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Senate hearing on stablecoins: Compliance anxiety and Republican pushback

December 17, 2021No Comments


On December 14, the United States Senate Committee on Banking, Housing and Urban Affairs held a hearing titled "Stablecoins: How do they work, how are they used and what are their risks?" Testimonials, both spoken and written, focused heavily on the last two topics, as anxiety over Meet Your Client compliance and the threat of US dollar inflation dominated the discussion.

Held less than a week after the House Financial Services Committee hearing on digital assets, which was generally perceived as "constructive", the meeting held by the Banking Committee was provided be hard. Senator Sherrod Brown, an Ohio Democrat who chairs the Committee and had convened the hearing, is famous for his critical stance on the crypto industry, and the November report of the President's Task Force on Financial Markets (PWG) demonstrated that stablecoins are in the spotlight. focus of the legislator due to its structural proximity to fiat money.

Compliance anxiety

Senator Brown released his opening statement, bringing to life a ghost of the Great Depression: โ€œThese tokens can crash, and the crypto markets plummet by almost 30% in one day. History tells us that we should be concerned when an investment becomes so disconnected from reality. Look at the 1929 stock market crash. "

Brown again voiced his aggressive approach when he noted that even in the absence of joint action from both houses of Congress, there is a range of regulators already sharpening their tools to preside over stablecoins, from the Securities and Exchange Commission to the Federal Commission. . Reserve and Department of the Treasury.

The bombardment escalated with testimony from Alexis Goldstein, director of financial policy at the Open Markets Institute. The liberal think tank, according For some observers, he has become influential by stimulating the Democratic Party's momentum to curb tech goliaths like Meta and Google.

Goldstein seized the opportunity to fiercely attack decentralized financial projects, arguing that they largely "do not meet" existing Know Your Client, Anti-Money Laundering and Anti-Terrorism Financing standards, and to question the potential stablecoins to become a widely adopted market. payment settlement tool:

A recent report by the World Economic Forum found that stablecoins have no financial inclusion benefit as they are subject to the same or greater barriers than pre-existing financial options, including the need for the internet and smartphones. [...] As someone who has played with send them [stablecoins]Both personally and at work, you often make Western Union look cheap when you rack up all the fees you need.

Goldstein's scathing sentiment was countered by Dante Disparte, Circle's chief strategy officer and global policy director, who highlighted a number of digital asset use cases, including empowering women and minority entrepreneurs and delivering aid. . Disparte called on lawmakers to take a "do no harm" approach to regulation:

Argument that we are winning this [digital currency] race due to the sum of free market activity taking place within the US regulatory perimeter with digital currencies and blockchain-based financial services. The sum of these activities is boosting the economic competitiveness and national security interests of the United States.

The Circle executive said the stablecoin sector was still in the early innings and those who accuse it of failing in terms of financial inclusion wrongly presume that stablecoins have a similar agency to the dollar. The argument resonated with Circle's recent announcement that its stablecoin, USD Coin (USDC), will be compatible with the Avalanche blockchain, aiming to provide lower fees and faster smart contract settlement.

The issue of issuance

Arguably the most technically nuanced part of the audience had to do with the future legal classification of stablecoins. At this point, it was Senator Pat Toomey, a Republican from Pennsylvania, who led the opposition to Democratic scaremongering by proposing that the issuance of stablecoins not be limited to insured depository institutions. This point showed up in the set of Toomey principles published before the hearing.

Previously, the Democratic-led PWG had advocated for limit the issuance of stablecoins to insured depository institutions. Toomey's reaction to Brown's opening statement was a clear message: Any final decision on stablecoins "is a matter for Congress."

The need to consider stablecoin issuance as a matter of federal statute was established by Jai Massari, a partner at the international law firm Davis Polk, in his written statement:

A new, well-designed federal charter could accommodate a business model based on the issuance of stablecoins fully backed by short-term liquid assets and the provision of related payment services. This charter could impose requirements for the composition of reserve assets while tailoring leverage ratios or risk-based capital requirements and other requirements to the nature of the business model.

According to Massari, have regulated stablecoin issuers similarly to the banks insured by the Federal Deposit Insurance Corporation, they would be "unviable" and "unnecessary". He added that companies are already able to limit the risk of their stablecoin reserves and to "require that the market value of these reserves be not less than the nominal value of the stablecoins in circulation."

A calm reaction

The aftermath of the hearing saw the positions of the unwavering speakers. Senator Brown shared a portion of his testimony on Twitter, calling stablecoins a "broken mirror of the same. [banking] system":

Senator Toomey once again expressed his enthusiasm for the new technology and his determination to work closely on its friendly regulation:

Key participants in the previous week's most constructive House hearing have eloquently ignored the Banking Committee meeting on social media. Crypto Twitter has also been largely silent on the matter.

Whats Next?

While the hard work of formulating new regulatory standards can take years, with the regulation of stablecoins there are clear signs of rapid progress. However, not all developments seem favorable.

The GTP report called for the introduction of comprehensive supervision as soon as possible. In the opinion of Treasury Secretary Janet Yellen, the group urged Congress to require that issuers of stablecoins be insured depository institutions.

It took Republicans a little over a month to draft their counterplan and defend it at the Senate hearing. The obvious problem for those who want stablecoins to retain their non-bank identity is that, at this point, Senator Toomey's set of principles is a collection of vignettes that could fit on a single sheet of paper, while the report of the PWG contains 26 pages of dense policy proposals.

Perhaps an even bigger problem is that the approach articulated by the PWG is endorsed, and likely inspired, by those within the current presidential administration. If Republicans are serious about taking the non-bank side of the stablecoin divide and suggesting an alternative regulatory approach for this asset class, they'd better consolidate their views in an equally strict way.