of the U.S. dollar, but it needs to be on a stable footing. It needs to actually be stable. Stablecoins that are not stable could undermine some of the confidence in the dollar. Mr. Mooney. Thank you. I want to ensure that any regulation we provide of stablecoins does not get in the way of one of our country's greatest strengths here in America, which is innovation. With global adversaries like China, which have banned cryptocurrencies and the freedom they represent, our country can embrace them. Next, I would like to pivot to the role of Congress in this progress. The report calls for congressional action on stablecoins, but also says that FSOC should act on its own to regulate stablecoins in the absence of legislation. So Ms. Liang, do you have any specific timeline in mind for congressional action before the FSOC would step in on its own? Ms. Liang. As you mentioned, the recommendation is for legislation. The Financial Stability Oversight Council has a responsibility to be monitoring for risk to financial stability and to consider actions to reduce those risks. So, it is an ongoing monitoring of the issues. They have some tools, but they are not a substitute for legislation. They cannot make structural changes to what stablecoin issuers would be. Any action they would take is a little premature, given how quickly the system changes. I am sure that their processes are defined by what is laid out in the Dodd-Frank Act, and it would be very data-driven and very deliberate and would invite public input and be transparent. Mr. Mooney. Okay. To follow up and make a final point on it, let's say, for example, that stablecoin legislation makes it through Congress by the end of this year. How do you think Treasury would respond to that? Ms. Liang. I think, again, FSOC would be monitoring risks to financial stability. To the extent that any risks to financial stability were increasing, it would be their responsibility to consider what tools it has to address those risks. But it is not a substitute for legislation. Mr. Mooney. In my last 30 seconds, let me just say thank you, and I do fear that hasty action on the part of regulators could do more harm than good. Sometimes, people have the best of intentions but it has an opposite effect. The last thing we need is a rushed regulatory process. Congress, where we are elected to serve, is a deliberative body, and the legislative process does take time. I say, let Congress do its work. Let this committee do its work. This is a complex issue. It is more important to get it right than to rush and get something done quickly. Thank you, Madam Chairwoman. I yield back. Chairwoman Waters. You are welcome. The gentleman from New Jersey, Mr. Gottheimer, who is also the Vice Chair of our Subcommittee on National Security, International Development and Monetary Policy, is now recognized for 5 minutes. Mr. Gottheimer. Thank you, Madam Chairwoman, for holding this important hearing and discussion on new innovations in the stablecoin space. Given the explosive growth in the stablecoin and cryptocurrency space, including, as I said, stablecoins, which continue to be front and center as an issue, it is critical, I believe, that Congress examine how best to establish appropriate guardrails around stablecoins to ensure these assets continue to mature here within the United States instead of fleeing overseas. I am continuing to work on draft legislation examining how best to establish guidelines on stablecoins, including coins issued by insured depository institutions, but also through properly-constituted nonbank stablecoin issuers. Establishing appropriate guardrails to mitigate the risk of a run and potential collapse of a stablecoin issuer should be a primary goal of any stablecoin legislation, and I look forward to working with my colleagues on both sides of the aisle on this issue. Ms. Liang, it is great to see you again, and thank you for coming today to testify. If Congress looks at stablecoins through a partisan lens and, in turn, fails to pass meaningful reform in short order, do you believe we could see the collapse of improperly-backed issuers, and would the effect be on the broader cryptocurrency market as well, as ordinary people invest in this market? Ms. Liang. I do believe that if stablecoins continue to increase rapidly and there are large stablecoins without appropriate reserve assets backing the ability for investors to redeem, that is a potential run risk and could have implications for other short-term funding markets and systemic risks for the financial system. Mr. Gottheimer. I agree. I am very concerned that if we sit here and let partisan games get in the way of getting a bill done it would be a huge mistake, and obviously, we will continue to lose companies overseas and they will flee our markets and consumers will be hurt. As part of the PWG report, you outline how stablecoins can pose substantial illicit finance risks without appropriate oversight. The report specifically cites the need to counter terrorist financing as a major objective of stablecoin oversight. Additionally, crypto scams resulted in $14 billion in losses in 2021, and I have heard from some of my own constituents who have seen funds stolen. The hard-earned dollars of ordinary citizens could have literally been stolen to help finance terrorist attacks. Do you think the only appropriate oversight method for stablecoins would be to ensure all issuers are subject to bank- like AML/KYC requirements to counter terrorist financing and scams? Ms. Liang. Currently, stablecoin issuers are subject to the AML/CFT regulations, the anti-money laundering, under the State money transmitter licenses. So, they have an anti-money laundering framework. It triggers various reporting requirements of large transactions or suspicious activities. The banking charter could increase some of those compliance regulations, but I do think that FinCEN has a framework in place that, as I understand it, some of the bigger issues with illicit finance now is inadequate enforcement of existing regulations in other countries. And Treasury is leading an effort at FATF to try to improve compliance and enforcement of these actions in other countries and the exchanges in those countries. Mr. Gottheimer. There are some potential holes right now. We need to make sure we close them, right? Ms. Liang. Yes. That is correct. Mr. Gottheimer. When examining privately-issued stablecoins, I think a major concern is ensuring we do not allow these coins to undermine the supremacy of the U.S. dollar. The PWG report advocates for an approach where stablecoins could be issued by insured depository institutions. Actually, the report says, ``If well-designed and appropriately regulated, stablecoins could support faster, more efficient and more inclusive payment options.'' Would you mind elaborating a little bit on that, please? Ms. Liang. As I mentioned, the potential for stablecoins to improve the speed and efficiency of payments is large. We are seeing payments being offered 24/7, instantaneous, on public blockchain ledgers, on public blockchains. So, that has a benefit to help all consumers by reducing the cost of payments and increasing their speed. We are seeing that being tested in cross-border remittances. We are seeing consumers respond to surveys to say they would benefit, and they would like to use stablecoins. So, I think when that becomes used to conduct transactions in the system that we all share, a payment system, it is important that that payment system be operationally resilient to all kinds of stresses, and that is the basis for the recommendations of the PWG. Mr. Gottheimer. Thank you so much. I yield back. Chairwoman Waters. Thank you. The committee will take a break for 5 minutes. [brief recess] Chairwoman Waters. The committee will come to order. The gentleman from Ohio, Mr. Davidson, is now recognized for 5 minutes. Mr. Davidson. Thank you, Madam Chairwoman. And thank you, Ms. Liang, for the testimony today and the work that you have been doing on this topic. I would like to step back and discuss the concept of a stablecoin more broadly. I think it is easy to get caught up in discussing this topic solely in the context of digital assets that are pegged to currency or to a commodity. The President's Working Group Report acknowledges that some stablecoin arrangements could fall under U.S. securities laws, which is the SEC's jurisdiction. This risked a siloed approach to addressing specific types of stablecoins; in fact, footnote 2 of the report explicitly states that the report, ``does not provide recommendations regarding issues or risks under Federal securities laws under the Commodity Exchange Act.'' This gap, to me, is concerning. So, my question is this, if you think about stablecoins, you have referred to them as risky, as potentially systemically risky, but you haven't really talked about specific things. I guess we did briefly allude to Tether, which I have called a time bomb. It is not regulated. It is not getting a lot of scrutiny, and I think the Securities and Exchange Commission should focus some attention on Tether. But if you look at the next-largest stablecoin, the U.S. Dollar Coin, it is a highly-regulated asset. Do you believe that the New York financial services regulatory framework is a deficient means of providing regulatory clarity for things regulated as New York Trusts? In fact, we are talking about stablecoins as this new or emerging idea, but there have been stablecoins approved under New York Trust laws since 2015. We are 7 years late. Could you address the regulatory framework of New York, specifically, and those coins that are audited, have audited financials, and transparency requirements under New York law, as just one example, to be specific? Ms. Liang. Yes. Thank you for that question, Congressman Davidson. I think the issue of stablecoin that the PWG report focused on is that it can serve as an investment, and SEC and CFTC laws and regulations would apply. But it also serves as a payment instrument, which distinguishes it from, say, a money market fund. The New York State laws apply to stablecoins as an investment, and look to audit the assets or provide some transparency around the assets, but do not have the authority to look into the other functions of a stablecoin that are necessary for it to function as a payment. Mr. Davidson. Okay. Thank you for that. If you look at it, it is okay as a payment system, Visa and MasterCard aren't legal tender, but, frankly, they are about the only thing that is accepted in America. It is almost impossible to pay in cash, and that is actually the legal tendered currency in the United States. We have made it almost impossible to transact that way, which has made it so that there is an emerging technology for better payment systems. And, frankly, digital assets aren't subject to the Durbin Amendment, so the market is working; there are more affordable, lower-cost transaction processes. And as an investment, stablecoins aren't really, generally, good investments. They are worth a dollar, so why would you own them? And so, the question is, if we think about dollars, like the U.S. Dollar Coin is U.S. dollars and Treasuries. Another one would be gold. We have talked about the silver notes. One of the first ones approved was a New York Trust-regulated stablecoin for gold. But there are also stablecoins that are pegged to other very liquid assets like, say, shares of Apple. So, if somebody has custody of shares of Apple, some would say, and make this choice clearly every day in our financial markets, the best in the world, and say, I would rather hold shares of Apple than cash, because I don't think my cash is going to keep up with inflation and I do believe that Apple is going to become more valuable over time; that is an investment. They could tokenize that and the share, and the token would be represented by someone who truly had custody of shares of Apple, as an example. Right now, that is not possible for American citizens, but it is for others around the world. Wouldn't that also be a stablecoin? Ms. Liang. I think the value of the stablecoin is distinct, because the value is designed to be stable and close to a dollar. The value of Apple stock, you could use it to transact, but it is volatile, and so both the purchaser and the consumer-- Mr. Davidson. It is volatile in terms of U.S. dollars, but less volatile than--it has done better to keep up with inflation than U.S. dollars. It has outperformed inflation, as an example. So, the U.S. dollar isn't a good metric; frankly, the stablecoin should be relative to what it holds. And I don't think that this Working Group does anything except protect the big banks. It may as well be called a big- bank protection concept. Chairwoman Waters. The gentleman's time has expired. Mr. Davidson. My time has expired, and I wish we could go a lot longer on the topic. Thank you. Chairwoman Waters. The gentleman from Florida, Mr. Lawson, is now recognized for 5 minutes. Mr. Lawson. Thank you, Madam Chairwoman, for having this hearing, and I thank Ranking Member McHenry as well. It is a great opportunity for us to learn more about what is going on in the economy. Under Secretary Liang, according to the recent NASDAQ article, data shows that Black and Latino communities are driving national, mainstream adoption. The article highlights that in a Harvard and Harris Poll, only 11 percent of White Americans, 23 percent of Black Americans, and 17 percent of Hispanic Americans own such assets. This is a positive trend, but it also signals a greater need for financial literacy and skill training. The rising interest in new technology is instrumental, and an opportunity to prepare key demographics for a next-gen workforce. How do you suggest the Federal Government be more proactive when it comes to future work strategies to position the historically-disadvantaged groups to compete in a global innovation of the economy and force digital equity? Ms. Liang. Thank you for that question. That actually gives me an opportunity to highlight a new initiative at Treasury. Through the Financial Literacy and Education Council, we announced a new initiative on digital assets just within the last month or two. We think there is a need and an opportunity to introduce digital assets, highlight the risks and the opportunities, and highlight the distinctions between types of digital assets. This is a cross-government council, and has been around for many years, and digital assets is a new initiative. In addition to that, which is just, which is just the education component, the Consumer Financial Protection Bureau (CFPB) is clearly following and tracking and taking actions against misleading advertising, and the market regulators will, of course, be looking to take actions to reduce fraud, and to take other actions to protect investors. Mr. Lawson. Okay. Thank you. A financial regulator stated that an effective payment settlement system requires four things: lower fees; predictability; exchangeability for goods and services; and consistent high speed. Present day, there is a consensus among most experts that stablecoins do not meet all of these objectives. Compared to our traditional financial system, would you still consider stablecoins to be an effective way to settle payments? Ms. Liang. The stablecoins have developed very quickly. They are continuing to develop. There is an incentive for developers to make them very efficient, to manage all of these, to meet all of these requirements to be an efficient payment method. Are they there yet? That is hard to tell. They haven't been tested in periods of stress. I think there still needs to be more oversight of their operational risks, and their convertibility risks to function as payments. But I think the potential for them to be beneficial to the payment system, to cut costs, to make it faster, to offer 24/7, is absolutely there. Mr. Lawson. Okay. Madam Chairwoman, I am going to try to get this in. Do you think it is necessary for stablecoin issuers to meet the same capital requirements as traditional IDIs if the majority of the reserved assets are backed by cash? Ms. Liang. I believe in terms of capital requirements, risk-based capital requirements would clearly be lower, if stablecoin issuers held only high-quality, liquid assets. Mr. Lawson. With that, Madam Chairwoman, I yield back. Chairwoman Waters. Thank you. The gentleman from North Carolina, Mr. Budd, is now recognized for 5 minutes. Mr. Budd. Thank you, Madam Chairwoman. And thank you, Ms. Liang, for being here. The President's Working Group Report states that absent urgently-needed legislation, the respective agencies in the FSOC can apply their existing authorities. So, do you see a scenario where they get tired of waiting for Congress to act and, in turn, they would place centralized finance (CeFi) designations on particular stablecoins? Ms. Liang. I think the scenario for the FSOC to take such actions is premature to understand how it could apply its tools. FSOC has a responsibility to monitor risks to financial stability. It has been following and monitoring digital assets. But FSOC's tools are limited. Designation is limited. It is not a substitution for a requirement that stablecoin issuers be insured depository institutions. Mr. Budd. But if I am hearing you correctly, that is-- Ms. Liang. Proper authorities in the future would have to be very factored in and deliberate. Mr. Budd. So, if I hear you correctly, you don't see a scenario where FSOC would front-run Congress and then place heavy limitations on stablecoins? Ms. Liang. In the current environment, I don't see that FSOC would take such actions. Mr. Budd. Okay. So, second question: In his confirmation hearing last month before the Senate Banking Committee, Fed Chairman Powell agreed that well-regulated, privately-issued stablecoins can coexist along a Fed-issued CBDC. Do you and the Treasury Department share the same opinion with Chairman Powell or do you differ from that? Ms. Liang. No, I absolutely agree with that assessment. I think regulation of stablecoins will make them more stable, but does not preclude, at all, the introduction of a CBDC, nor does it determine, the future of the CBDC will probably be the ones that determine how stablecoins exist or coexist. Mr. Budd. Okay. Thank you. So, there seems to be some disagreement among regulators about whether or not stablecoins are securities, which would determine if they fall under the SEC's regulatory regime. My view is that stablecoins that are backed by quality assets do not meet the Howey Test. Do you believe that stablecoins should be treated as securities? Ms. Liang. I would really need to defer to the SEC or the CFTC for their views on the applicability of their laws and regulations. I think that this is a product that has futures of a number of different financial products and services, and as such, that is why the regulatory approach to it should meet those differences. Mr. Budd. Very good. I thank you for your time. And, Madam Chairwoman, I yield back. Chairwoman Waters. Thank you very much. The gentleman from New York, Mr. Torres, is now recognized for 5 minutes. Mr. Torres. Thank you, Madam Chairwoman. Under Secretary, do you believe, as I do, that 100 percent of stablecoin reserves should consist of cash and cash equivalents? In the interests of time, a simple yes or no will suffice. Ms. Liang. Yes. Mr. Torres. And I share the PWG's concern that stablecoin, if left unregulated or poorly reserved, could impose a systemic risk as it becomes more widely adopted as a means of payment. But here is where we disagree. The risk of stablecoin, to me, is best managed not by the blunt instrument of banking regulation, but by common-sense rules, requiring transparency and accountability, reporting, auditing, liquidity standards, and redemption rights; rules that can be passed on a bipartisan basis. The benefits of stablecoins, simply, safely, and soundly- regulated, will ultimately outweigh the risks. And for me, the tokenization of the dollar or the ability of the dollar to move at the speed of a blockchain, has the potential to lead to a better, cheaper, and faster payment system. Now, the leading stablecoin issuers in the world have chosen to peg their stablecoins to the U.S. dollar, which, to me, represents a re-invigoration of the dollar as the world's reserve currency. Under Secretary, do you believe, as I do, that dollar stablecoins have a role to play in preserving the primacy of the U.S. dollar? Ms. Liang. I do believe that, yes. Mr. Torres. During a House Financial Services hearing in December of 2021, Brian Brooks testified that Circle, the stablecoin issuers of USD Coin, had applied for a bank charter with the Office of the Comptroller of the Currency (OCC), but was unlikely to receive one. Under Secretary, should the OCC grant a banking charter to Circle? Ms. Liang. I am not in a position to understand a particular application. The PWG recommendation is for an issuer to become an insured depository institution with the appropriate regulation that matches the activities. So, that would be the recommendation, but I cannot comment on a particular application. Mr. Torres. I will just note that the PWG, as you noted, has taken the position that stablecoin issuers should operate within the regulated banking system. If that is, indeed, the policy preference of the PWG, it seems contradictory to deny a stablecoin issuer the ability to operate within the regulated banking system. I have a question about the notion of regulating stablecoin issuers as banks. Suppose for a moment there is a stablecoin issuer whose reserves are verifiably backed by the dollar on a 1:1 basis, and whose reserves can be immediately redeemed for a dollar on a 1:1 basis. If the stablecoin issuer has no fractionalization of reserves and has no lending, it would seem to me that the stablecoin issuer is operating differently from a bank and, therefore, should be regulated differently from a bank. Under Secretary, even though the PWG proposes regulating stablecoin issuers as banks, do you acknowledge that at some level, the absence of fractionalization and the absence of lending are relevant factors that differentiate stablecoin issuers from banking and, therefore, should differentiate stablecoin regulations from banking regulations? Ms. Liang. I absolutely acknowledge that there are differences, and the lack of lending makes a stablecoin issuer different from a traditional, commercial bank. The proposal recognizes or relies on the flexibility of current banking regulation to distinguish between those kinds of activities that a stablecoin issuer that does not make loans would not be subject to regulations that would apply to institutions that make loans. The distinction about the stablecoin issuer is that it is more than just a redemption and creation of stablecoins, which the transparency and disclosure rules could apply to, but it is also about storing, transferring, using the stablecoin for payments and that is why-- Mr. Torres. In the interests of time, I just want to interject. The reserves of Tether, the largest stablecoin issuer, consist heavily of commercial paper, and is shrouded in secrecy. The public has a right to know the names of the companies buying the commercial paper and the countries in which those companies are located in order to fully assess the true safety of Tether's reserve assets. Suppose for a moment we were to adopt the rule of requiring reserves that were 100 percent cash or cash equivalent. Since Tether has become one of the largest holders of commercial paper in the world, what unintended effects could a 100 percent cash or cash-equivalent rule have on the commercial paperwork? Ms. Liang. I believe this is similar to the issues that arise in the money market fund regulation. There are government money market funds and there are prime money market funds. The prime money market funds, under new regulations, have reduced their holdings of commercial paper and commercial paper issuers have sought other investors. I think over time, the choice, the markets and the issuers find the right investors and reduce risk to the system overall. Mr. Torres. My time has expired. Thank you. Chairwoman Waters. Thank you very much. The gentleman from Tennessee, Mr. Kustoff, is now recognized for 5 minutes. Mr. Kustoff. Thank you, Madam Chairwoman. I thank you and the ranking member for calling today's hearing. And Under Secretary Liang, thank you very much for sitting here for almost 3 hours. Frankly, I appreciate your straightforwardness in talking about issues that are complex to a lot of people. And to that point, if we could, the President's Working Group report that talked about the uses and the benefits of stablecoins, I think you have touched on this and we have gotten in the weeds during today's hearing, if you were talking to any one of our Rotary Clubs or Kiwanis Clubs anywhere in the country, could you talk to that degree or if you were talking to one of those groups, about the uses and the benefits of stablecoins? Ms. Liang. I think stablecoins reflect a new technology and the technology, itself, can be complicated. But what it does offer is the ability to transact payments instantaneously, 24/ 7, on a public chain so that the transactions are viewable. So, I think it offers efficiency, makes the payments cheaper, and faster to meet consumers' needs. And the technology is sort of behind that, but I think that is what the benefits are. How that technology can evolve and introduce other innovations is sort of open at this point. This is just every adoption and further adaptation, I am sure, will come. So, I think that is what the explanation of stablecoin is; it is an alternative form of cash, an alternative way to make a payment. Mr. Kustoff. You mentioned the technology, which I appreciate. I know we are talking in theory, but it would be a true statement that if we were too heavy-handed from a regulatory standpoint, as it relates to the technology, and it doesn't catch up. Is that fair? Ms. Liang. I agree. I think it is a balance that needs to be--there are benefits and there are costs, yes. Mr. Kustoff. Right. It is not easy to find that balance and, obviously, you have been questioned today by Members who have different thoughts about the degree of regulation, which is fair, and that is why we are here and that is why we appreciate you participating in today's hearing. If I could, and I know there have been some questions to you related to the Chinese Communist Party (CCP), we have recently seen the CCP go after some digital assets, an outright ban on some of those assets in China. Can you talk about the consequences, if you will, of China's crackdown on digital assets and maybe what lesson we can learn in the United States from those crackdowns? Ms. Liang. I believe, as I understand it, China is trying-- introducing the eCNY, the digital law, is in some parts, a way to take back some control that they have lost to private firms that offer digital assets. And they are offering their own digital currency as a CBDC, which will offer a lot of lessons for other countries. In terms of adoption, they are offering incentives. As we understand it, people are still evaluating whether to use the eCNY or the other two products that they have become accustomed to. I think it is reflecting that there is a change in technology for how payments will work and consumers will make the choices, and they are moving into this market. China doesn't value privacy as much as, say, the U.S. does, so I think the lessons from how they introduce theirs versus how the U.S. could introduce one here, in that space are a little less direct, but I think the use, the provision of a CBDC, the introduction of custodial wallets by the Central Bank of China will have a lot of lessons for other countries as they consider how to introduce a CBDC, if they choose to do so. Mr. Kustoff. Thank you, Under Secretary Liang. And thank you, Madam Chairwoman. Chairwoman Waters. The Chair now recognizes the gentleman from Massachusetts, Mr. Lynch, who is also the Chair of our Task Force on Financial Technology, for 5 minutes. Mr. Lynch. Thank you, Madam Chairwoman. And Under Secretary Liang, thank you for your willingness to come before the committee to help us with our work. This has been a very good hearing. We are currently in a period of elevated inflation and the Fed has made announcements that over the coming months and perhaps into next year, they will introduce a series of interest rate increases in order to try to get control of that inflation by increasing the cost of money. And my concern is that that monetary policy, that ability to control the cost of money, would be undermined by, let's say, if Meta, formerly known as Facebook, had an idea about a digital currency, and they have that network effect where they have 2 billion daily users or something like that. Wouldn't the introduction of stablecoins on a wider basis undermine the Federal Reserve's ability to control inflation, for example? Ms. Liang. I think you are raising an important issue about private money increasing quickly in scale that could produce its own internal system, which is then outside what the central bank would set interest rates and control. I think that is exactly one of the concerns about large technology firms or large firms with networks that could create a closed loop. I think the implementation of monetary policy does come into play. The questions around how will you do that, I think is an important issue. That was a potential risk we raised. Mr. Lynch. Okay. Have you thought through how, in periods of high inflation, for example, the Fed could retain the ability to restrict, say, an issuance of a stablecoin during that high-inflation period? Is that something that might be a tool that would mitigate that danger, or am I getting into someone else's jurisdiction, as opposed to Treasury? Ms. Liang. Yes, I think that probably starts to cross the line of independence of monetary policy from the regulatory structure of the financial institutions. But it is something that I am sure the central bank, the Fed, would be thinking about in terms of introducing a central bank digital currency and how it would coexist with private stablecoin issuers and that they would be considering that seriously when they are in those, in that, in their efforts. Mr. Lynch. Okay. Let me ask you this. I know a couple of Members have raised this in the past, but it would seem to me that the issuance of a central bank digital currency by the Fed--and I know that the Boston Fed is working with MIT in Boston to come up with the technology around that--would diminish the value of many of these stablecoins, especially with respect to the payment system; in other words, instantaneous transactions with near-instantaneous reconciliation and settlement. Ms. Liang. Yes. I think there are a lot of really important questions in terms of designing a CBDC, all of which would have implications for how they either coexist or compete with private stablecoins. There would be issues of who they held the accounts with, whether there would be caps on the accounts, and whether they would be interoperable with private stablecoins. As you know, the Fed is looking at this, and in their paper they raised 20-something questions about it, which just suggests the complexity of the issues. And I think that it is a critically-important issue for the Fed and for Congress to consider what the future of the money and payment system should look like in this country. Mr. Lynch. Thank you, Madam Chairwoman. And I yield back. Chairwoman Waters. Thank you very much. The gentleman from Indiana, Mr. Hollingsworth, is now recognized for 5 minutes. Mr. Hollingsworth. Good afternoon, everybody. I am really excited about this hearing. I have been looking forward to it for quite a while. Under Secretary Liang, I have been on an emotional roller coaster over the last couple of weeks and through this hearing. I started off dismayed because I saw in the report put out that only banks should issue stablecoins and that they should be subject to prudential regulation. But then, surprisingly, and happily, by the way, I have heard you a couple of times in response to some of my colleagues' questions, maybe draw a little nuance to that particular issue, and I want to go back to a few things that you said earlier. First, ``The full set of bank regulations do not need to be applied to a stablecoin issuer that does only stablecoin issuance. There is flexibility in the insurer depository institution framework.'' Next quote: ``stablecoin issuers that have a simple business model, holding high-quality assets, would be subject to less-stringent supervision and regulation.'' I think these are really important points to make, that there is the opportunity for good stablecoin issuers, and I have met many stablecoin issuers that are very interested in being good operators, good stewards, and good issuers, for them to have a lower-regulatory model, provided that they are wholly reserving for the issued assets. Can you talk a little bit about the type of assets that should qualify as high-quality assets, according to you? Ms. Liang. Thank you for that. And I stand behind those statements I made. The high-quality assets that can meet the abilities for investors and consumers to redeem their stablecoins should be cash, or reasury securities. It could be, if it were in the banking system, reserves at the central bank, which are the highest quality, and then would also not have any convertibility issues upon redemption. I am not trying to specify or limit what could be in that category, but just high- quality, credit risk-free assets. Mr. Hollingsworth. And I think we would also want to make sure, not just high-quality--30-year Treasuries are high- quality--but we also want to make sure they are of a limited maturity, right? You talked about run-risks several times. Ms. Liang. Yes. Mr. Hollingsworth. Making sure near-term maturity at par is important, as well; is that right? Ms. Liang. I think that is an important consideration that short-term Treasury bills convert much more quickly to cash than longer-term Treasury securities, we found, at least in March 2020. Mr. Hollingsworth. And several times previous to that, and, obviously, you are taking less interest rate risks, with a shorter duration. Ms. Liang. Yes. Mr. Hollingsworth. So, I guess my point here today, and I think you have elucidated it very well, is that we do have the ability to say if you are going to be, I will use your word, a simple stablecoin issuer that, and you are going to fully reserve and your assets are going to meet a certain quality and are going to be no longer than a certain duration, we should accept that even without prudential regulation layered over and above that, right? Ms. Liang. I think there are regulations related to the operational risks of stablecoin for storing and transferring the stablecoins as payments and that are more than just the consumer-protection kinds of the rules that the State money transmitter laws usually focus on. Mr. Hollingsworth. There are a lot of businesses that aren't subject to full prudential regulation that do those very things. We have figured out custody of assets, outside of banking the loan and other issues related to, I will call it the back-end operations that we could sufficiently ensure they operate without the full weight of prudential banking regulations. There are businesses that we allow to do business today. Ms. Liang. Yes. The other service providers in the recommendation were not required to be--the recommendation was not to require them to be an insured depository institution. Mr. Hollingsworth. Right. Ms. Liang. It only applied to the issuer of the stablecoin. Mr. Hollingsworth. Right. Ms. Liang. As you know, it is part of a broader arrangement for-- Mr. Hollingsworth. In my 20 last seconds, I just want to make sure I hit this nail on the head. I think there is room for non-bank stablecoin issuers, provided that their assets are backed wholly and that they are of sufficient quality and they don't exceed a certain maturity. I think that we should find another avenue for this technology to develop outside of giving the exclusive power to banks themselves. Chairwoman Waters. Thank you very much. The gentleman's time has expired. The gentleman from Illinois, Mr. Casten, who is also the Vice Chair of our Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, is now recognized for 5 minutes. Mr. Casten. Thank you, Madam Chairwoman. And thank you, Under Secretary Liang. I want to follow up on the conversation you had with Mr. Huizenga. I think there are all these really, really cool things around digital money and all of these things we are developing. I also think sometimes we wrap things in acronyms and techno-speak. We make the old sound new and some of these things are simple, and I want to just focus on sort of the simplicity of currency. Because if I understood your answer to Mr. Huizenga, and I hope you will correct me if I get this wrong, when he asked you why shouldn't we regulate this like money market mutual funds, you said, because that can't be used as a currency and this can. I see you are nodding, so hopefully, I got that right. It seems to me that it can be used as a currency is one question, is a separate one--cowrie shells can be used as a currency, and as Mr. Sherman noted, there are an awful lot of people who are not taking them, stablecoins or any digital currency, as money right now. And to my simple way of thinking, that is not really that surprising. If you want a dollar-denominated currency, we have one: It is the dollar. And we have created a world where the dollar is valuable as a currency: one, because we pay our taxes with it, which is 20 percent of the economy, roughly; and two, because it is backed by the full faith and credit of the government. Since, presumably, I didn't see anything in the PWG report that said when we will allow people to pay taxes in stablecoin or Dogecoin or Ethereum or whatever else, then the full faith and credit piece of any dollar-backed stablecoin really comes down to making sure that we have the management and reserve rules, such as we already have for money market and mutual funds. Regardless of whether or not this actually becomes a currency that converts from, ``can be used'' to, ``is being used,'' is there any reason why we should not be saying, let's put all of those same fiscal protections that we have in money market mutual funds, in these stablecoin markets? Ms. Liang. I believe that the protections of the money market fund industry that apply to money market funds would apply to stablecoins, to the extent that they offer a stable, a redemption into a dollar. I guess I would think that stablecoins, because they can be used as payments by households and businesses and are currently being adapted to do so, raises a separate set of issues, and that is what the PWG report-- Mr. Casten. And if I may, and I understand that you have to be a little bit careful about not recommending policy, but I understand that people are trying to do that. I think that is the separate question of, until they do, how does this behave in the market, because we do still need to have all of those consumer protections that I think Mr. Himes so eloquently outlined. So, to the extent that this is being used as a currency today, where there is a push, if I understand your testimony, and I understand the markets right, these three big values: number one, in remittances; number two, in clearing time; and number three, in lower fees, and all of the benefits that creates. Did I understand your answer to Mr. Gottheimer correctly, that you think that those issues are not creating, essentially, an arbitrage issue with anti-money laundering and know-your- customer rules, that the rules around this are robust enough that we are just arbitraging away existing market and efficiency, not dodging regulations. Is that the gist of your answer to Mr. Gottheimer? Ms. Liang. Yes, in terms of the illicit finance risks of stablecoins, yes, absolutely. Mr. Casten. Okay. So, then I get back to saying, okay, if we think that eventually this thing is going to have appropriate regulation as it sits right now to make sure that there is the fiscal protections and the don't break the bucket of a money market fund, and if we agree that the existing rules, and I don't know that I am convinced on this, but if I am just, do I take your testimony, do we agree that if the existing rules provide all of the AML/KYC protections, why go through all the complexity of creating a stablecoin that exposes us to those risks that we have to regulate around to protect? Aren't we just really creating a central bank digital currency that would solve those issues just as well and not have all of these other exposures? What is a well-regulated stablecoin providing that a CBDC doesn't? Ms. Liang. I think, one, a central bank digital currency would be the backed by the central bank. This is by high- quality assets, which are not central bank reserves. So, there is that distinction. The other distinction that I think we were trying to grapple with is that there are private stablecoins now and they are growing and growing quickly and may grow faster if network effects allow them to scale up. And there is not a central bank digital currency being issued right now, so this could be the substitute. It could be a complement. They could go away once a central bank digital currency were to be introduced, if it were. But the current situation is they are currently being used and-- Mr. Casten. The Chair is telling me we are out of time. I know. So, thank you. I am all for private sector innovation. I just want to make sure that if that requires us to build a big regulatory framework, let's have eyes wide open about what that means. Ms. Liang. Yes. Chairwoman Waters. Thank you very much, Mr. Casten. Mr. Casten. Thank you, Madam Chairwoman. Chairwoman Waters. The gentleman from Ohio, Mr. Gonzalez, is now recognized for 5 minutes. Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. Thank you for holding this hearing. And thank you, Under Secretary Liang, for your participation. I will start with the question that I think Mr. Casten just left off with, which is, what do we get with a well-regulated stablecoin that we do not get with a central bank digital currency? I think privacy, for one, right? There is a design question with the CBDC. But me, personally, I have massive privacy concerns that I don't see a CBDC being able to address. And, two, the innovation that we get on the private sector, the history on this is pretty clean. I think that private sector innovation tends to be more efficient, more economical, and better. And so, I think those two things are worth considering. Ms. Liang, I want to start with a question with respect to where the primary, prudential oversight of stablecoin should exist. There are some proposals that have been put out that would put that under the Treasury. My view is, that is an option. I would like you to opine on that, and maybe if you are willing, where do you think primary prudential regulation should be housed other than the Federal Government? Ms. Liang. Thank you. I agree with you on the central bank digital currency, that privacy and innovation are advantages of the private versus the central bank digital currency. I appreciate that. The U.S. Treasury is not set up to regulate financial institutions, and has not been, historically. The OCC, of course, is a regulator. The Federal Reserve is a regulator. The FDIC is a regulator. I think a proposal for a stablecoin issuer to be an IDI would, depending on the charter as an IDI, go into the regulator as under current practices. That could be a choice-- Mr. Gonzalez of Ohio. I would like to interject here if I could, and pick up where Mr. Hollingsworth and Mr. Torres left off. I would like to associate myself with much of what they said. I want to ask a pretty direct question. The IDI recommendation, as you have said, is more or less to ensure safety and soundness and to guarantee a consumer protection mechanism so that if you have a stablecoin, it can be redeemed for a dollar. I think you have said in various instances that if the reserve quality is high enough and there are redemption rights in place, maybe that is not necessarily required. Did I hear that correctly, that there could be a world that you would agree with, which is to say, hey, there are some who probably need to be IDIs, but if we define what a stablecoin is in a particular way, that is not necessary. Is that fair? Ms. Liang. I think a stablecoin issuer, and these are all issues for further discussion, but a stablecoin issuer within an IDI framework that held capital and was subject to liquidity standards, could have reserve assets that were not 100 percent cash because of the capital and liquidity standards and the other standards. If it didn't have the capital or liquidity, one would want, basically, cash-- Mr. Gonzalez of Ohio. So, there is a world where we could have stablecoins regulated as such that they do not need to be IDIs. I think that is really important for a whole host of reasons, one of which is the diversity and inclusion aspect of crypto. As has been pointed out, crypto has been disproportionately adopted by diverse communities, which is in contrast to other financial innovations, which typically benefit non-diverse communities disproportionately. I would argue that part of this is because the barriers to entry for diverse communities are much lower in crypto and also, it gets around to two things that when the FDIC surveys the underbanked and unbanked, why do they remain unbanked? One, minimum-balance requirements, and two, they don't trust banks; they are unbanked. And so, I think a fear I have with the IDI requirement is that we push our diverse communities and those who are unbanked into a banking relationship that they either, don't trust or have natural reasons why it doesn't make sense. So, I think to preserve the innovation for all Americans, doing so outside of the IDI framework is something of which we absolutely should be cognizant. And with that, I yield back. Chairwoman Waters. Thank you very much. The gentlewoman from North Carolina, Ms. Adams, is now recognized for 5 minutes. Ms. Adams. Thank you, Chairwoman Waters, and Ranking Member McHenry, for hosting the hearing today. And Madam Under Secretary, thank you for your expert testimony and for answering our questions here today. You know as well as I do that industry, academia, and everyone in between has their own opinion on who should regulate cryptocurrencies and stablecoins. The report that we are discussing today suggests that our prudential regulators should be the primary Federal overseer of stablecoins, So, Madam Under Secretary, are you concerned that there could be confusion if stablecoins are brought into the prudential regulatory framework, but other cryptocurrencies are not? Ms. Liang. I believe that there is a distinction in consumers' minds and investors' minds between what are unbacked crypto assets and stablecoins. And I think we, as regulators and policymakers, can actually try to reinforce that distinction with regulation, that stablecoins offer stable value, actually can provide stable value. I think that is an important distinction to make and I think regulation can help that. I am not concerned that it introduces confusion. Ms. Adams. Okay. Thank you. You have heard today that there is bipartisan desire to provide this industry the tools that it needs to grow in a strong and safe manner. In your view, how can both Democrats and Republicans in Congress work together with the Administration, industry, and other stakeholders to best provide those tools? Ms. Liang. I think that Members of Congress have been proposing pieces of, parts of legislation to consider how to make stablecoins more stable. I think there is a general acceptance of what are the sensible risks of stablecoins for payments. And there is a discussion about what is the best regulatory approach for it, but there does seem to be some common acceptance of a need for regulation, and I think that there is agreement that more consistent is value to promote innovation and competition. So, I think these are issues for Congress to consider and balance the benefits of innovation with the costs, and the risks to users and the payment system on the financial system broadly. We are very happy to continue to engage in that process. Ms. Adams. Thank you very much. Madam Chairwoman, I am going to yield the rest of my time back. Thank you. Chairwoman Waters. Thank you very much. The gentleman from Tennessee, Mr. Rose, is now recognized for 5 minutes. Mr. Rose. Thank you very much, Chairwoman Waters, and Ranking Member McHenry, for holding the hearing. And I also want to thank our witness for being here today. As my time is limited, I am going to go ahead and dive right in. Under Secretary Liang, I wanted to follow up on a line of questioning on the importance of the dollar on the global stage. If Congress banned stablecoins, do you think that stablecoins would be developed in other countries? Ms. Liang. Yes, I think stablecoins would continue to develop. Mr. Rose. And do you think that stablecoins would be pegged to other currencies, rather than the dollar? Ms. Liang. I think the use cases would determine what it would want to peg to. But if the U.S. dollar is supported by not stablecoins or technology, but by the country's respect for the rule of law, it is the infrastructure or the economic potential of the country, but no doubt if you created currency or payment systems that are separate and independent, it would take away from what could have been additional contributions to the role of the dollar. Mr. Rose. Sure. The U.S. dollar, of course, is the world's dominant reserve currency, and as I think has already been mentioned, approximately 59 percent of all foreign exchange reserves are held in U.S. dollars. Currently, the five-dollar pegged stablecoins represent 94 percent of the market. Under Secretary Liang, what are the benefits of having stablecoins pegged to the U.S. dollar, as opposed to other currencies? Ms. Liang. I think the reflection that many of the major stablecoins being pegged to the dollar reflects that the dollar is the primary reserve currency. And I think for policy purposes, policies to promote the strength of the dollar are critical, and stablecoins will continue to peg to the dollar as long as the dollar remains strong and reflects-- Mr. Rose. Okay. So, is the inverse true, that having a majority of stablecoins pegged to the dollar might help to preserve the dollar's status as the world's reserve currency? Ms. Liang. Yes. I think it is a positive contribution. Mr. Rose. And are there stablecoins that reference other currencies, such as the Yuan or the Euro today? Ms. Liang. The Central Bank of China has issued additional currency, yes, but-- Mr. Rose. According to a recent staff working paper released by the Federal Reserve, entitled, ``Stablecoins Growth Potential and Impact on Banking'', quote, ``stablecoins served as a digital safe asset, while more speculative crypto assets were temporarily in free fall during the crypto market crashes in March of 2020 and May of 2021.'' The paper adds that these episodes demonstrate the potential for stablecoins to serve as a digital safe haven during market distress. You testified that stablecoins may pose systemic risk. Do you know what the size of the market for stablecoins is today? Ms. Liang. Currently, stablecoins are roughly $170 billion, but they are used in many transactions. Their value does not represent their importance in the crypto asset market, because they are used in many transactions and that doesn't [Audio malfunction.] in share of transactions, it is much higher. Mr. Rose. To give some contrast, what is the size of the money market funds today? Ms. Liang. The money market fund industry, I would guess, is in the $4 trillion range at this point. Mr. Rose. And then, similarly, what is the market for U.S. Treasuries today? Ms. Liang. The market for U.S. Treasuries is much larger than stablecoins. Mr. Rose. Right. So, is the stablecoin market really big enough to pose systemic risk, and do these incidents in March of 2020 and May of 2021, those market events, do they tend to show that adequately-capitalized stablecoins with appropriate safeguards in place, can, as the Fed's working paper states, ``serve as a digital safe haven during market distress and provide a level of stability that is on par with traditional forms of safe value''? Ms. Liang. Yes. The PWG report does not suggest that stablecoins currently are a threat to financial stability and pose systemic risk. It is the ability for stablecoins to scale up rapidly because of network effects, once they become adopted, then it could pose a systemic risk. Mr. Rose. Thank you, Under Secretary Liang. I see my time has expired. I appreciate your responses. And Madam Chairwoman, I yield back. Chairwoman Waters. Thank you. The gentlewoman from Texas, Ms. Garcia, who is also the Vice Chair of our Subcommittee on Diversity and Inclusion, is now recognized for 5 minutes. Ms. Garcia of Texas. Thank you, Madam Chairwoman, and thank you for this very important hearing. And Under Secretary Liang, thank you so much for your patience and your endurance. The end is in sight. We are coming down to the last few Nembers, and votes are taking place, so I will have to rush through my questions. But I just want to quickly follow up on Mr. Rose's question. The $170 billion market share that stablecoins represent, how many consumers would that be? How many people are actually using this? Ms. Liang. That is a great question. I would have to get back to you on that. Ms. Garcia of Texas. How many investors does it represent? Ms. Liang. I do not know. Ms. Garcia of Texas. So, we just know the growth in value, but we really don't know if we are talking about 1,000 consumers or 2,000 investors. And I just wanted to say, to keep things in perspective, that we are saying it is growing, and we need to do something. But is it really? Who is really using it? And I ask that because the report states that legislation should require stablecoin issuers to be registered as insured depository institutions in order to participate in issuing currency. Well, I understand the reason behind this, and I think I do support it. I want to explore the possibility of this requirement preventing smaller issuers from participating in market activity. We always have challenges, and I think other Members have asked you about barriers for unbanked and smaller providers, smaller issuers. I don't want us to create a system that is just going to repeat what the banks have been doing, which is leaving us out. And if we don't know who is using it now or who is investing now, I am afraid that we are just going to repeat ourselves. So my question is, what can we do to make sure that the little guys or the little gals are not left out while allowing only the big banks coin issuers to participate? Ms. Liang. Right. The proposal for an IDI does, of course, raise some costs of entry for this business. But I believe that there is a lot of flexibility in a new charter. So, it is not trying to reduce-- Ms. Garcia of Texas. I understand that. I don't mean to interrupt, but I just want to be clear. My question is, how are we going to make sure that there is true equity--I think Mr. Meeks also asked this question--and that it will be accessible and that we are not just putting together another system that is going to leave the same people out who have always been left out? Because you have mentioned remittances, and while that is a laudable goal, I think there's a lot of work to do before we could get there. Because you have mentioned in terms of things that are good about stablecoins and creating a new payment system would be lower costs, but I am worried about conversion fees. I am worried about accessibility to be able to get those funds. If I am in Mexico, and I am a poor person waiting for my relative here in Texas to send money, how do I convert this stablecoin into money that I can then take to the market to buy a jug of milk? Shouldn't we think this through? Ms. Liang. That is exactly the pilot programs that stablecoin issuers and wallets are testing. Can you improve the speed and reduce the cost of these remittances between, say, Texas and Mexico? Ms. Garcia of Texas. But you understand that a lot of people don't use wallets. A lot of folks don't have cell phones. That has been my pet peeve of the entire vaccine rollout. It is so tech-dependent. Ms. Liang. Yes. Ms. Garcia of Texas. Because there are people in my district--I have a 77-percent Latino district--who don't have Wi-Fi and don't have the tech capacity to do that. So, once again, we are creating this system that is just going to help those who already have and leave the have-nots out of the picture. I just want us to be mindful that $170 billion does not mean it is 170 billion people who are using it. Ms. Liang. No, absolutely. And I share your concern that not all households can access this. But I believe greater competition is probably the best way to improve the payment system, and that stablecoins are a competitor to the existing payment system. I would say we won't know what our payment system will look like many years from now. But competition is probably the strongest force for improving a payment system over time and meeting the needs of all consumers. Ms. Garcia of Texas. Thank you. I see my time has run out. Madam Chairwoman, I yield back, and I am running to the Floor to vote. Thank you. Chairwoman Waters. Thank you very much. The gentlewoman from Michigan, Ms. Tlaib, is now recognized for 5 minutes. Is Ms. Tlaib on the platform? [No response.] Chairwoman Waters. The gentleman from Wisconsin, Mr. Steil, is recognized for 5 minutes. Mr. Steil. Thank you very much, Madam Chairwoman. I appreciate you holding today's hearing on a really important topic. As we have seen, digital assets are already transforming our financial system, and I think we really have an amazing opportunity right now to put in place the legal foundations that are going to support continued innovation and long-term growth, in particular, in the United States. And I am concerned that if we continue down a path of ill-fitted regulatory constructs, we may be moving this innovation offshore, rather than coming up with the approach of, how can we help bring innovation into the United States? And so, with that background, Under Secretary Liang, we have had a great conversation today about digital asset coins, how they are currently and particularly State-regulated. And besides the money transmitter regimes, as we have noted today, several States have developed pretty sophisticated approaches to digital assets regulation. As we noted, in New York, the BitLicense allows firms to apply for limited purpose trust charters under State laws. But I notice in many ways, your report didn't really address the regulatory framework in States. Earlier, I think you mentioned that you talked to State regulators and analyzed State frameworks. Is that correct? Ms. Liang. We did consider State frameworks. Yes, we considered State frameworks. Mr. Steil. But there is not really an actual analysis of State frameworks included in your report. Is that correct? Ms. Liang. No, we did not include a discussion of State framework analysis. Mr. Steil. So, do State-chartered depository institutions have a primary Federal regulator, and are they subject to Federal banking regulations? Ms. Liang. I think Federal banking regulations can apply to banks that are State-chartered. Mr. Steil. Okay. Ms. Liang. Some of the BitLicenses are, as you said, limited purpose banks or charter banks, as I understand them, or trust banks. Yes. Mr. Steil. I appreciate that. I would like to go back a little bit in time here to earlier in the hearing, back to a response you gave to my colleague, Mr. Loudermilk's, question on the PWG approach. I think you referenced, if I recall correctly--you said it builds upon existing State laws. But as we just noted, the report doesn't really analyze State laws. There is definitely a Federal primary approach. What do you mean by, ``builds upon State laws?'' Ms. Liang. Yes. One is partly all stablecoin issuers and custodial wallet providers are money services businesses, and money transmitter laws apply to them. That is at least 49 State regimes. The proposal does not replace the State money transmitter with the Federal money transmitter proposal, which I understand maybe some legislators are considering. But it could build on that and require a set of risk management standards that could apply to custodial wallet providers. In that sense, it builds on the State frameworks. Also, insured depository institutions can be State- chartered or Federal-chartered. That is in the current system. But even a State-chartered bank has always had some Federal layer on it for deposit insurance or some of the other features of a traditional bank. Mr. Steil. I just think it is a really interesting topic here. So, I am just trying to flesh it out a little bit. Ms. Liang. Yes. Mr. Steil. We are looking at kind of a construct that would privilege federally-insured depository institutions. How would you account for the existing State-based regimes that already apply to incumbent firms? It is a little bit what you are talking to. Could you hit that point for us? Ms. Liang. Yes. I think that would be something that needs further discussion. The current existing State charters, at least some of them, do not provide the supervisors of those institutions sufficient visibility into the broader payment arrangement. Therefore, we are looking to fill that gap. Mr. Steil. Yes, understood. Under Secretary Liang, I appreciate your time. I think it is really important that we get this right. I think we are digging into the right topics. I think the key here is to make sure that we don't overregulate, that we encourage innovation in the United States of America. I think we are at a moment in time where there is great opportunity. We don't want to overregulate this and throw the baby out with the bath water on what is clearly a really interesting space of development. And so, conscious of the time, Madam Chairwoman, I will yield back. Chairwoman Waters. Thank you. The gentlewoman from Pennsylvania, Ms. Dean, is now recognized for 5 minutes. Ms. Dean. Thank you, Madam Chairwoman. And thank you, Under Secretary Liang, for testifying today and for all of this valuable information. When we had a hearing on digital assets in December with witnesses from the crypto industry, I talked about my concerns over the extreme volatility that we see in the market, and I asked the panel if we are at risk of a bubble akin to that which was triggered in the 2008 financial crisis. I will note that the volatility that we have seen in the 2 months since the hearing has certainly not reassured me. But at the hearing, in response to my question, Mr. Brian Brooks likened this volatility to what we saw in the first 100 years of the stock market. While it may be turbulent in the early days, the long chart is up and to the right, he said, just like the U.S. equity markets. Well, that may be true, but I am worried, and that doesn't quite tell the whole story. Under Secretary Liang, what are your thoughts? Are we at risk of another bubble? Ms. Liang. I think with many of the digital assets, especially those that are unbacked, the price volatility is very high, and investors absolutely need to understand whether those investments are appropriate for them. The costs of a bubble are high when the prices are supported by financial leverage in the system, or they are connected to traditional highly-levered banking institutions that could magnify the impact of any price decline in crypto assets. Currently, investors in crypto assets and digital assets-- this is separate from stable value, but in terms of the digital assets with highly-volatile assets--are bearing the losses and the gains largely on their own. But we definitely are concerned that those do not cause problems for the broader financial system or the economy where consumers who are least financially and economically resilient would bear the cost of a decline in prices of a bubble bursting. But to the extent that these prices are within the sort of digital asset space, the implications of the price decline are less severe for the broader economy and less severe for the consumers who really are most vulnerable to these kinds of outcomes. Ms. Dean. Thank you. That is really helpful. And I wanted to build on that issue of leverage. You have talked today about your concerns with the systemic risk posed by the buildup of leverage against digital assets. In your written testimony, you stated, ``As we saw in 2007- 2008, financial risk--and most that preceded it--leverage can play a key role in catalyzing and accelerating financial instability.'' And you note that the Administration is still working to understand the role that leverage plays in digital asset markets. Can you give us any further clarity along those lines of leverage and what the Administration is recognizing? Ms. Liang. I think it is early to say very much, except to highlight that it is a topic of high importance because high leverage in a volatile asset can cause problems for the financial system and the economy. The Financial Stability Oversight Council is following this, and looking at it. But I think it is too early to say that we have conclusions. Ms. Dean. And in terms of the investor base, I think some of the reports that I have read, it is quite diverse, which makes me worry about those that would be potentially at risk. Can you talk about the investor base? What do we know about the demographics? Ms. Liang. I think there are concerns about the demographics if they--some surveys suggest more minorities, more lower-income investing in these assets. To the extent those surveys are accurate, that is of great concern, because as we mentioned, these prices are highly volatile. But this is a space that is not regulated, and I think the information about who the investors are and the transactions is actually quite limited, and we are relying on various surveys. Ms. Dean. That's very helpful. My time has expired. I yield back. Thank you, Madam Chairwoman. Chairwoman Waters. Thank you. The gentleman from South Carolina, Mr. Timmons, is now recognized for 5 minutes. Mr. Timmons. Thank you, Madam Chairwoman. And first, I want to thank the Under Secretary for her work on the President's Working Group and for being here with us today. I want to first touch on a subject many of my colleagues have brought up with you today, whether stablecoins should be regulated and housed solely within the banking system or not. I know that your report speaks to this, and you have discussed it at length in today's hearing. But I wanted to ask you myself, do you and the PWG see stablecoins existing exclusively within the traditional banking system? Ms. Liang. I think the recommendation is to require the issuer to be an insured depository institution with a flexible regulatory framework that is lower cost for simpler business models. Mr. Timmons. Were there other options discussed in the PWG? Ms. Liang. Yes, of course, other options were considered in developing a recommendation. I think the principles of providing clarity, consistency, and a comprehensive framework is what led to this particular recommendation, recognizing that there is some flexibility in the IDI framework. And no one was recommending that a stablecoin issuer be regulated like a traditional commercial bank. But the IDI charter has the flexibility to provide some supervision and regulation that is adjusted for the risks of the activities of the stablecoin issuer. Mr. Timmons. I think it seems obvious to me that regulating a product under a regime designed for something completely different, while it may solve some problems, it is likely to create many more problems and stifle innovation and investment in an emerging industry that shows great promise. I guess my question is, what do you think the obstacles are that stablecoin issuers are likely to face if PWG's recommendation to regulate them like banks comes to fruition? Ms. Liang. I think it would be on the regulators to try to reduce the costs for an issuer that is not a traditional bank. And they can have some flexibility to keep those costs down, and I think that is the function, the stablecoin function of providing payments is a bank-like function. And that is why the recommendation was to use the bank framework. But recognizing that a stablecoin issuer is not likely to make loans and extend credit and engage in fractional reserve banking, the regulatory system can be adjusted to not apply all the kinds of rules and regulations that would apply if you were to make laws. Mr. Timmons. You are making a lot of assumptions on their ability to thread the needle. I personally think it would be better for Congress to do their job and to craft policy specifically for this new emerging industry. What are your thoughts on that? Ms. Liang. Yes, I think that is clearly an issue for Congress to certainly discuss. Again, we were trying to promote a more consistent framework, less fragmented, not--we were just less compelled to introduce yet another regulatory scheme. And to the extent an existing tested framework is available and could be applied, that seemed to be the preference of the group. Mr. Timmons. Sure. Well, I would like to think that Congress might be able to do better. Disruption is a natural part of a free market economy. New products and technology emerge and shake things up. It can sometimes lead to short-term pain for entrenched industries, but it forces adaption and almost always leads to better products for consumers and more prosperity for our communities. I urge my colleagues to really find a better path forward. And with that, Madam Chairwoman, I will yield back. Thank you. Chairwoman Waters. Thank you very much. The gentlewoman from Michigan, Ms. Tlaib, is now recognized for 5 minutes. Ms. Tlaib. Thank you so much, Chairwoman Waters, for holding this important hearing, and I thank the Under Secretary for being so patient with all of us, and for presenting the Working Group's report. I thank you so much for the important work. As fintech becomes an entry point for the underbanked and unbanked to access financial services, we must ensure that we are putting in place adequate protections on behalf of our constituents. [Audio malfunction.] Ms. Liang. I believe we lost her connection. Chairwoman Waters. Okay. We are going to hope that she gets back in, and we are going to go on to our next Member at this point. The gentleman from Illinois, Mr. Garcia, is now recognized for 5 minutes. I don't see Mr. Garcia on the platform anymore. The gentleman from Massachusetts, Mr. Auchincloss, who is also the Vice Chair of the committee, is now recognized for 5 minutes. Mr. Auchincloss. Thank you, Madam Chairwoman. And Under Secretary Liang, I appreciate your stamina in a long hearing and your thoughtful answers, and I have learned a great deal from your memo and the PWG and my colleagues' good questions from both sides of the aisle. I want to talk about three different domains of risk that I think we can bucket this conversation into. The first near-term bucket is prudential risk, is run risk and payment risk of stablecoins, which you have articulated and have answered a lot of questions about. It seems like from your previous answers--I believe specifically to Mr. Himes--you feel like run risk could be mitigated with a simple registration process by stablecoin issuers which where they were audited and disclosed not as IDIs, but just in a transparent auditing process. But that you feel like payment risk really is what requires the IDI. And I want to press on that a little bit because it is not really clicking to me. I understand that stablecoin is used as a medium of exchange, but only really within the crypto economy. So, why do we feel like there needs to be a federally- insured regulation around a medium of exchange that is really quite constrained to the crypto economy, when other fintech innovations, like the PayPals or Venmos of the world, weren't subject to the same type of regulation? Ms. Liang. Thank you for that clarifying question. The premise of the PWG report is that stablecoins will continue to work, try to be converted just via currency, be work outside the crypto economy, that it will not only be used to facilitate crypto trading. An example is cross-border remittances, which are translated into currency in some successful sense, right? And it then becomes part of the payment system the way that money is transacted-- Mr. Auchincloss. I would encourage us then to investigate that premise further and try to find a way to mitigate payment risk that is in keeping with that premise and more narrowly tailor it. I am not convinced that we need to have it fully an IDI, partly because we risk regulatory capture by the banks. Part of the promise of Web3 is that it is disruptive in a good way to the financial services system, and I worry that layering on these requirements that may be unnecessary, given the actual payment risk, could actually just be a boon to established incumbents. But this leads us, your answer, to our second kind of big bucket of risk here, which is systemic risk, and my colleague, Mr. Hill, asked about this. And you answered that you really did not see this stablecoin economy as being a systemic risk at this point. It seems that FSOC should really be doing persistent monitoring of that, and reporting back to Congress about whether it is becoming so. You also suggested that interoperability between stablecoins could help mitigate some of that systemic risk. Are there measures that you would recommend beyond FSOC monitoring and interoperability standards that could mitigate systemic risk, or is there a firewall that could be set up, or at least monitored to forewarn of it? Ms. Liang. Ideally, I think this is always about trying to identify the next potential source of systemic risk, and the way that regulators approach that is to look at the common sort of vulnerabilities like leverage. So, if there were a way to measure and quantify leverage in this system, that would be an early warning indicator. Mr. Auchincloss. So, again, for-- Ms. Liang. I think in the current environment, that is not easily done. Mr. Auchincloss. Another reason why registration, auditing, and disclosure would be helpful, but not necessarily--you wouldn't need to have IDI status to be able to track leverage. You could do just basic registration to accomplish that? Ms. Liang. Yes. The stablecoin itself, as registered, that itself is not leverage. It is the use of the stablecoin as collateral to lender stablecoins so that someone can use it to purchase on margin. Because it is a stable value, it provides a stable collateral. Mr. Auchincloss. So, that might be more the custody wallets then that have to be-- Ms. Liang. Exactly. Mr. Auchincloss. So, custody wallets and stablecoin issuers are registering and disclosing and auditing. All of that seems to sort of make sense to me. Again, it is just the IDI. Finally, Under Secretary, in my last couple of seconds, do we need a CBDC in order to address this third bucket of risk, which is the United States losing its preeminence on the global stage as the world's reserve currency? I loved your answer about how it is more about the liquidity of our markets, it is more about the rule of law; this is not a tech fix. The CBDC paper--and I appreciate the work that the Fed did--struck me as a solution in search of a problem. Can't we just accomplish a lot of these aims with better stablecoin regulation and with compounding the existing strengths of our nation? Ms. Liang. Yes. I guess I would--as you say, I would repeat my previous answer that the strength of the U.S. dollar is based on its country's laws and governance and its markets and its economic potential. Technology can play a constructive role, but it is not the primary indicator. Mr. Auchincloss. Under Secretary Liang, thank you again for your testimony today. Madam Chairwoman, I yield back. Chairwoman Waters. Thank you very much. I just want to make sure that Mr. Garcia and Ms. Tlaib left the platform and that somehow they were not frozen out of here. It is about time for us to close down, and I would like to thank our witness for her testimony today. Thank you so much for the time that you have spent with us. Thank you so much for your patience. And thank you so much for the way that you were able to address all of the questions that were asked of you. The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness and to place her responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. This hearing is adjourned. Ms. Liang. Thank you. [Whereupon, at 2:12 p.m., the hearing was adjourned.] A P P E N D I X February 8, 2022 [all]