If you look at the six crypto luminaries scheduled to testify before the House Financial Services Committee next week, an agenda becomes clear.
Clear regulation integrating cryptocurrencies, stablecoins and decentralized finance (DeFi) into the financial system is coming, and it could be a good thing. The “how” of getting it right will be on the agenda more than the “if” of it happening.
The Dec. 8 hearing is titled Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States.
It will focus on how the government should support the crypto economy’s innovations while also building a regulatory structure that will protect its users.
The witnesses are:
- Jeremy Allaire, CEO, Circle
- Sam Bankman-Fried, CEO, FTX
- Brian Brooks, CEO, Bitfury
- Chad Cascarilla, CEO, Paxos
- Denelle Dixon, CEO, Stellar Development Foundation
- Alesia Haas, CEO, Coinbase Inc., and CFO, Coinbase Global Inc.
The committee’s chairwoman, Rep. Maxine Waters of California, is looking for support for legislation to regulate stablecoins and other digital assets. Support for this is far from universal. The Chamber of Digital Commerce took issue with it in an Oct. 19 letter to the members of the President’s Working Group on Financial Markets — a group that includes Allaire.
See more: The Great Crypto Debate: It’s Different This Time, or Maybe Not
Arguing that stablecoins do not threaten the financial system, the chamber said it “believes the current federal and state regulatory regimes should remain in place,” allowing stablecoin payments systems “to be regulated in the same way that other U.S. digital payments platforms are regulated.”
Last month, QED Investors Partner and former Assistant Treasury Secretary Amias Gerety told PYMNTS’ Karen Webster, “just because you’re using technology that is new or innovative in some way does not necessarily imply that you need new regulations … we have to start from a skeptical place when we claim that something is new or different.”
Read more: Regulating Crypto: Is It Different — or Is It the Same?
Now parse that speakers list a little, and Hass’ Coinbase is a public company and Allaire’s Circle is a soon-to-be-public company. They are jointly behind No. 2 stablecoin USD Coin (USDC). Cascarilla’s Paxos issues the smaller — just under $1 billion — Pax Dollar (USDP).
By and large, they have advocated to bring crypto into the financial system, and they want the blessing of lawmakers and regulators.
FTX’s Bankman-Fried has called over-regulation a huge threat that can only be overcome by the industry working to build trust. He is also in favor of regulation that is “done properly,” saying “it’s a long time coming, and it’s completely necessary.” (Also, he gave $5 million to the President Joe Biden campaign, making him one of the Biden’s biggest donors).
Then you’ve got Brooks, formerly acting comptroller of the currency — a position he used to allow banks to make payments in stablecoins, a move whose importance, Allaire said, could not be overstated. It was a big step in bringing crypto into the banking system, and one that requires a sound regulatory framework.
Stellar’s Dixon is focused on making local and international payments, notably remittances, quick and inexpensive. She has called regulation “necessary” to make that happen.
Read more: Blockchain Rails Plus Stablecoin Advance DeFi Reality
Throughout the year, PYMNTS has spoken several times to Allaire. Here’s a roundup of the thoughts on regulation he shared.
See also: New Regulations Could Push US Dollar Stablecoins Into the Payments Mainstream
Back in September, when USDC had a market cap of only $27 billion — as opposed to its current $39 billion — Allaire told Webster that regulatory scrutiny was both appropriate and desirable. When something gets as big as crypto, he said, “naturally — whether you’re the Federal Reserve or the U.S. Treasury Department or other federal level agencies — the question … is whether this will ultimately be something that’s supervised just like other banking activities.”
Read more: With $27 Billion In Market Value, Circle CEO Says USDC Stablecoin Is Too Big to Ignore
Back in mid-June, Allaire added that crypto is approaching a tipping point that will match the societal changes that came with the broadband revolution that brought about a connected economy.
“There are key pieces of infrastructure that have to fall into place that kind of light this up around the world,” he said, that are necessary for this crypto economy to have its “broadband moment.”
See more: The Crypto Economy Prepares for Its Broadband Moment
And, he added, this will require innovation that can only come from the private sector. Pointing to the changes in payments ranging from credit and debit cards to PayPal and Apple Pay, he said, “they didn’t come from the federal government. They came from private sector actors. And it’s likely to be no different in the age of internet money.”
But this tech revolution must be — and is being — accompanied by a regulatory infrastructure.
“Policy structures are taking shape all around the world that acknowledge this as a legitimate, fundamental infrastructure,” he said. However, “the exam manuals don’t exist for these new technologies” as of now.
Those two infrastructure changes are driving innovations like stablecoins and nonfungible tokens (NFTs), Allaire told Webster.
“You’re seeing the birth of interest rate markets where people can borrow and lend through a machine on the internet,” he said. “And that’s really dramatic … it opens up access to financial services, potentially, to far more people than have had access before.”
Talking about stablecoins in late June, he added, “there’s wide recognition that stablecoins running on public blockchain infrastructure are here to stay.”
Read more: Cryptocurrencies Are Not a Zero-Sum Game
Building a regulatory framework that allows them to be compliant without sacrificing innovation requires a recognition that it must leave governments in charge of the things they really care about: firm control of the money supply and monetary policy.
This means charters, licenses and being clear that crypto cares “about safety and soundness,” he said. “You want well-supervised, well-risk-managed, with capital preservation and liquidity.”
For all that to happen, at least some of the intermediaries blockchain technology was supposed to eliminate will still be needed — particularly in DeFi — as regulators will require them, he warned. But, he told Webster in March, that will require an intermediary innovation, building a regulator-friendly structure on top of the new payments and financial services model that is emerging
See more: Decentralized Finance Drives Birth of New Internet Credit Markets
“The role of intermediaries will be key,” he said. “In particular, as [DeFi] becomes more mature as an infrastructure for financial market activity and payments activity, the regulators will want firms that are intermediaries to cover consumer protection and monitoring for financial crimes.”
Brooks’ letter when he ran the Office of the Comptroller of the Currency was a powerful success that “speaks to the need for banks and other financial institutions to try and participate in standards” that govern the creation, issuance and use of stablecoins, Allaire said earlier in the year.
What Are Some of the Questions They Will Face?
- What’s the right balance between regulation and innovation?
This Democrat versus Republican fight was previewed in last week’s stablecoin hearing in front of the Senate Finance Committee, when President Donald Trump-appointed Federal Reserve Chair Jerome Powell sparred with Biden-selected Treasury Secretary Janet Yellen.
- How can we ensure that the promise of a new crypto economy is shared by all?
Given committee chair Waters’ priorities, ensuring people of all races, classes and income levels share the benefits of the FinTech revolution will be key.
- How can we ensure that consumers are protected, and bad actors are foiled?
Everyone agrees on the need for anti-money laundering (AML) regulations, even in DeFi. But making it happen without stifling innovation will be a sticking point.