[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
UNDERSTANDING STABLECOINS'
ROLE IN PAYMENTS AND THE
NEED FOR LEGISLATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON DIGITAL ASSETS,
FINANCIAL TECHNOLOGY,
AND INCLUSION
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
APRIL 19, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-15
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-393 PDF WASHINGTON : 2023
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio JUAN VARGAS, California
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California SYLVIA GARCIA, Texas
BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
SUBCOMMITTEE ON DIGITAL ASSETS,
FINANCIAL TECHNOLOGY, AND INCLUSION
FRENCH HILL, Arkansas, Chairman
FRANK D. LUCAS, Oklahoma STEPHEN F. LYNCH, Massachusetts,
TOM EMMER, Minnesota Ranking Member
WARREN DAVIDSON, Ohio BILL FOSTER, Illinois
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin RITCHIE TORRES, New York
WILLIAM TIMMONS, South Carolina BRAD SHERMAN, California
BYRON DONALDS, Florida AL GREEN, Texas
MIKE FLOOD, Nebraska SEAN CASTEN, Illinois
ERIN HOUCHIN, Indiana WILEY NICKEL, North Carolina
C O N T E N T S
----------
Page
Hearing held on:
April 19, 2023............................................... 1
Appendix:
April 19, 2023............................................... 35
WITNESSES
Wednesday, April 19, 2023
Campbell, J. Austin, Managing Partner, Zero Knowledge Consulting,
and Adjunct Professor, Columbia Business School................ 7
Chervinsky, Jake, Chief Policy Officer, Blockchain Association... 9
Disparte, Dante Alighieri, Chief Strategy Officer and Head of
Global Policy, Circle.......................................... 10
Hand, Delicia Reynolds, Director, Financial Fairness, Consumer
Reports........................................................ 12
Harris, Hon. Adrienne A., Superintendent, New York State
Department of Financial Services............................... 6
APPENDIX
Prepared statements:
Campbell, J. Austin.......................................... 36
Chervinsky, Jake............................................. 51
Disparte, Dante Alighieri.................................... 63
Hand, Delicia Reynolds....................................... 73
Harris, Adrienne A........................................... 80
Additional Material Submitted for the Record
Hill, Hon. French:
Written statement of the Crypto Council for Innovation....... 92
Davidson, Hon. Warren:
Written statement of the Electronic Transactions Association
(ETA)...................................................... 94
Waters, Hon. Maxine:
Written statement of Americans for Financial Reform (AFR).... 96
Written statement of the Bank Policy Institute (BPI)......... 100
Written statement of the Credit Union National Association
(CUNA)..................................................... 102
Written statement of the Independent Community Bankers of
America (ICBA)............................................. 104
Written statement of the National Association of Federally-
Insured Credit Unions (NAFCU).............................. 108
Written statement of Public Citizen.......................... 110
Written responses to questions for the record submitted to
Adrienne A. Harris......................................... 127
Written statement of various undersigned organizations
expressing concern about stablecoin risks.................. 128
UNDERSTANDING STABLECOINS'
ROLE IN PAYMENTS AND THE
NEED FOR LEGISLATION
----------
Wednesday, April 19, 2023
U.S. House of Representatives,
Subcommittee on Digital Assets,
Financial Technology,
and Inclusion,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. French Hill
[chairman of the subcommittee] presiding.
Members present: Representatives Hill, Lucas, Davidson,
Rose, Steil, Timmons, Donalds, Flood, Houchin; Lynch, Foster,
Gottheimer, Torres, Sherman, Casten, and Nickel.
Ex officio present: Representatives McHenry and Waters.
Also present: Representative Himes.
Chairman Hill. Good morning. Welcome to our first hearing
on stablecoins, entitled, ``Understanding Stablecoins' Role in
Payments and the Need for Legislation.''
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
I want to thank all of our witnesses for being here today,
and I now recognize myself for 4 minutes for an opening
statement.
Today's hearing marks the official resumption of the House
Financial Services Committee's efforts to enact payment
stablecoin legislation. Last Congress, Democrats and
Republicans worked together on a proposal to bring payment
stablecoin issuers under a regulatory framework in the United
States, and to allow stablecoins to unlock their potential as a
contributor to a modern payment system. That proposal from
September was noticed for today's hearing.
Last year, Members from both sides of the aisle reviewed
the proposal, provided feedback, and worked to reach a
compromise, but the clock ran out on those efforts due to the
fall elections. That bill is an infant. It is a baby. It is not
necessarily a beautiful baby, but it is our baby, and it is
named, ``Maxine McHenry.'' And it is here today for both sides
of the aisle to review and consider and to hear from our
panelists, so today, we are going to discuss it, and think
about revisions.
How do we address the benefits and risks described in the
Biden Administration's 2021 report on stablecoins? The
Financial Stability Oversight Council (FSOC) recommended that
Congress pass a legal framework, and Chairman McHenry and I are
committed to working across the aisle to pass payment
stablecoin legislation. And we are hopeful that Members in this
room on both sides of the aisle will build on the foundation of
that work.
Luckily, we have made significant headway with the proposal
that we noticed for today's hearing. By requiring payment
stablecoins to be backed one-for-one by high-quality liquid
assets held in reserve, the proposal mitigates run risk. The
legislation also requires stablecoin issuers to comply with
redemption requirements monthly at the station, and disclosures
and risk management standards. These are just a few ways that
this legislation established strong, much-needed consumer
protections in this area, just as Ms. Hand outlines in her
testimony today.
However, there is more work to be done. It is my goal that
our payment stablecoin legislation will provide different ways
for issuers to maintain and come into compliance. I believe
innovation is fostered through choice and competition. And one
way to do that is through multiple pathways to become a
stablecoin issuer, with appropriate protections so that we
prevent regulatory arbitrage or a race to the bottom. I am glad
to have Superintendent Harris here from the New York State
Department of Financial Services to explain the framework that
is currently in place in New York and to discuss their
requirements for payment stablecoin issuers.
Finally, I want to reiterate the urgency for those of us in
this room to work together and pass this needed legislation.
Recent reports indicate that digital asset developers are
leaving the United States to go to countries that have more-
established regulatory frameworks for digital assets. That is
not good for innovation, jobs, or consumer investor protection
here.
The ongoing turf war between the SEC and the CFTC over
digital assets is not only unhelpful, but it is also
unsustainable. When you have two agencies contradicting each
other about whether one of the most-utilized stablecoins in the
market is either a security or a commodity, you end up with
uncertainty.
Federal regulators have made it abundantly clear that
without an Act of Congress, they will continue to interpret
their authorities broadly, even when in direct contradiction
with each other. That is why it is time for Congress to act and
pass legislation to establish a regulatory framework for
payment stablecoins. We look forward to hearing from our
witnesses, and I look forward to picking up where we left off
last fall.
I now recognize the ranking member of the subcommittee, Mr.
Lynch, for 4 minutes for an opening statement.
Mr. Lynch. Thank you, Mr. Chairman, for holding this
hearing to further examine the role of stablecoins in our
financial system. I would like to also thank the witnesses for
their appearance here to help the committee with its work.
Thank you.
The last several months have marked the effective collapse
of much of the crypto industry following the abrupt demise of
Tether, FTX, and Silvergate Bank, and countless other
cryptocurrency companies have also witnessed the massive
failure of Silicon Valley Bank and Signature Bank, which is
also a crypto-centric bank. In the wake of these destabilizing
events and their devastating impact on the crypto sector, which
lost two-thirds of its market cap and went from $3-trillion
market capitalization to $1 trillion--$1.06 trillion as of this
morning--stablecoins remain a relevant oversight topic,
particularly considering that they fall within a subset of
cryptocurrency, and are intended to be non-volatile digital
assets by intent and design.
As reported by the President's Working Group on Financial
Markets in its report on stablecoins, well-designed and
appropriately-regulated stablecoins could support faster, more-
efficient, and more-inclusive payment options. However, the
panel also underscored that the stablecoins present a variety
of risk factors that are not currently subject to robust
regulatory standards and cohesive oversight.
To this extent, then-Chairwoman Waters led our committee's
bipartisan investigation last Congress to examine the risks to
investors, market integrity, and financial stability associated
with stablecoins. We reviewed the technology behind
stablecoins, their current use cases, State regulatory
structures, and Federal oversight gaps. And we also examined
the role of stablecoins in potentially promoting financial
inclusion.
As we learned last year, stablecoins are a type of
cryptocurrency that issuers assert is pegged to stable reserve
assets such as the U.S. dollar. Issuers claimed that
stablecoins serve the purpose of payments with the potential to
improve payment infrastructure and increase access to financial
services. In reality, however, we know that stablecoins are
rarely used for payments, and are instead used to facilitate
speculative cryptocurrency trading and investments.
Stablecoins also contain structural fragilities that make
them vulnerable to runs and pose risks to monetary policy,
national security, financial stability, and fair competition.
It is worth revisiting questions of whether stablecoins are
even needed, if they are hardly used for the purposes intended.
If our goal is to improve our payment system and financial
inclusion, we should instead consider advancing public sector
options such as the FedNow payment system and a publicly-issued
digital dollar.
Considering these insights, I have trouble understanding
why this outdated legislation, which is not cognizant of the
recent disasters in the crypto space that has structural flaws,
is attached to this hearing. I share concerns about key parts
of this with the 14 consumer advocacy groups that sent a letter
yesterday expressing concerns about the numerous, grave risks
that stablecoins pose to households and our financial system,
and I will share a few.
For starters, giving States the authority to regulate
stablecoins allows issuers to easily avoid Federal oversight
and seek out more permissive States. Additionally, the bill
identifies the Federal Reserve as the primary regulator for
oversight and provides issuers with the access to Federal
Reserve programs such as the discount window, master accounts,
and payment services. These programs are typically limited to
banks which are heavily regulated, and that is for good reason.
Most importantly, the bill does not address the biggest
lessons we have learned in recent months. We have witnessed the
risks that can occur when players commingle customer funds.
This bill does not mention how conflicts of interest will be
managed, particularly between issuers and exchanges. I also
continue to have concerns about allowing non-bank entities with
no regulation to issue bank-like products. If the recent bank
runs have taught us anything, it is the danger of allowing
shadow banking products, particularly stablecoins, to issue
deposits-like products without FDIC insurance. So, I strongly
believe we need to separate crypto assets from our banking
system, and this bill does just the opposite.
With that, I ask that we take the time that we need to get
this right rather than try to get there first. I yield back.
Chairman Hill. I thank the gentleman. The Chair now
recognizes the Chair of the full Financial Services Committee,
Chairman McHenry, for one minute.
Chairman McHenry. Payment stablecoins are an important part
of the digital asset ecosystem and have the potential to be a
cornerstone of modern payment systems. I want to thank the
Subcommittee Chair and the Subcommittee Ranking Member for
their engagement on this. I also want to thank the Ranking
Member of the Full Committee, the former Chair of the
committee, for her engagement. The Ranking Member and I spent a
significant amount of time along with our staffs, working
together with Treasury, with the Fed, and with members of our
committee last Congress, and I thought it was important to
acknowledge that good work as the foundation of our discussions
and the frame laid out that between these negotiations between
Ranking Member Waters and I last Congress when she was the
Chair.
I think it is important that we lay that down for a public
hearing and understanding of what we negotiated, and this is
the continuation of that good work, but it is the first piece
of committee work that we have done in a setting like this. A
lot of things have happened since this draft, and we want
members to engage in this, especially new members of this
committee, and have ownership of the legislative product that
we will be moving.
But I want to thank Ranking Member Waters for her
engagement on this. And I think she and I both will confess
that this bill is imperfect to us in many, many ways, to each
of us in different ways. But I thought it was important to
ensure that a Democrat-led committee, now a Republican-led
committee, that we acknowledge the intellectual framework
around us having a modern financial regulatory regime at the
Federal level, like consumer interest is not served by us not
acting. We need to have a Federal regulatory regime for
stablecoins. It is important for us internationally and
domestically. And it is very important that we have the
understanding, on a bipartisan basis, of the utility and the
importance of this legislation. And with that, I yield back.
Chairman Hill. I thank the chairman. The Chair now
recognizes the ranking member of the Full Committee, Ms.
Waters, for one minute.
Ms. Waters. Thank you very much, Chairman Hill and Ranking
Member Lynch, and I want to thank all of the witnesses for
testifying today. Let me start by saying that last Congress, my
staff and I worked extensively with then-Ranking Member McHenry
on legislation to provide a regulatory framework for payment.
He is absolutely correct about that. However, what did not
happen was we did not complete the negotiation so that we can
move forward, and, unfortunately, a lot of things have happened
in between.
And, of course, in addition to FTX and a lot of other
things going on, this bill that we have posted in no way
represents any final work, and because so much has happened in
between, we needed to get back together in negotiations. But
Mr. McHenry alarmed me somewhat when he said that the Members
on his side of the aisle had come up with a whole new bill, and
I said to him, ``Well, then, they come to any negotiations
having made up their minds already.'' And I suggested that if
he was going to have a Republican bill, that we would go back
to work on a Democrat bill, and then we will get together and
decide who is going to give, and what we are going to do to
work out the differences, et cetera, et cetera. That has not
happened.
So let me just say, the posted bill in no way represents
the final work on stablecoins by negotiations between the two
of us. The bill has been posted. The Chair wanted to post the
bill. It does not represent a final product of any kind, so I
think we are starting from scratch to deal with stablecoins. We
must deal with it. We must get a stablecoin bill. I think we
can do that, but we must disregard the bill that has been
posted altogether. I yield back.
Chairman Hill. The gentlewoman yields back. My response to
that would be that we welcome any legislative effort from the
Minority in this regard, in a constructive way, and on behalf
of Republicans. We have just been looking at the September
draft led by Ms. Waters and Mr. McHenry and making our own
changes, doing our own due diligence, and that is what this
hearing is all about. So, we agree that in no way is the bill
posted to this hearing the be-all or end-all. I made that clear
in my opening statement. This really is an opportunity for both
sides of the aisle to fully engage with this superb panel and
think through the right way to revise the good work of Ms.
Waters and Mr. McHenry last fall.
Before I call on our panel, I want to wish my colleague,
Jae Jang, a Happy Birthday today. Nothing says, ``Happy
Birthday,'' like a stablecoins hearing.
We will now turn to our witnesses. First, the Honorable
Adrienne Harris. Ms. Harris is the Superintendent of the New
York Department of Financial Services. Prior to her service
there, she was in senior roles at the Treasury Department and
the White House.
Second, Professor Jesse Austin Campbell joins us. He is an
adjunct professor at Columbia Business School, where he teaches
a class on blockchain markets and infrastructure, as well as
serving as a managing partner at Zero Knowledge Consulting.
Third, Mr. Jake Chervinsky. Mr. Chervinsky is the chief
policy officer of the Blockchain Association, a digital asset
association based here in Washington, D.C.
Fourth, Mr. Dante Disparte. Mr. Disparte is the chief
strategy officer and head of global policy at Circle, the
issuer of USDC, as well as a member of the World Economic
Forum's Digital Currency Governance Consortium.
And our final witness is Ms. Delicia Reynolds Hand. Ms.
Hand is the director of financial fairness at Consumer Reports.
We thank each of you for taking the time to be here today.
Each of you will be recognized for 5 minutes to give an oral
presentation of your testimony. And without objection, each of
your written statements will be made a part of the record.
Ms. Harris, you are now recognized for 5 minutes to give
your oral presentation.
STATEMENT OF THE HONORABLE ADRIENNE A. HARRIS, SUPERINTENDENT,
NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES
Ms. Harris. Thank you, Mr. Chairman. Good morning, Chairman
McHenry, Ranking Member Waters, Subcommittee Chair Hill,
Subcommittee Ranking Member Lynch, and members of the
Subcommittee on Digital Assets, Financial Technology, and
Inclusion, and to the hardworking staff. I am Adrienne Harris,
Superintendent of New York's Department of Financial Services
(DFS). Thank you for inviting me today.
Strengthening the nation's regulatory oversight of virtual
currency is critical to protecting consumers and ensuring the
safety and soundness of institutions. I look forward to sharing
with you some key features of the DFS framework and to offering
continued assistance as you work to develop a comprehensive
national regulatory framework.
DFS has been a prudential regulator of virtual currency
since 2015. Our virtual currency regulatory framework is the
most comprehensive in the country, built on the model of full-
scope banking supervision, but tailored for the unique
considerations of the industry. It has served well to protect
New York consumers, keep virtual currency entities safe and
sound, and hold the bad actors to account.
The Department has a wide range of tools to regulate the
virtual currency industry, including licensing, supervision,
examination, and enforcement. The core provisions of the DFS
regulatory and supervisory framework are robust capital and
financial standards, strong consumer protections, sophisticated
cybersecurity requirements and strong anti-money laundering
provisions. For example, virtual currency entities are subject
to custody and capital requirements designed for industry-
specific risks. Entities must hold virtual currency in the same
type and amount on a one-to-one basis that is owed or obligated
to a customer that is distinct from the traditional banking
fractional reserve system.
Once an entity meets rigorous standards to be licensed or
chartered, DFS creates a detailed supervisory agreement that is
tailored to each company's risks. Companies must get approval
from the Department for material changes in business, including
for new product offerings, and stablecoin issuance. Entities
also are subject to ongoing supervision and are regularly
examined for compliance with regulations and those supervisory
agreements. If, through our supervision, we find that a
regulated entity is not in compliance with our rules, DFS'
enforcement division can investigate and take appropriate
actions to ensure that companies pay penalties for violations,
remediate issues, and return lost funds to customers.
Specific to stablecoins, DFS was the first agency to
provide regulatory clarity for these products. In June 2022,
DFS provided guidance related to the issuance of U.S. dollar-
backed stablecoins. The DFS stablecoin guidance requires one-
to-one reserving with cash or cash equivalents, redemption
fulfillment within 2 business days, and independent public
audits to confirm reserves.
As members of this committee contemplate Federal
legislation for stablecoins, I believe the best path forward is
to build on the well-established dual-banking regulatory
system. Any legislation that preempts the State's ability to
regulate innovative financial services would be harmful to
valuable regimes that already exist, and hamper State
regulators' ability to respond nimbly to a changing financial
ecosystem.
I am proud of the work DFS has done to develop a
comprehensive supervisory framework and to foster a well-
regulated virtual currency industry in the State. We welcome
further collaboration with you to take advantage of our lessons
learned and develop a comprehensive national regulatory
framework to protect markets, entities, and consumers. Thank
you.
[The prepared statement of Ms. Harris can be found on page
80 of the appendix.]
Chairman Hill. Thank you.
Mr. Campbell, you are now recognized for 5 minutes for your
presentation.
STATEMENT OF J. AUSTIN CAMPBELL, MANAGING PARTNER, ZERO
KNOWLEDGE CONSULTING, AND ADJUNCT PROFESSOR, COLUMBIA BUSINESS
SCHOOL
Mr. Campbell. Thank you very much. I would like to start by
thanking Chairman McHenry, Ranking Member Waters, Subcommittee
Chair Hill, and Subcommittee Ranking Member Lynch, and all of
the members of the subcommittee and the hardworking staff for
the opportunity today.
I want to start with something of an apology, which is to
say the debate around stablecoins has been incredibly
confusing. It has probably been harmful to consumers. It has
probably been harmful to the nation. One of the problems is
that with the lack of clarity from Congress, many things are
called stablecoins which should not be. What we need is clarity
to define stablecoins so that we understand that stablecoins
built right are actually not new and are relatively mundane
financial instruments.
If you look at frameworks that have worked, like the
framework from the NYDFS, these things look like conservative
banks, maybe government money market funds. These are the sorts
of things we know how to address as a financial system. We can
regulate them, and I think there are also answers to some of
the issues that already exist in our current system, such as
State versus Federal. I suggest in my testimony for small to
medium-sized stablecoins, they are fine at the State level.
When they become very large and systemic, they should probably
exist at the Federal level. We don't need a $2-million
stablecoin being regulated by the OCC or the Federal Reserve.
It is not an effective use of time, but nobody is suggesting
that JPMorgan be only State-regulated.
I think there is a way to make these things work. They
serve the purpose of money on a blockchain, and that is what is
ultimately the real innovation here is the blockchain itself
and the opportunities for transactions that creates. In the
current environment, we are failing at making this happen as a
country. Our regulation is currently chaos for stablecoins. If
I am an issuer and I want to create a stablecoin, I technically
don't know if I am going to be answering to a State regulator,
a Federal banking regulator, the SEC, or the CFTC.
And it puts you in the same position as if you are out with
friends and you are going to play some sports game, and
somebody tells you, well, we may enforce the rules of baseball,
or football, or basketball, and we are not going to tell you
which in advance. And maybe some of them will all apply at the
same time. It is unworkable.
And what this means, and it pains me to say this as an
American, is that things are moving offshore. I can say this
with certainty because I advise my clients right now to do
exactly that. There are other regimes with significantly more
regulatory clarity than what we have provided here, where if
you are a good actor who wants to comply with the law, who
wants to do the right thing, you want to go there because you
know you can do it with certainty.
And this is bad for jobs. It is bad for the strength of the
dollar. It is bad for our status as a reserve currency. And it
is particularly bad for national security, as blockchains have
a significant degree of transparency that is not present in
markets like actual cash markets, right? When somebody
transacts on a blockchain, it is public. We may not always know
right now who transacted, but you know the amount, the time,
the wallets they traded with, and what they sent back and
forth. And with the richness of data, it is just a matter of
time until you can identify the wallets. This is a huge data
analysis tool to enforce our rules on the financial system that
we are potentially giving away.
Right now, over the past year, the biggest winner has been
Tether. They are offshore. They don't work well with us. They
facilitate some activity they probably shouldn't, but the chaos
is leading that stablecoin to grow while others shrink. The
other thing that is happening is other countries are moving
into this space.
Just this morning, before the hearing, I saw news that
Russia is exploring legislation to formalize their ability to
transact in crypto. If we don't take the field, others will do
so before us, and they may not be doing it in ways that we
like, so in the end, this matters. I would call upon the
subcommittee to think deeply about passing some sort of bill
about stablecoins. We can't let perfect be the enemy of good
when one of our enemies here is time.
Right now, doing this right will bring financial inclusion
through the dollar to billions of people globally. This is not
just a U.S. concern; it reinforces the strength of the dollar
in the world. It will help us fund the deficit. Every dollar
that goes into stablecoins ends up in traditional financial
instruments that we can use to fund our government, like T-
Bills. It will bolster our reserve currency status, and it will
ensure that if the blockchain continues to grow at the pace it
has from 2012 to present, the standard of transaction on there
for a currency is the dollar. Thank you very much.
[The prepared statement of Mr. Campbell can be found on
page 36 of the appendix.]
Chairman Hill. Thank you, Mr. Campbell.
Mr. Chervinsky, you are now recognized for 5 minutes for
your oral presentation.
STATEMENT OF JAKE CHERVINSKY, CHIEF POLICY OFFICER, BLOCKCHAIN
ASSOCIATION
Mr. Chervinsky. Thank you, Subcommittee Chairman Hill,
Subcommittee Ranking Member Lynch, Full Committee Chairman
McHenry, Full Committee Ranking Member Waters, and members of
the subcommittee for inviting me to testify today. My name is
Jake Chervinsky, and I am chief policy officer for the
Blockchain Association, a nonprofit trade association dedicated
to advancing good policy so that all of the benefits of public
blockchains can be realized here in the United States. The
Blockchain Association includes over 100 leading U.S. companies
who are committed to responsible innovation, to advancing and
strengthening the United States strategic position in global
finance and technology, and to making financial services more
accessible to American consumers.
My message for you today is simple: Congress must pass
stablecoin legislation. Given the right policy, stablecoins can
revolutionize the payment system and reinforce the dominance of
the U.S. dollar at a time when our foreign adversaries, like
China, are seeking to undermine its status as the global
reserve currency.
In my time this morning, I want to give you three reasons
why stablecoin legislation is so necessary. First, our
financial system has a problem. It is stuck in the analog era
of the last century, constrained by intermediaries who act as
gatekeepers and middlemen to outdated infrastructure that has
failed to keep pace with the digital age.
Today, the global economy is on all the time. It is always
connected, and yet, our payment system is still slow,
inefficient, unreliable, and inaccessible to many Americans.
Public blockchains are the solution to that problem, a
revolutionary upgrade on the technology that powers the global
financial system. And U.S. dollar stablecoins are one of their
best applications, allowing anyone with an internet connection
to send any number of dollars to anywhere in the world, nearly
instantly, and at nearly zero cost. Stablecoins outperform
legacy payment rails across-the-board. They are safer, they are
faster, they are cheaper, they are more reliable, and they are
accessible to everyone. Now, new legislation is necessary to
maximize the benefits of stablecoins and also to protect
consumers and to ensure that the financial system is safe and
sound.
Second, the status of the U.S. dollar as the global reserve
currency is under threat by foreign adversaries like China,
which is pushing the digital yuan as a competitor to the
dollar. The best way for us to maintain U.S. dollar-dominance
worldwide is to spread stablecoins all over the world.
Stablecoins are indeed best suited to perform that task.
Third, if Congress fails to act, we will not only forfeit a
huge competitive advantage to our adversaries, we will also
lose entrepreneurs and innovators to other, more-welcoming
jurisdictions like Europe, the United Kingdom, Singapore,
Japan, Australia, and many others that are far ahead of the
United States in regulating digital assets. Make no mistake,
regulatory uncertainty is already driving innovation overseas.
Adopting stablecoin legislation now will send an important
message to the job creators and the taxpayers in the U.S.
blockchain industry that they are still welcome here at home.
Members of the subcommittee, stablecoin legislation has
already received bipartisan, bicameral support, and the
Financial Services Committee has already made great strides
toward a balanced and effective bill. I urge you to continue
that work on a bipartisan basis, and I, along with the
Blockchain Association and all of our member companies, stand
ready and willing to help. I appreciate the chance to testify
today, and I look forward to your questions. Thank you.
[The prepared statement of Mr. Chervinsky can be found on
page 51 of the appendix.]
Chairman Hill. Thank you very much.
Mr. Disparte, you are now recognized for 5 minutes for your
oral statement.
STATEMENT OF DANTE ALIGHIERI DISPARTE, CHIEF STRATEGY OFFICER
AND HEAD OF GLOBAL POLICY, CIRCLE
Mr. Disparte. Full Committee Chairman McHenry, Full
Committee Ranking Member Waters, Subcommittee Chairman Hill,
Subcommittee Ranking Member Lynch, and members of the
Subcommittee on Digital Assets, Financial Technology, and
Inclusion, it is my honor to submit my testimony to you today.
My name is Dante Disparte, and I am the chief strategy officer
and head of global policy for Circle, a leading global
financial technology firm, and the issuer of the USD coin, or
USDC.
USDC is a dollar digital currency supporting the
extensibility of the U.S. dollar in a competitive, always-on,
internet-based global economy. Indeed, as fears grow of de-
dollarization, or the rise of alternative payment systems that
are non-conversant with U.S. values or broader norms in the
rules-based financial system, Circle, USDC, and dollar-
denominated payment stablecoins can help to ensure the dollar
remains the global currency of preference, including natively
on the internet.
Over the course of our 10 years of activity in the U.S. and
around the world, we have always aspired to a regulation-first
approach based on trust, transparency, accountability, and
financial integrity. It has been 5 years since the first USDC
was issued, which, for the purposes of this hearing and
proposed legislation, can be considered a dollar-denominated
payment stablecoin.
Today, USDC has supported more than $10 trillion in
cumulative transactions on the public internet. A USDC-enabled,
wallet-supported global payment network is in more than 190
countries, which is akin to a mobile money network like M-PESA,
but at world scale. More than 75 percent of all USDCs in
circulation are held in digital wallets and smart contracts
rather than on digital asset exchanges, suggesting a strong
correlation as a dollar-denominated store of value. Indeed,
there is a, ``Cambrian explosion,'' of use cases and
responsible innovation, courtesy of the programmable,
composable, trusted, and open nature of USDC. Rather than
disrupting traditional financial systems or markets, we are
seeing growing acceptance of USDC as a dollar settlement option
among major financial services firms including Visa, MoneyGram,
and Worldpay, among many others.
By every measure, courtesy of this early adoption of
dollars as the currency of reference in digital assets markets,
more than $132 billion of stablecoins in circulation reference
the dollar, albeit to varying degrees of prudential regulatory
standards. While some of these dollar-referenced stablecoins
are starting to embrace sunlight and transparency, USDC was
born in it. From the first issuance through to today, we have
adopted macroprudential risk standards and transparency that is
a hallmark of trust, even when compared to traditional
financial services firms. As a result, a proliferation of
enterprise use cases and adoption has followed.
Enterprise use cases for USDC run the gamut from Treasury
management to easing the exacting cost and slow speeds of
cross-border payments, which remain stubbornly high, and
inconveniently slow, with little meaningful competition.
Indeed, one of the partnerships we are the proudest of shows
the art of the possible with USDC and the advantages of open
interoperable payment systems. Last year, Circle, together with
the Stellar Development Foundation and MoneyGram, partnered
with the United Nations High Commissioner for Refugees (UNHCR),
to enable USDC as a form of digital dollar cash assistance
supporting war-displaced Ukrainian refugees.
As the sole issuer of USDC, Circle has always operated
under the highest-prevailing regulatory standards for
electronic-stored value and money transmission in the United
States. While other countries regulate payments and electronic
money activity at a national level, the U.S. framework empowers
State banking and money transmission supervisors to foster,
develop, and regulate the payments industry at the State level.
Although this sum-of-the-parts approach may be subject to
potential operating and regulatory gaps, it has nonetheless
produced an economic development model that has enabled
companies to start up and scale across the United States. Our
States are not only the laboratories of U.S. democracy, and
crucibles for economic development, they are also the
laboratories of payment services innovation. Rather than
framing financial innovation and regulation as competing
forces, Circle's operating experience over the last decade has
prioritized public-private regulatory partnership and
personhood.
In short, financial innovation, inclusion, and protecting
the integrity of the financial system are not competing
objectives. Today, we are comprehensively licensed as a State-
supervised money transmission and electronic stored-value
company across 48 States. We were the first company to receive
a BitLicense from the New York State Department of Financial
Services in 2015. We have been and remain a registered money
services business conforming with the Financial Crimes
Enforcement Network's (FinCEN's) guidance on combating illicit
financial activity. The net result is a company that went from
a mere idea 10 years ago, to a business that has approximately
1,000 employees in 35 States and 12 countries, with both strong
prospects and the desire to become a U.S.-listed company.
Thank you for the opportunity to testify today. I look
forward to addressing the committee's questions.
[The prepared statement of Mr. Disparte can be found on
page 63 of the appendix.]
Chairman Hill. Thank you, sir. Ms. Hand, you are now
recognized for 5 minutes for your oral presentation.
STATEMENT OF DELICIA REYNOLDS HAND, DIRECTOR, FINANCIAL
FAIRNESS, CONSUMER REPORTS
Ms. Hand. Thank you. Good morning, Full Committee Chairman
McHenry, Full Committee Ranking Member Waters, Subcommittee
Chairman Hill, Subcommittee Ranking Member Lynch, and members
of the subcommittee. I am honored to participate in this
important conversation about stablecoins and the need for
legislation today. My name is Delicia Reynolds Hand, and I am
the director of financial fairness at Consumer Reports, where I
lead the organization's work to evaluate and rate digital
financial products and services.
Today, these products and services promise all kinds of
things--financial security, well-being, and even the ability to
leverage new forms of asset classes--without financial
intermediaries, with a simple swipe or click. Whether these
products and services live up to these promises is still an
open question, but it's one that we aim to answer through our
product testing and consumer research.
Cryptocurrencies can be appealing to everyday consumers,
whom traditional finance has never appropriately served. Our
own 2022 Consumer Reports survey showed that African Americans
once owned cryptocurrencies at a higher rate than other ethnic
groups. These consumers have never been a priority of the
traditional finance and banking system. They continue to live,
however, in credit and intergenerational wealth deserts, so
there is a certain appeal to something outside the very
financial system which has largely ignored them. They are the
targets of Super Bowl ads, influencers, and cryptocurrency
kiosks.
But consumers are caught in a vicious cycle of boom and
bust of crypto experimentation. It is a public policy disaster
that there yet no uniform and meaningful regulatory frameworks
in the United States. These risks are significant and include
an unlimited supply of tokens and coins serving as collateral
for loans, rigid self-executing smart contracts, non-existent
reserve requirements, lack of interoperability requirements,
lack of meaningful disclosures, and the creation of debtor-
creditor relationships.
We need to see common-sense, consumer-first, comprehensive
regulation, and the bill as posted, while it has some positive
things, does create some concern. First, the bill creates the
potential for regulatory arbitrage. An important check on our
banking system is that even State-chartered institutions have
to obtain Federal approval. But this bill has no equivalent
requirements for Federal regulatory review, as the Federal
Reserve Board or other regulators would have no authority to
reject State licensing.
Second, while the bill does outline an important role for
Federal oversight, and require parent companies of bank
subsidiaries authorized as stablecoin issuers to be insured
depository institutions, it doesn't provide the same
requirement for non-bank issuers, and allowing this will create
confusion and less protection for consumers who choose to
purchase stablecoins that do not offer such insurance. While
the bill sets up a regime to approve issuers of payment
stablecoins, it doesn't outline how payment activities
conducted or facilitated by the issuers or their coins will
have adequate consumer protections. Consumers need to be able
to prevent, cancel, replace, or override a transaction. And
this is a critical, critical function necessary to ensure that
payment system operators are able to conduct chargebacks or
facilitate disputes over payments.
Consumers have come to rely on interoperability, and they
should have the same benefits in stablecoin payments. But this
bill does not require interoperable technology protocol,
although the bill calls for the development of standards. This
may still impede consumer access and leave consumers walled off
into each institution's specific system.
We would also like to see additional language associated
with custodial wallets. While custodial wallets may help
consumers keep track of their keys, this has created a legal
gray area that should be clarified. The law should prevent a
debtor-creditor relationship from being formed, and this should
be clearly required in the disclosures.
There are additional consumer investor protections that we
would like to see included or improved in the bill such as
moving from outdated notice and disclosures, prohibiting the
commingling of funds, requiring a 24-hour calendar day
redemption requirement, and ensuring that a consumer's use of
stablecoins does not create the debtor-creditor relationship.
Notably, we want to see all Federal regulators have a clear and
meaningful role in this space. I encourage committee members to
continue to work together on a bipartisan basis, and I
appreciate the ability to be here with you today. Thank you.
[The prepared statement of Ms. Hand can be found on page 73
of the appendix.]
Chairman Hill. Thank you very much for your testimony. We
will now turn to Member questions, and the Chair recognizes
himself for 5 minutes for questions.
Currently, the SEC and the CFTC are taking contradictory
positions in court about whether one of the most-utilized
stablecoins in the market is a security or a commodity. This
creates an impossible situation for the private sector, for
other regulators, and for stablecoin issuers, who can't
possibly comply with both securities and commodities laws at
the same time. One of the main goals of our legislation is to
resolve this regulatory uncertainty once and for all.
Let me start with you, Mr. Disparte. Can you discuss the
impact of that conflict?
Mr. Disparte. Thank you, Chairman Hill. Indeed, this is
what I like to classify as sort of a regulatory Game of Thrones
at the Federal level, and it isn't helpful. I think we saw that
yesterday in the committee. Looking at securities issues alone,
it isn't particularly helpful. There is a proliferation of
digital assets in circulation. However, virtually every country
of substance in the world treats payment stablecoins under an
equivalent national regime that would conform with electronic
money rules and as a payments and banking innovation, not as a
securities or commodities innovation. They might be used in
digital asset trading, but their core function, particularly
when treated as a payment stablecoin, is to solve the buyers
and spenders remorse that were one of the original sins, if you
will, of the digital assets industry.
Chairman Hill. Thank you.
Mr. Campbell, in your view, should non-interest-bearing
payment stablecoins be considered securities?
Mr. Campbell. No, I would echo Mr. Disparte's comments.
These fundamentally work like money. They operate like banking
products. Unless you believe that something like JPMorgan's
bank deposits or physical U.S. dollars should be securities,
then they should not be either. They should note that well.
Chairman Hill. Okay. That is helpful. Let me switch gears.
The current regulatory framework for stablecoins is mostly
handled by State regulators and FinCEN. The State frameworks,
New York being the most recognizable, provide critical consumer
protections and regulatory oversight. As we seek to set up a
Federal framework, it is critical that we also retain multiple
pathways for payment stablecoin issuers. This is an aspect of
the proposal that I particularly want to make sure we get
right. We had a version of that in the draft.
So, Superintendent Harris, what role do you think State
regulators currently play, and should play in regulating
payment stablecoin issuers?
Ms. Harris. Thank you so much, Mr. Chairman. I think the
State regulators can play an incredibly important role. As you
have seen in New York, we work very closely with FinCEN, among
other Federal regulators, but we have been able to nimbly
respond to all of the changes in the marketplace, laying out a
flexible licensing and charter regime both through our
BitLicense and limited purpose trust, and engaging in
supervisory agreements with each of our licensed entities, so
that we can tailor our oversight to each of the risks that
those entities present, examining on a regular basis, and
bringing enforcement actions when necessary.
And as I noted in my testimony, everything that we do is
based on the banking supervision model, and I think it would be
very helpful to see the dual regulatory framework that we use
in banking duplicated for cryptocurrency and stablecoins as
well.
Chairman Hill. Good. Thank you. And consumer protection is
at the forefront of what you do and investors, right?
Ms. Harris. Absolutely, we require--
Chairman Hill. I thought Ms. Hand made a good point about
making sure that is at the forefront of what we are doing, and
you would echo that as a State regulator?
Ms. Harris. Absolutely. We require robust disclosures about
fees and risks. We require one-to-one reserving and
attestations, we don't allow lending of consumer assets, and we
require segregation, all of which are very important consumer
protections.
Chairman Hill. Thank you. Representative Himes is visiting
our subcommittee today. We are glad to have you, Mr. Himes. He
and I have a bill called the 21st Century Dollar Act. The
mission is to ask the Treasury to inform Congress about how to
keep the preeminence of the dollar-based trading system in the
world, which is integral to the economic success of the U.S.,
and has been a boon for countries all over the world in the
past 8 decades. It is a positive thing, not a negative thing,
and only people who think it is negative are people who are
sanctioning. So, you have to think about that for a little bit.
We are not here to emulate whatever the surveillance State
policies are of Iran or China.
In my view, one of the benefits of creating regulatory
certainty in America is preserving this innovation in our
country and preserving the U.S. dollar's status as the global
reserve currency.
Mr. Disparte, could you reflect on the role stablecoins can
play in supporting U.S. dollar dominance?
Mr. Disparte. Thank you, Mr. Chairman. As I mentioned in my
testimony, cumulatively, in 5 years alone, Circle's USDC has
processed $10 trillion of internet-native payments. This is an
activity that is not possible by any other means and any other
transactions. Most of the world's payment systems labor under
what is known as the, ``walled garden,'' problem. That would be
the equivalent of a Gmail account not being able to send an
email to a Hotmail account because the two systems are not
conversing.
Chairman Hill. Thank you very much. If there are any
further thoughts from witnesses on the panel, please respond in
writing.
I'd now like to turn to my friend, Mr. Lynch, the ranking
member of the subcommittee, for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman. Ms. Hand, the landscape
of stablecoins has changed considerably in recent months. In
particular, it has shrunk due to failure of some stablecoin
issuers following the collapse of FTX, the crypto exchange.
About a million customers lost all of their money, totaling
about $8.9 billion. All of this has revealed some complex risks
associated with stablecoins, including their lack of stable
values. Obviously, stablecoins are not stable. I know that
there have been warnings to the banking system about the
custody of stablecoins and dealing with other cryptocurrencies
and also the vulnerability to runs that we have seen recently.
Can you talk about some of the other risks that have been
exposed in recent months? And could you also discuss the ways
in which the current legislation that is tied to this hearing
does not reflect those vulnerabilities and does not offer ways
to address those new risks?
Ms. Hand. Certainly. Thank you for the question. I think
one of the primary risks has actually been brought up in
testimony here today with reference to the growing acceptance
of USDC by financial institutions. So, despite the recent
instability and volatility that has impacted the fiat currency
banking system, we continue to see the traditional financial
industry invest, and this is at the risk of consumers. We need
to see in a bill clear activity limitations that reflects some
of the issues that came up in recent months.
We need to see limitations on commingling. That was an
issue with FTX. We also need to see restrictions on self-
dealing, and undisclosed conflicts of interest. And very
explicitly for the consumers in Celsius, who were not able to
recover, we need to prevent a debtor-creditor relationship so
that my coins are my coins, and not those of the company. Those
are some of the key risks that we see are not addressed, among
other things.
Mr. Lynch. I do want to make one correction in what I said
before. I think I talked about Tether's collapse, but it was
actually Terra, not Tether, that collapsed. Tether just dropped
in value. One of the things I worry about in this current
legislation being proposed is that it would allow stablecoin
issuers access to the Federal Reserve services, the discount
window.
One of the saving graces of the FTX collapse, and other
subsequent collapses, is that it wasn't tied to the traditional
banking system. We had ring-fenced the crypto industry so well
that most of those losses were occurring in the crypto industry
itself, and did not infect the traditional banking system,
which is the envy of the world, and provides so much power to
the U.S. dollar, and provides us a safe haven for much global
investment. Can you discuss the risks that can come with
allowing stablecoin issuers to act like banks without the
regulatory framework that provides protection to depositors and
provides integrity to our entire system?
Ms. Hand. Certainly. I will start with an historical point,
which is the reason why we have the National Bank Acts. They
stemmed from a series of bank failures, and systemic runs, and
a complete lack of Federal oversight. So in the equivalent
here, we need that clarity. We cannot treat non-bank entities
like banks without the equivalent restrictions to their access
to consumers and not having substantive consumer protections in
place.
Mr. Lynch. My time has expired, and I yield back.
Chairman Hill. The Chair now recognizes Mr. Lucas of
Oklahoma for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman. I appreciate that. I
think it is helpful as we work through this process to do just
a little bit of housekeeping on some of the definitions.
``Stablecoin'' attempts to provide a relatively stable value in
pegging its value to real-world assets.
Mr. Campbell, could you elaborate on the different
categories of underlying assets that can back a stablecoin, and
then specifically on the payment stablecoins in the legislation
we are discussing today?
Mr. Campbell. Yes, thank you very much. If we look out in
the wild, there are really three kinds of stablecoins that have
existed. The first is what I would call fiat-backed
stablecoins. They kind of work the way you have in your mind,
which is there is a pile of some sort of financial instruments
behind them. The second is crypto-backed. This is people
attempting to over-collateralize with things like Bitcoin or
Ethereum. And then, the last version is algorithmic, which are
backed by some sort of mathematical relationship.
I can tell you that the first category has been largely
successful. The second two are highly-experimental financial
products that probably should not be called, ``stable.'' And I
would say specifically within this bill, defining stablecoins
as the first category with good reserve guidelines and then
consumer protections around what you are allowed to call a
stablecoin would be greatly helpful. Thank you.
Mr. Lucas. Ms. Harris, you discussed the general approval
process for a BitLicense through the New York State Department
of Financial Services (DFS) and how DFS enters into supervisory
agreements with companies based on their individual risks and
business models. Could you elaborate a bit more on examples of
specific risks presented by a firm that could be addressed in a
supervisory agreement?
Ms. Harris. Absolutely. Thank you, sir. First, I want to
note that we have one licensing and one chartering regime in
New York, so it gives companies the flexibility to choose a
regime that matches their business model without sacrificing
any regulatory rigor. Then, once a firm has a license or a
charter, as you noted, we engage in the negotiation of a
supervisory agreement that allows us to tailor our oversight to
risks.
So, imagine a company that wants to offer a coin on two
different protocols. We can require separate disclosures,
enhance cybersecurity controls, and enhance Bank Secrecy Act/
Anti-Money Laundering (BSA/AML) controls, based on the risk
that those protocols might present. We also have preapproval
for every new product or material change in business a licensee
seeks to offer.
Mr. Lucas. Mr. Disparte, Circle's USD Coin fell below its
$1 peg during the banking turmoil that stemmed from Silicon
Valley Bank (SVB). SVB was, of course, one of the banks that
Circle used to manage cash reserves. And as we all know, the
regulators stepped in to fully insure those deposits. Mr.
Disparte, could you discuss the lessons learned from the
collapse of SVB and what the potential impact of the SVB
collapse was to USDC?
Mr. Disparte. Thank you for the question, Congressman. We
learned a lot of lessons, the first of which is that while many
of the policy conversations have been about what risks could
crypto and digital assets introduce to the traditional banking
system in the traditional sector, we learned with the failure
of not one bank, but three successive bank failures
consecutively over the course of several weeks, that we had to
protect our business from risks in banking. And one of those
risks obviously could have been an existential-level event for
America's commercial banks, but for the Federal intervention.
And over the course of the weekend, Circle, like any other
U.S.-regulated money transmitter, had a fiduciary obligation to
redeem all USDC demands at par. We were able to make that
promise on the Saturday after the bank failures began, closing
the temporary DPAC of USDC from $0.88 to $0.98.
And today, as we advocate for this legislation, one of the
points that we could separate is payments activity from banking
because Circle, like any other company that relies on banks for
payments, had an exposure, and that exposure was what happens
with uninsured deposits inside the banking system.
Mr. Lucas. Absolutely. I thank the witnesses for their
observations, and with that, Mr. Chairman, I yield back.
Chairman Hill. I thank the gentleman from Oklahoma. And I
recognize the distinguished gentlewoman from California, the
ranking member of the Full Committee, Ms. Waters, for 5
minutes.
Ms. Waters. Thank you very much. First of all, I am a
little bit surprised that Superintendent Harris is here today.
I didn't know that you have a regulatory framework for
stablecoins. Do you?
Ms. Harris. Yes, ma'am, we do, quite a robust one that
exists both in regulation in our supervisory agreements and in
our recent guidance that we issued.
Ms. Waters. I agree with most of our panel that we should
move very quickly to establish the stablecoin bill and get that
legislation going. But since I have you here, Ms. Harris, I
cannot help but ask you a few questions about the stablecoins
that we are concerned about, which certainly are very
important. But you just had a big bank failure in New York, and
I want to take a moment or so to understand that. What happened
with one of the biggest bank failures in the country as it
relates to cryptocurrency, if I may?
Ms. Harris. Absolutely, ma'am. It is a misnomer that the
failure of Signature Bank was related to crypto. What we saw
with Signature Bank is that it had a new-fashioned bank run and
the outflow of deposits were from a broad depositor base,
including wholesale food vendors, fiduciaries' trust accounts,
and law firms. And in fact, the outflow of crypto deposits was
in exact proportion to the representation in the depositor base
overall, and, in fact, some of those deposit outflows were
actually pre-planned. It is, of course, unfortunate that there
was a run on the bank at Signature prompted by what we saw with
SVB, but it is not the case that the failure of Signature was
related to crypto.
Ms. Waters. Again, why is it understood or believed that it
was related to cryptocurrency? How do you absolutely excuse
cryptocurrency from being a part of the problem at Signature,
that caused it to be in the situation where it had to be closed
down?
Ms. Harris. Yes, ma'am. I think it is part of what has
transpired with social media and other things. It is true that
Signature banked a healthy proportion of crypto customers;
about 20 percent of its depositor base was crypto companies.
They were known and had announced previously that they were de-
risking from the crypto space. But again, with the run we saw
on the bank that Friday evening, about 20 percent of the
deposits left the bank, but 20 percent of that 20 percent was
crypto. The rest were normal commercial customers with
uninsured deposits that were leaving the bank.
And so, we did not see the collapse as a result of crypto
deposits and their instability. There was a broad base of
depositors that left the bank. The crypto depositors that left
the bank were in exact proportion to their depositor base, so
it really was just a new-fashioned bank run prompted by what
happened with SVB.
Ms. Waters. As you know, there will be continued
discussions and hearings and investigations on the issue. But
since you do have a regulatory regime for the stablecoin, much
of the concern that we have learned about has to do with assets
and whether or not they are credible, and what can be called an
asset, and how can we be sure that we are going to protect the
investors with assets that may not be real. What have you
learned about that?
Ms. Harris. We have learned a great deal, and let me start
by saying in New York, we did not license FTX. They could not
do business in New York. The same is true of Voyager, and the
same is true of Celsius. They did not meet our standards, so
they could not operate in New York, even though they could
operate in the rest of the country. We require our stablecoin
issuers to back their stablecoins one-to-one with cash and cash
equivalents. They have to provide redemption to their customers
within 2 business days. They have to provide public and
independent attestations of their reserve mix on their
websites. And we have robust capital requirements based on a
very sophisticated formula that we require our companies to
have, which is why no New York-licensed entity has gone
bankrupt.
Ms. Waters. What advice would you give us, since we are
still at the point of putting together legislation and
hopefully working in a bipartisan way to do that? What advice
can you give us about determining what is and what is not a
real asset?
Ms. Harris. I think, ma'am, the framework that we have put
together in New York is a very good model that has served well
to protect New Yorkers. And I would urge the committee to do
what it can to duplicate that and to allow for a State pathway
so that nimble regulators can continue to police the space
appropriately.
Ms. Waters. Thank you very much.
Ms. Hand, given the implications of our national payment
system, should we allow States to regulate payment stablecoins
on their own? Does a Federal agency, like the Fed, need a role
to approve payment stablecoins before they are issued in
addition to regulating their digital wallet providers?
Chairman Hill. Could you submit that answer in writing?
Ms. Hand. Yes, I am happy to do so.
Chairman Hill. The gentlewoman's time has expired.
Ms. Waters. Thank you.
Chairman Hill. The Chair now recognizes Mr. Davidson, who
is also the Vice Chair of this subcommittee, and the Chair of
our Housing and Insurance Subcommittee, for 5 minutes.
Mr. Davidson. Thank you, Mr. Chairman. And thanks to our
witnesses for being here today. I also thank the staff on both
sides of the aisle for all of the work that has gone into
getting to this point on the stablecoin bill. The market has
been pleading for this for a long time, except in New York.
The New York regulators have been way ahead of the curve. I
am glad that more of my colleagues are learning that not only
is there a regulatory framework in place, but that it is
essentially impossible for a stablecoin to go to zero. And the
reason is that it is backed by Level 1 high-quality liquid
assets or, in at least one case, physical custody of a
commodity, not a derivatives contract like a net asset value
fund, but actual audited, physically-present custody of a
commodity.
Superintendent Harris, you regulate those things, so what
would you say are the key elements of the guidance that gives
people confidence that a stablecoin really is stable and backed
by the full value, whether that is $1, or in the case of a
commodity, the value of the commodity?
Ms. Harris. Thank you so much for your questions, and they
are precisely the elements that you mentioned. And I will also
note that in New York, we have not approved any
algorithmically-backed stablecoins for issuance or listing in
New York, but it is that one-to-one backing. It is our
prohibition on commingling rehypothecation lending. It is our
T+2 redemption, and it is our audit and reporting requirements,
I think, that gives consumers quite a bit of confidence in a
New York-regulated entity.
Mr. Davidson. Just as a follow-up, when you look at the
implications of that--I am from Ohio, and we don't have an Ohio
regulator that is doing what you are doing. But a Federal
framework for payments stablecoins would say, we can trust that
the New York financial services regulators have this. At some
level, we would have some Federal supervision that would
interact like we do in other financial services, and that would
be highly compatible with your existing State-based regulatory
framework?
Ms. Harris. Absolutely, sir.
Mr. Davidson. Thank you very much for that clarification.
Mr. Campbell, Tether is the largest stablecoin in the
ecosystem, and it is headquartered in Hong Kong. What does it
mean for the stablecoin ecosystem that Tether is located
offshore, and how has Tether become such a large player in the
space?
Mr. Campbell. Thank you for the question. I would say, one,
Tether has become a large player because they had a first-mover
advantage. They started in 2014 before other stablecoins, and
that just speaks to the problem of inaction. When people can't
move elsewhere, you end up with entrenched incumbents.
Two, Tether has not faced the same kind of regulatory
uncertainty. They don't have the concerns that others do about
having to conform with something relatively strict and
relatively demanding like the NYDFS guidance, which, by the
way, I greatly support, having worked in that space as well,
that keeps consumers safe. They are not transparent. It is
unclear if they have always had all the reserves, and it puts
people at risk, but when they are the default option because
others are being hamstrung, it is what people use, because
there is demand for dollars on a blockchain. So, I think it is
there just because it has been available.
Mr. Davidson. Yes. I think that is a big part of it, and
thanks for your clarification. Because they don't have the
transparency and disclosure requirements, I have at times
referred to it as a, ``time bomb,'' because we have clarity in
New York, but we don't have clarity into Hong Kong's market.
And frankly, the move to Hong Kong is a step in the right
direction, because for a while it wasn't even clear that they
were accountable even in Hong Kong, so hopefully, Tether is as
stable as it is purported to be. But I think the real
opportunity for us is for this body to create legal clarity.
And look, we hit SEC Chairman Gensler pretty hard yesterday
on his failure at the SEC to provide clarity, but ultimately,
we should be clear: The job to provide legal clarity at the
Federal level is right here in this body. And I just want to
thank Chairman McHenry, and, when she was Chair, Maxine Waters,
for paying attention to this space. The market really needs
this legal clarity, and I think that is something that both of
you have highlighted.
Let me close with Mr. Chervinsky. If stablecoins are to
eventually be used as an actual medium of exchange to move that
store of value that is stable, do you believe it is necessary
that they retain the attributes of cash, which is
permissionless, peer-to-peer transactions versus an
intermediary third-party that facilitates the transactions?
Mr. Chervinsky. Thank you for your question, Congressman. I
think that is absolutely critical. I think that we are
currently moving toward a cashless society, and we can go in
one of two directions. We can either follow China and have a
currency that is totally controlled and surveilled by
governments and also by corporations to sort of a business
model of surveillance capitalism where we can reproduce the
benefits of cash. I think we all agree that cash is a very
important tool for people to use and we can do that in the
digital space using stablecoins.
Chairman Hill. The gentleman's time has expired.
Mr. Davidson. To be trusted, it has to have those
characteristics. My time has expired, and I yield back.
Chairman Hill. Thank you. And I now recognize my friend
from Illinois, the distinguished ranking member of our
Subcommittee on Financial Institutions and Monetary Policy, Dr.
Foster, for 5 minutes.
Mr. Foster. I guess I will start with a question that I
asked a little more than a year ago when we had SBF and all of
the crypto luminaries in front of our committee, and what I
regard as the foundational question on identity, which is, if
we wish to prevent crypto assets from being used for ransomware
and a long list of illicit activities, is there any alternative
to having every crypto transaction traceable to the secure
digital identity issued by a country with which we have
extradition treaties, or is there any technological solution to
that of which anyone is aware, or do we have to just say, we
cannot have self-custody? We can't have any of these? We can't
have anonymous transactions? Is there anyone who believes there
is a solution that prevents ransomware, and doesn't violate
that?
Mr. Chervinsky. I will take that, Congressman. I think that
there will be those solutions, and I can tell you--
Mr. Foster. No, that is not acceptable. I am talking about
doing something right now. Right now, is there a technology
that stops ransomware, if we allow self-custody on anonymous
transactions?
Mr. Chervinsky. There are many companies working on very
important--
Mr. Foster. That do not have solutions that work. I
understand there are many companies that are anonymous Monaro-
type collaborations that are trying to make the exact opposite
happen. I think everyone watching this debate should understand
that either you support continuation of ransomware and all of
that illicit stuff or you don't, and it is a pretty much a
binary choice that we have to face. Another example of this is,
let's say that someone puts a gun to your head, drags you into
an alley, and says, get out your phone and transfer all of your
digital assets to me, are you screwed or not? In your ideal
world, are you in your utopia? What is your reaction to that?
Mr. Campbell. I will say that if you look at the models of
existing stablecoins, including the Paxos stablecoins that I
previously ran, we do have a solution to this problem, and I
advocate for it in my testimony. Stablecoins that exist on
public blockchain should have freeze and cease capabilities. If
there is illicit action, we need the ability to take those
coins back and prevent them from being spent. We also need
blockchain surveillance tools, which Superintendent Harris
talked about, and they exist: Chainalysis; Elliptic; Inca
Digital.
Mr. Foster. But these are being defeated by more anonymous
coins all the time.
Mr. Campbell. Only when using crypto assets that are not
the regulated stablecoins.
Mr. Foster. Okay. So, part of your vision is that there be
mandatory transparency so that ultimately, regulators can see
the true identities behind the participants in transactions?
Mr. Campbell. That is one option. I would say the other is
right now, given the lack of clarity and the inability of many
of the most-regulated financial institutions to operate in this
space, you have many bad actors. If you create a Federal
pathway where they use specifically-regulated stablecoins that
have these properties--
Mr. Foster. Yes, ultimately, what we need is the equivalent
of a license plate on every digital wallet because if you think
about how essential the development of license plates and
driver's licenses were to the healthy development of the
automobile industry, you know that this was crucial. It would
be completely unacceptable to have unlicensed cars and
unlicensed drivers driving through your neighborhood or across
your international borders.
And it can be anonymous, like a license plate is anonymous,
under most circumstances, but you have to have that guarantee
that if someone drives through your neighborhood and runs over
your dog, you can jot down the license plate, take it to a
trusted court system, de-anonymize the owner of that car or
that wallet, and haul them into court.
Mr. Campbell. I would say, in fact, in the freeze-and-seize
regimes for stablecoins, you don't even need anything other
than their license plate. I don't need to know who owns a
wallet address to take the assets out of it. If somebody was
hacked, and all we know is the wallet address, you can take
those assets back.
Mr. Foster. You have to know the private key associated
with it.
Mr. Campbell. No. No. With the freeze of stablecoins--
Mr. Foster. If you have or if you are willing to--
Mr. Campbell. --if the token is standard, we can take it
back.
Mr. Foster. With some kind of governance superseding and
overpowering the blockchain, in which case the blockchain
doesn't rule, you have a trusted third party that can reverse
transactions.
Mr. Campbell. That is essentially correct in how the
centralized fiat stablecoin issuers--
Mr. Foster. Okay. For my last 30 seconds here, there is a
whole bundle of things associated with rapid run risk,
fraudulent minting implications on monetary policy, that all
seemed like they would be perfectly addressed with a simple
rule that any stablecoin that is issued has to be associated
with an account at the Federal Reserve, and that no issuance is
valid until it is accompanied by an attestation from the Fed
that the total amount that has been issued is less than what is
on reserve at the Fed. And a simple API that the Fed would
provide, as well as the license, seems like an answer to that
whole bundle of things.
Is there anyone, if you can answer for the record, who sees
any problems with that simple rule? Among other things, it
provides a business model for issuers, because they get to
collect the interest from the Fed.
Chairman Hill. I would invite the panel to respond to that
good question in writing.
Thank you, Mr. Foster. The Chair now recognizes the
gentleman from South Carolina, Mr. Timmons, for 5 minutes
Mr. Timmons. Thank you, Mr. Chairman. Mr. Disparte, in the
last few weeks, $6 billion has been transferred from USDC to
foreign stablecoins. That $6 billion left the U.S. economy.
That $6 billion is no longer subject to the same U.S. AML/KYC
standards. Could you opine on this? What do you believe are the
reasons for this mass exodus of U.S. funds, and do you believe
it is due to the lack of regulatory clarity? And what
implications does that have for our national security?
Mr. Disparte. Thank you for the question, Congressman. I do
think for a lot of users of these alternatives in the world, be
it alternative payment systems, or in this case, Tether,
opacity is the future they are looking for the most, and that
should be neither conflated nor confused with the presumption
of privacy in financial services, whether digital or analog.
But I do think there is a race to the bottom taking place in
corners of this market segment, and candidly, the void of
regulatory clarity in the United States is partly filling that
vacuum.
And there is also a geopolitical digital currency space
race taking place around the world that I think, more
importantly and perhaps more kinetically in the short run, also
manifests itself as a digital assets 5G war. So, just as there
are certain companies you wouldn't want building hardware and
software in your telecommunications infrastructure, I think
there are certain firms in this industry that you wouldn't want
building the financial plumbing of the future. And many of
those firms are operating with impunity outside of the
perimeter of major jurisdictions including the United States.
Mr. Timmons. Thank you for that. It seems direct
contradictions from regulators are just one of the many signs
that show Congress needs to act. Many stablecoin projects are
fleeing the United States for countries that have established
clear frameworks for payment stablecoin issuance. The longer
the U.S. goes without a clear regulatory framework for
stablecoins, the more this will accelerate.
Mr. Chervinsky, would you describe what the impact will be
if legislation is not enacted?
Mr. Chervinsky. Thank you for your question. I think if
Congress doesn't act, then stablecoins will be issued in other
countries. There is a clear desire for this type of technology
and for its application to national currencies, and there are
many other jurisdictions that are adopting workable frameworks.
And I think what that means is that the United States will not
be able to ensure that stablecoin issuers are observing
American principles. It also may mean that stablecoins will not
be based on the U.S. dollar to begin with. We will see euro
stablecoins in Europe, and yen stablecoins in Japan, and that
will be a hit to U.S. dollar dominance, and is something that
we should avoid.
Mr. Timmons. Thank you. The draft legislation attached to
this hearing would require stablecoin issuers to produce
information such as financial inclusion reports annually.
Mr. Campbell, in your view, what is helpful to know about a
stablecoin issuer? Would you consider financial inclusion
reporting as materially-important enough to be statutorily-
required?
Mr. Campbell. Thank you for the question. I would start by
saying I primarily think of these as banking products, which
means the first thing I think about is safety and soundness
when I think about stablecoins. Number one on the list when you
think about transparency is transparency of reserve assets,
composition of reserve assets, and giving everybody from a
financial inclusion perspective, the faith that they can use
this instrument, and it is backed by things like cash at U.S.
banks that is insured, it is backed by T-Bills, it is backed by
the correct forms of assets. Then, where you end up with from
an inclusion standpoint is regardless of reporting at very low
cost with very low friction, every American and others can use
this product.
Mr. Timmons. Thank you for that. Mr. Chairman, I yield
back.
Chairman Hill. The gentleman from South Carolina yields
back. The gentleman from New York, Mr. Torres, is now
recognized for 5 minutes.
Mr. Torres. Thank you. Superintendent Harris, I said to you
privately and will reiterate publicly that I will not support
any stablecoin legislation that preempts the New York State
Department of Financial Services or otherwise encroaches on the
sovereignty of New York State. As a New Yorker, that is a red
line for me.
When it comes to finance, there is a long tradition of dual
regulation. Just like banking has both a Federal option and a
State option, stablecoin issuance should have both a Federal
option and a State option, and a State option should exist not
only on paper but in practice. The Federal Government should
certainly have a floor that prevents regulatory arbitrage to be
sure, but there is no need for a ceiling that preempts either
in theory or in practice does the proposed legislation before
us create a genuine system of dual regulation.
Ms. Harris. Thank you so much, Congressman. It has been
such a pleasure to get to know you and work with you since
taking on this role, so I appreciate your partnership. I think
there are certainly improvements that could be made to the
present legislation, although it has language which states that
nothing in the legislation will preempt States in practice. I
think there are a number of provisions that give Federal
regulators veto authority over State regulators and their
judgments and oversights that would be counterproductive and
provide a disincentive for companies to take a State path.
Mr. Torres. So, we are not quite there yet.
Ms. Harris. Not quite yet.
Mr. Torres. Do you agree that stablecoin issuers should be
fully reserved and that those reserves should consist of 100
percent cash or cash equivalents?
Ms. Harris. Absolutely, and that is what we do in New York.
Mr. Torres. And do you agree that those stablecoin reserves
should be verified not only by self-attestation, but also by a
third-party audit?
Ms. Harris. Yes, and that is what we do in New York.
Mr. Torres. Common sense dictates that you cannot have an
honor system in which a charlatan like Sam Bankman-Fried claims
to be fully reserved and then the regulators take his word for
it.
Ms. Harris. Exactly.
Mr. Torres. The President's Working Group (PWG) report
proposes banking regulation for stablecoin issuers, but since a
stablecoin issuer has no fractionalization of reserves and no
lending function like a bank, it would seem to me that a
stablecoin issuer operates differently from a bank and
therefore should be regulated differently.
Mr. Chervinsky, do you agree with that analysis?
Mr. Chervinsky. I completely agree, and I think that we can
design reasonably-tailored regulations for non-bank entities to
issue stablecoins in a way that is just as safe and sound as a
bank doing the same.
Mr. Torres. SEC Chair Gary Gensler asserts that an
alternate regulatory framework for crypto would undermine 90
years of securities law. Since American federalism has 50
laboratories of democracy, we can actually test that thesis,
that hypothesis against the regulatory experience of one of
those laboratories, New York State. New York State crypto
regulation is segregated from securities regulation. The New
York State Department of Financial Services regulates crypto,
whereas the New York State Attorney General regulates
securities. So, has the Gensler hypothesis been proven right or
wrong in New York? Has a separate regulatory framework for
crypto undercut securities regulation?
Ms. Harris. What I would say is our authorities do not
depend on definitions about what is a security, what is a
commodity, or what is a currency. At DFS, we have blanket
authority over virtual assets, and we exercise it accordingly.
Some of our companies are also subject to registration
requirements with the Attorney General, and I think what we
have done in New York has proven to be quite successful for
some of the reasons we have discussed today.
Mr. Torres. So, has a separate licensing regime for crypto
come at the expense of regulatory rigor?
Ms. Harris. No, not at all, to the contrary.
Mr. Torres. In fact, New York State DFS is the most
rigorous regulator of crypto in the country.
Ms. Harris. And I would say in the world.
Mr. Torres. In fact, who was the first to raise red flags
about the insufficient reserves of Tether? It was not the SEC.
It was not the CFTC. It was the State of New York.
Ms. Harris. Correct.
Mr. Torres. So, the notion that a separate regulatory
framework for crypto would undermine 90 years of securities law
has been definitively disproven in New York State. The legacy
financial system has high fees and long delays that prey upon
the lowest-income Americans. Poor people of color have to pay
predatory fees in order to transfer their own money to loved
ones abroad. Stablecoin has the ability to function as a
currency, and blockchain has the ability to move money from
peer to peer in real time.
Mr. Campbell, is it fair to say that the combination of
those two technologies has the potential to create a better,
cheaper, and faster payment system? Actually, that question is
for both Mr. Campbell and Mr. Disparte.
Mr. Campbell. I thank you for the question, and I would say
yes, unequivocally. The beauty of a blockchain is it treats
everybody the same. If you have low fees, high transparency,
and a high ability to transact, everybody can use it regardless
of the amount of money they have, and I think that is one of
the best features of this new technological innovation.
Mr. Disparte. Unequivocally.
Mr. Torres. Short and sweet. I yield back.
Chairman Hill. The gentleman from New York yields back. The
gentlewoman from Indiana, Mrs. Houchin, is recognized for 5
minutes.
Mrs. Houchin. Thank you, Chairman Hill and Ranking Member
Lynch. And thank you to the witnesses for your testimony and
for speaking with us today.
As I highlighted yesterday in our hearing with SEC Chair
Gensler, I am concerned about the lack of regulatory clarity
from agencies and the restrictive, overly-burdensome approach
that many of our Federal regulators are taking with the digital
assets ecosystem. The constant threat of regulation by
enforcement has done nothing to help businesses and innovators
here in the United States. Instead, an unclear approach by the
Federal agencies has only served to push innovators elsewhere.
Mr. Disparte, Circle just announced it is opening its
European headquarters in Paris. What does the regulatory
environment for stablecoins look like in the European Union?
Mr. Disparte. Thank you for the question, Congresswoman.
The European Union, since 2019, has embarked on a whole-of-
region, whole-of-economy framework for digital assets known as
the Markets in Crypto-Assets Regulation framework. Originally,
this was in response to fears of Big Tech and, at some level,
fears of China tech or geopolitical competition in technology.
But today, that framework has evolved into perhaps the world's
most comprehensive framework for digital assets that including
the topic of stablecoins would acknowledge them as electronic
money, tokens, and would passport those licenses across the
European Union.
Circle has just announced the submission of two licenses in
Europe and Paris, and France is the venue of choice. One is an
electronic money license and the second is a digital assets
service provider license. And the two of them would allow for
all of the activity that we support here to be effectively
exported to Europe. I should add, we have also filed for a
similar license in Singapore as a major payments institution.
Mrs. Houchin. How does it compare to the draft proposal
from the 117th Congress that is attached to this hearing?
Mr. Disparte. On the one hand, it is a much broader
framework. The European framework, Markets in Crypto-Assets
(MiCA) framework, contemplates broader activities and payments
stablecoins. It contemplates digital asset trading, which types
of assets would be systemic, definitional issues around market
conduct, and so on, but it does have many aspects that would be
comparable. For example, the requirement of prudential
treatment of stablecoin reserves, segregation of funds, a lot
of the disclosure points that we have highlighted so far in
this hearing.
Mrs. Houchin. And to be clear, the EU is not the only
foreign political entity that is moving on this issue. Mr.
Campbell, Mr. Disparte, could you shed some light on what other
countries' regulatory frameworks for stablecoins look like, and
what the frameworks require of issuers? I am looking at what
are the implications of the United States not being the first
mover in this space, and how has that impacted the current
dynamics of the overall ecosystem?
Mr. Campbell. Thank you for that question. I would say, if
you look around the world, you are starting to see legislation
that deals specifically with fiat-backed stablecoins, so nobody
is really embracing crypto-backed. Nobody is really embracing
algorithmic. But places like Singapore, Dubai, Abu Dhabi, and
the U.K., which is now working on a framework like the European
Union, all have frameworks that I would say are substantially
similar to what has been proposed in the 117th Congress bill. I
think we can do better in America. Our financial regulation and
systems are more robust than some of those places, but, in
general, if we don't act, those are the best options, and
people will take advantage of them. Thank you.
Mr. Disparte. And for my part, I don't subscribe to the
view that it is a zero-sum proposition. I do think the stakes
are increasingly higher and there are more choices in terms of
jurisdictions and venues, but it should be made clear that
Circle, or a company like Circle, probably wouldn't have been
started successfully in any other country around the world. But
the fact that we are now a net exporter of our operating model
and business model does require, I think, that the U.S. pay
attention to these alternative jurisdictions.
There are other places as well. Later in June, Japan will
issue broad, comprehensive stablecoin guidance. Hong Kong has
come back online in a broad way. But the innovation ultimately
will conform, I think, with all of the rules that we could set
forth in this committee. And I do think it is really critical
that the path for digital assets is increasingly shaped by city
states as opposed to nation states. And we see that, of course,
with New York, Singapore, Hong Kong, and many other
jurisdictions around the world.
Mrs. Houchin. Thank you. Without proper action, I certainly
fear the U.S. could lose its leading role in digital assets.
Many stablecoin projects are fleeing the United States for
countries that have established clear frameworks for payment
stablecoin issuance. Without guidance, I think this problem
will only worsen. As a member of the subcommittee, I am
certainly excited to tackle these important issues to make sure
that we get it right here in the United States. I yield back,
Mr. Chairman.
Chairman Hill. The gentlewoman yields back. And I now
recognize the gentleman from California, Mr. Sherman, who is
also the ranking member of our Capital Markets Subcommittee,
for 5 minutes.
Mr. Sherman. There is a lot of money in the crypto and the
crypto-adjacent space. The crypto world makes money by
literally making money. They had it up to $3 trillion. It has
dropped down to $1.2 trillion, but $1.2 trillion out of thin
air pays for a lot of lobbyists, and a lot of propaganda. In my
City, Los Angeles, the Lakers play in a crypto arena. They do
not play at a, ``Know Your Customer,'' arena. They do not play
at an, ``Enforce Our Tax Laws,'' arena. They do not play at a,
``Prevent Drug Dealers from Being Able to get Their Financial
Transactions Handled,'' arena.
We have a very good payment system. We have an excellent
currency. The entire world tends to like the dollar. It is a
good store of value, a good measure of value, and a good means
of transaction. If you use Apple Pay, it comes right out of
your checking account. It is not as good as what the crypto
world promises they will deliver in some future decade, but it
is way better than what the crypto world delivers now, and I am
sure that payment systems using the dollar will get better.
So, what is the problem? The problem is that it is so hard
to cheat on your taxes, and it is hard to run a drug sales
operation with the U.S. dollar because we have Know Your
Customer (KYC) and we have Anti-Money Laundering (AML), and we
need a payment system that meets the needs of the millions of
Americans, or at least the hundreds of thousands of Americans
who want to engage in major illegal activity.
Other countries are moving forward with this, and we have
to catch up with them. Peru is ahead of us in cocaine
manufacture and cocaine cultivation. China is ahead of us in
organ harvesting, and it is time for America to catch up.
Ms. Hand, if we allow every State to have its own rules,
and say, a State like Wyoming, which doesn't have that many
people and cows don't always sell for as much as they would
like, if they could make a billion dollars by just having a
regulatory system that was perfect for tax evaders, what would
stop them?
Ms. Hand. Thank you. Currently, nothing would stop them
because there is no overarching equivalent Federal regulatory
framework, and we would continue to see a race to the bottom,
which is not good--
Mr. Sherman. Yes. What the payment system needs is
regulation so that you can be sure that while you are hiding
your money from the IRS, and that is the big market for this.
Drugs are important, sanctions evasion is important, but the
IRS has testified that there is nearly a trillion dollars of
unpaid taxes every year, almost exclusively from the very
wealthy. And in order to not pay a trillion in taxes, you need
to hide a trillion of income, which means over a decade, you
have to hide $30 trillion of assets. That is a huge market, and
I think it could be more important to Wyoming than cows. And of
course, it all goes away if your payment system has Know Your
Customer and Anti-Money Laundering provisions.
And a stablecoin, talk about an oxymoron. The problem for
those who want to use the system is that it is so completely
unregulated that they might find that their money in the
Bahamas isn't there anymore. So, they need regulation to
protect those who put their money in while at the same time,
who don't have Know Your Customer and Anti-Money Laundering.
And that is something that I think the State of Wyoming or
anyone else trying to provide this service will make sure that
there is actually reserves behind the coin. But at the same
time, the IRS can't find out who owns the coins. So, every day,
drug dealers get cheated because they try to buy a kilo and the
scale is deliberately cheated against them. They need
regulation too, and a fair system to have a concealed currency
is what cryptocurrency is all about. I yield back.
Chairman Hill. The gentleman yields back. Mr. Flood is now
recognized for 5 minutes.
Mr. Flood. Thank you, Mr. Chairman. I appreciate all of the
witnesses' time and testimony today. As someone who passed the
Nebraska Financial Innovation Act to allow State-chartered
banks to custody digital assets in my home State, I am really
interested in the pathway for States, and I appreciate,
Superintendent Harris, you being here today and your testimony.
As we think about legislation, can you describe why maintaining
a robust role for State regulators is important?
Ms. Harris. Absolutely, sir, and thank you for your
question. I think we see the success of the dual regulatory
framework on the banking side, and it is something that we
should seek to duplicate when it comes to stablecoins. I think
the main virtue is the nimbleness with which State regulators
can act and you see that evidence in New York with our one-to-
one reserving requirements. All of the things we have talked
about here today are already in place in New York because we
can move more quickly and stay abreast of developments in the
space.
Mr. Flood. In your position, can you tell me other States
that you think are at the forefront of stablecoins and
understanding the space and State regulators that have maybe
taken some steps to be more innovative?
Ms. Harris. Illinois has recently announced that they are
going to take the New York framework and duplicate it, and I
understand that a number of other States that are exploring
that as well.
Mr. Flood. Okay. Thank you. It is important that the
pathway to becoming a stablecoin issuer remains open for new
entrants.
Mr. Disparte, do you view the current path for non-banks in
the current draft legislation attached to this hearing as
achieving this goal?
Mr. Disparte. Thank you for the question, Congressman. I do
think it is really critical. The United States of America is an
outlier among the advanced economies in the world and not
having a Federal payment system charter. The best alternative
we have is companies like PayPal, and Stripe, and Apple Pay,
and all of these other services. And I do think it is really
critical that a Circle enjoys competition in the future, where
a comparably regulated and structured stablecoin might exist
also, referencing the dollar. The next real breakthrough is
fungibility and interoperability of those payment systems as
well. So, preserving a bank and non-bank pathway for digital
currency issuance in the country is going to be really
critical.
Mr. Flood. One of the issues that I have dealt with in
Nebraska is, I think consumers don't appreciate that the word,
``bank,'' comes with a level of security that you can't get in
a lot of countries around the world. Allowing non-bank entities
access to the Federal payment system is a big step for
Congress. It is a big step for this process. It comes with FDIC
oversight, and the Federal Reserve. Can you respond to the
concerns that someone might have about allowing an entrant into
the Federal payments system? And how do we weigh whether or not
we do it with a non-bank entity, which I really think is an
open question. I am concerned about it. I would like to know
your thoughts.
Mr. Disparte. Again, here, too, if you want to really
understand the competitiveness gap the United States faces, the
inability for the central bank of the United States, the
Federal Reserve Board, to provision Federal services to non-
bank actors is an enormous gap. Again, we are an outlier
compared to the United Kingdom, Europe, Singapore, and many
other countries around the world and indeed, the digital
currency space race analogy is precisely that. There are 114
central banks around the world representing 95 percent of
global GDP, developing solutions around this digital currency
question, and that could include the provision of central bank
custody for cash reserves. We have just run the cusp of
launching FedNow in the United States. If FedNow is going to
work, FedNow has to be provisioned to non-bank actors.
The banks, I hate to say, have no incentive in competing
past fee interest incomes--to be banked is expensive in this
country. To use basic payment services is expensive in this
country, and we exact the highest fees from the people who can
least afford it, for very basic services. Those services, I
might add, also enjoy a public backstop. The last time we
socialized losses to trillions of dollars was in bailing out
the very banking system; we just saw three banks bailed out
recently. So, payments competition is critical. Legitimizing it
at the Federal level would merely level the playing field
between the United States and other countries.
Mr. Flood. Do you think that non-bank entities would also
welcome all of the steps that we require like, Federal FDIC
insurance, and the exams? One of my concerns, and I think it is
an honest concern, is if we let non-bank entities enjoy the
benefits of banks, that could make it difficult. We can't have
a collapse. We can't have a calamity. We can't miss for the
American consumer. Thank you. I yield back.
Chairman Hill. I thank the gentleman from Nebraska, and I
now recognize the gentleman from Illinois, Mr. Casten, for 5
minutes.
Mr. Casten. Thank you, Chairman Hill. And thanks to all of
our witnesses. Mr. Disparte, I want to start with you. When Mr.
Lucas asked you what lessons you learned from this period in
March, when that essentially broke the buck, if you will, on
stablecoin, and you had mentioned that--I think you said you
were exposed to some risks in the banking sector. I want to
challenge you a bit on that because there were no money market
funds that broke the buck and they were just as exposed to the
banking sector. First question, do I have it right that you had
about $40 billion in cash deposits on March 9th, of which $3.3
billion was at SVB? Is that right?
Mr. Disparte. That is correct.
Mr. Casten. Okay. Have you since that point made any
efforts to increase your dollar holdings, diversify your
dollar? What have you done to protect against the fact that you
did have exposure to a part of the banking sector, but not to
the majority of your dollar holdings?
Mr. Disparte. Yes. Thank you for the question, Congressman.
Circle, prior to the failure of Silicon Valley Bank, continues
to operate what we think of as the safest dollar settlement
infrastructure on the internet. USDC's entire composition--
Mr. Casten. I don't want to be rude, but I don't want to
get into a whole pitch for Circle. I am just trying to
understand, did you take measures to increase the diversity or
the liquidity of your dollar holdings?
Mr. Disparte. Sure. Today, the cash component of USDC is
held at a large cash custodian, New York bank, and the
remainder, typically 80 percent of USDC, is short-dated U.S.
Treasuries.
Mr. Casten. Okay.
Mr. Disparte. Of 90 days or less.
Mr. Casten. Okay. And was there significant volume of loss
on the trading during that period before you got back to the
dollar peg?
Mr. Disparte. Well, yes, USDC lost about $10 billion of
circulation. But we think of it as fulfilling the right that
the coin holder has of redemption at par for a U.S. dollar,
even in a situation of extreme stress in the banking system.
The three banks that failed had connectivity to the digital
assets industry, although their failure wasn't caused by the
industry.
Mr. Casten. I understand. So, I asked that question. Now, I
just want to put a question to all of you, and I was going to
ask you all to be New Yorkers in 1975, but then I realized some
of you may be conflicted out from that question. So, let me ask
instead that you all be Michiganders in 2013. The largest city
in your State is about to go bankrupt. You were the treasurer
of Michigan. Would you support legislation that would allow
States to print paper money issued by the State of Michigan
with a peg to the U.S. dollar without any approval from the Fed
that would allow you to print your way out of the bankruptcy of
Detroit? Would any of you support that legislation, or would
that feel like a moral hazard to you?
Mr. Campbell. I will answer that one and say, one, no, you
shouldn't be having unbacked instruments, but two, their--
Mr. Casten. No, no, they are backed. They are backed by the
Fed. We are going to mandate that the Fed has to fully back
that Michigan dollar.
Mr. Campbell. I would say I think the model you should
think about in this context is things like prepaid cards or
money market funds, which are different--
Mr. Casten. I am just asking, should you be able to print,
as we did before the Civil War--just have States print
currency, but then say that the Federal Government is going to
backstop that currency? It feels like a big moral hazard to me.
The reason I ask that is because Section 103 of the draft
legislation says that a stablecoin issuer could ask for
approval from a State, that State could then choose to accept
that, and the Federal Reserve would have to approve that within
60 days, and the Fed would have no backstop.
Look, it is currency, right? You could have a situation
under Section 103 of this rule, where if I am a State, if I am
New York in 1975, and Michigan, if I am the next State that is
facing a fiscal crisis, I can just say, can somebody please
issue a stablecoin so that I can back my way through this and
dump all the risk on the American taxpayer?
Mr. Campbell. Yes, I would say that is the value of the
reserve guidelines that are also within this bill, is that to
create a stablecoin--
Mr. Casten. No, no, I am asking, should the Fed not have
the right, if we are going to give the Fed the obligation to
backstop that risk. And the reason I framed this by starting
about the Circle question is, the money market funds did not
blow up because for better or for worse, there is a Fed
backstop.
Ms. Hand, with the time I have remaining, do you have any
thoughts on how we might improve this legislation to remove the
moral hazard?
Ms. Hand. Absolutely. We need that clear backstop and the
Federal Reserve to minimally have the ability to reject
applications that don't come up to par.
Mr. Casten. Okay. I would hope that at a minimum, we can
improve this legislation by making sure that if we are going to
put that obligation on our Federal Government, the Federal
Government should have some authority to say whether or not
they are willing to accept it. Thank you. I yield back.
Chairman Hill. I thank the gentleman.
Mr. Nickel is now recognized for 5 minutes.
Mr. Nickel. Thank you. And thank you all for being here
today. I share the same concerns as Ranking Members Waters and
Lynch and agree that we need to ensure robust consumer
protections when it comes to digital assets. I also want to
thank Chairman Hill for holding today's hearing and I look
forward to working on bipartisan stablecoin legislation.
After our committee's hearing with SEC Chair Gensler
yesterday, it is still evident that there is a lack of clarity
in regulation impacting the digital assets industry. Without
clear rules of the road, this innovative technology could head
overseas where we can't protect investors. I am committed to
working in a bipartisan way to make progress wherever we can on
this issue.
Mr. Chervinsky, how would effective stablecoin legislation
bring more clarity to the way digital assets are regulated?
Mr. Chervinsky. Thank you for the question, Congressman. I
think stablecoin legislation would bring clarity in two ways.
One, specifically, it would provide clear rules of the road for
stablecoin issuers as to how they can set up their businesses
and put these products into the market here in the United
States subject to American principles and so that, as
Congressman Foster asked earlier, they would be required to
freeze assets, if it were required in order to keep illicit
actors and other bad actors out of the crypto ecosystem. I
think that is very important.
But secondly, it would also send a message that the United
States is open for business to this technology. That is not the
message that the industry has been receiving from many other
regulators so far, who have been substituting their own
judgments about the value of digital assets for Congress'
judgment. But indeed, it is Congress' role to answer the major
question of how digital assets should be regulated, and I think
that Congress should begin with stablecoin legislation.
Mr. Nickel. Thank you.
Mr. Disparte, I understand that the U.S. has an opportunity
with stablecoins to reinforce the dominance of the U.S. dollar
as the global reserve currency. This comes at a time when the
status of the dollar is under threat by foreign adversaries
like China and Russia. Mr. Disparte, can you provide some
examples of how stablecoins have improved cross-border
transactions and empowered those living in economically-
disadvantaged countries? And can you please explain how
stablecoins may enable individuals and businesses across the
globe to transact in U.S. dollars?
Mr. Disparte. Thank you for the question, Congressman. One
of the most powerful examples is a very recent one, which is
our partnership with the United Nations High Commissioner for
Refugees (UNHCR). Circle, together with Stellar and MoneyGram,
as I shared in my written testimony, helped design a sort of
digital cash assistance program for Ukrainian refugees. This
program worked in a manner that no other alternative payment
system could have supported, which is that if you think of the
way we as a country move foreign aid today or disaster
assistance, it is pallets of physical cash, which are literal
honey pots for corruption, bribery, and fraud. The idea that
you have device-centric money that is corruption-resistant,
near-instant, and auditable is a very powerful feature, and the
stablecoin, a dollar-denominated stablecoin, in this case USDC,
is the payload that supports that innovation.
Mr. Nickel. Thank you. Public blockchains offer a
revolutionary solution to our current financial system. Public
blockchains can be accessed by anyone in the world who has an
internet connection and are faster, less expensive, more
reliable, and more transparent than legacy payment rails. But
as we have seen, the value of various cryptocurrencies is
volatile when compared to many currencies, especially the U.S.
dollar.
Mr. Chervinsky, how do stablecoins differ?
Mr. Chervinsky. Stablecoins combine the best of both worlds
of the traditional financial system and public blockchains.
They take the benefits of the public blockchain--efficiency,
security, reliability, and accessibility--and combine that with
stable value. Now, many other types of digital assets like
cryptocurrencies are volatile against the U.S. dollar. And that
is not to say there aren't great reasons why people should use
those assets for any number of purposes in a decentralized
environment. But for the purpose of payments, it is best to
have an asset that is stable against a national currency so
that it can be used to exchange for goods and services without
worrying that tomorrow, the price of what you bought yesterday
is going to be way higher or way lower. So with stablecoins, we
get all the benefits of the technology without that issue of
volatility.
Mr. Nickel. Thank you so much. I yield back.
Chairman Hill. The gentleman yields back. I want to thank
our witnesses for being an excellent panel today. I thought the
conversation was very helpful in clarifying the direction to
take on stablecoin legislation. I certainly have heard
unanimity from the panel that a regulatory framework designed
by Congress is something that would benefit the U.S. economy
and U.S. investors and consumers.
The Chair notes that some Members may have additional
questions for this panel, 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 these witnesses and to place their 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 now adjourned.
[Whereupon, at 11:49 a.m., the hearing was adjourned.]
A P P E N D I X
April 19, 2023
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]