The Biden administration called on Congress Tuesday to develop laws and regulations to govern cryptocurrency transactions, specifically stablecoins, and to protect consumers and investors engaged in the burgeoning crypto market.
A top Treasury official urged Congress to act promptly to ensure that “payment stablecoins are subject to appropriate federal prudential oversight on a consistent and comprehensive basis.”
“Because payment stablecoins are an emerging and rapidly developing type of financial asset, legislation should provide regulators flexibility to respond to future developments and adequately address risks across a variety of organizational structures,” Nellie Liang, Treasury’s undersecretary for domestic finance, told members of the Senate Banking Committee during a hearing Tuesday.
Liang, who presented findings of an interagency report issued by the President’s Working Group (PWG) on Financial Markets on regulating the stablecoin market, said legislation should limit stablecoin issuance, and related activities of redemption and maintenance of reserve assets, to entities that are insured depository institutions, like banks and credit unions. The legislation would prohibit other entities from issuing payment stablecoins. Legislation should also ensure that supervisors have authority to implement standards to promote interoperability among stablecoins. The recommendations were included in a November report by the PWG, joined by the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency.
Stablecoins are designed to maintain a stable value and could potentially be used more widely as a means of payment by households, businesses, and financial firms. There are no standards regarding the composition of assets used to support the value of stablecoins (reserve assets), and information made publicly available regarding stablecoin reserve assets is not consistent across stablecoin arrangements in either its content or the frequency of its release, Liang explained. There are many different stablecoin issuers, most are tied to the U.S. dollar, Liang explained.
Tuesday’s hearing came the day after the Securities and Exchange Commission (SEC), in a first of its kind enforcement action, announced a $100 million settlement with BlockFi Lending LLC for violating the Securities and Exchange Act and the Investment Company Act for neglecting to register the offering and sales of its retail crypto lending product. The SEC action includes settlements with 32 states.
Sen. Sherrod Brown (D-OH), chairman of the banking committee, said Monday’s SEC action and the recent charges of a $3.6 billion bitcoin theft, emphasizes the need to regulate the crypto market. Brown criticized the numerous crypto commercials on Sunday’s Super Bowl, saying none of the ads explained consumer protections or limitations of crypto transactions. He called the burgeoning market “magic internet money run by an outfit called abracadabra,” and called on Congress and regulators to work together to develop a regulatory framework “before it’s too late.”
Sen. Elizabeth Warren (D-MA) asked Liang whether the interagency Financial Stability Oversight Council (FSOC) is prepared to use its statutory power to intervene in the crypto market before Congress acts in order to prevent potential systemic risk or “that things get out of hand.” Liang was reluctant to commit to such intervention. Warren said “risks are flashing bright red in our faces” in the crypto market now and she is writing a bill that would facilitate more urgent federal intervention in the market.
Sen. Pat Toomey (R-PA), the ranking Republican on the panel, urged his colleagues to go slow creating a regulatory framework, lest they stifle innovation. He said crypto offerings like stablecoin are different kinds of entities because they do not sell products and are not involved in depository activities and can serve as an important alternative to regular money while helping stabilize prices and the economy. Toomey has drafted a bill that would establish three types of regulated stablecoin entities: one that would be regulated by state money transmitter agencies; one that would clarify that insured depository institutions may issue stablecoins; and one that would be governed under a new state charter and have certain regulatory requirements.
The FSOC continues to review the systemic risk posed by cryptocurrencies like stablecoin, said Liang. One of those risks relates to the regulation of intermediaries that participate in digital asset markets. Some of these intermediaries are banks, investment companies, and other traditional financial actors that are increasingly expanding into digital assets. Other intermediaries, such as stablecoin issuers, custodial wallet providers, and digital asset exchanges, are emerging in the digital asset ecosystem, but provide financial services similar (and sometimes identical) to those provided by traditional financial services providers.
A second set of issues, she said, relates to potential for systemic risk that could result from the build-up of leverage against digital assets. “As we saw in the 2007-2008 financial crisis (and most that preceded it), leverage can play a key role in catalyzing and accelerating financial instability. To address these risks, the Administration is building its knowledge and understanding of the role that leverage plays in digital asset markets and of the implications of that leverage for the rest of the financial system.”
Sen. Mike Rounds (R-SD) joined Toomey in urging Congress and regulators for an “appropriate but measured” regulatory framework. “Otherwise,” said Rounds, “we may fall behind other nations (in developing the crypto market). “I believe there is a lot more innovation to come in the future,” he said, “and I don’t want that innovation to be stymied by a one-size-fits-all regulatory framework.”
Sen. Mark Warner (D-VA) worried about consumer protections ensuring that stablecoin have the asset backing they may claim and whether consumers can check on the actual backing in real time. He also wondered about the business model for stablecoin and asked how they can earn money without charging high fees. “How do these entities make money,” asked Warner. Liang said stablecoin are not as volatile as typical crypto assets and that is why it shows greater potential for price stability.
Sen. Robert Menendez (D-NJ) urged greater transparency for stablecoin and its backing, He said a stablecoin product called Tether that claimed one-to-one backing in dollars was actually backed by risky loans. He expressed concern that countries like Venezuela, Russia and Iran are using crypto and its anonymity to evade international sanctions.
Sen. Bill Haggerty (R-TN) echoed Menendez’s concerns on international sanctions but also worried that a federal regulatory framework could ignore states’ rights on overseeing finance. He urged Treasury to move quickly to develop a regulatory framework because, he said, “time is of the essence here,” because of the rapidly developing crypto (stablecoin) market.
Sen. Steve Daines (R-MT) agreed for the necessity of legislation and regulatory oversight of stablecoin but called for a “light touch approach,” to allow “innovation to flourish without the fear the regulators will overreach.”
Sen. Catherine Cortez Masto (D-NV) asked Liang whether any federal agency has authority to review the backing of stablecoin or crypto products. Liang told her that state regulators may review the backing for stablecoin or a state-licensed crypto product but there is currently no federal agency with that authority.
The PWG’s specific recommendations included: limiting issuance of stablecoins to insured depository institutions; giving supervisors of stablecoin issuers authority to set risk management standards for critical activities related to use of stablecoin as a means of payment; and certain measures to reduce concerns related to concentration of economic power.
The PWG did not take a position on whether stablecoin or other cryptocurrencies should be covered by federal deposit insurance. “While insuring stablecoins would protect users against the risk of loss, it would also introduce certain policy and technical challenges. For this reason, Congress (or the banking agencies) might want to consider alternative measures to protect stablecoin users,” said the PWG.