Senate hearing on stable coins: compliance anxiety and Republican retreat – The Bharat

On December 14, the US Senate Committee on Banking, Housing, and Urban Affairs held a hearing titled “Stablecoins: How They Work, How Are They Used, and What Are Their Risks?” The testimony, both oral and written, focused largely on the latter two issues, as concerns about Know Your Customer’s compliance and the threat of US dollar inflation dominated the discussion.

Held less than a week after the hearing of the House of Representatives Financial Services Committee on digital assets, generally perceived as “constructive”, the meeting held by the Banking Committee was expected to be tough. Senator Sherrod Brown, an Ohio Democrat who chairs the committee and convened the hearing, is infamous for his critical stance on the crypto industry, and the November report of the President’s Task Force on Financial Markets (PWG) has proven that stablecoins are indeed the focus of lawmakers’ attention due to their structural proximity to fiat money.

Compliance anxiety

Senator Brown went on a rampage with his opening statement, bringing a ghost of the Great Depression to life: “These tokens can crumble, with crypto markets plunging nearly 30% in one day. History tells us that we should be concerned when an investment becomes so detached from reality. Look at the stock market crash of 1929.

Brown once again manifested his hawkish approach when he observed that even in the absence of joint action from both houses of Congress, there is a series of regulators who are already sharpening their tools to preside over stablecoins – from the Securities and Exchange Commission to the Federal Reserve and the Department of the Treasury.

The roadblock escalated with testimony from Alexis Goldstein, director of financial policy at the Open Markets Institute. The liberal think tank, some observers say, has become influential in pushing the Democratic Party to curb tech goliaths like Meta and Google.

Goldstein took the opportunity to fiercely attack decentralized financing schemes – which she has kept largely ‘non-conforming’ to existing Know Your Customer, Anti-Money Laundering and Anti-Terrorist Financing standards – and to question the potential of stablecoins to become a widely adopted product. payment settlement tool:

A recent report from the World Economic Forum found that stablecoins have no benefit for financial inclusion, as they face the same or higher hurdles as pre-existing financial options, including the need for the internet. and smartphones. […] Like someone who has fun sending them [stablecoins], both personally and in a way in my job, Western Union often seems cheap when you rack up all the fees you need.

Goldstein’s scathing sentiment was counterbalanced by Dante Disparte, chief strategy officer and head of global policy at Circle, who highlighted a number of digital asset use cases, including empowering women and entrepreneurs. from minorities and the provision of assistance. Disparte called on lawmakers to take a ‘do no harm’ approach to regulation:

I argue that we win 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 advances the economic competitiveness and national security interests of the United States.

Circle’s executive said the stablecoins industry is still in its infancy, and those who accuse it of failing in terms of financial inclusion mistakenly assume 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 supported on the Avalanche blockchain, with the goal of providing lower fees and faster smart contract settlement.

The issue of deliverance

We can say that the most technically nuanced part of the hearing concerned the future legal classification of stable coins. At this point, it was Sen. Pat Toomey, a Republican from Pennsylvania, who led the opposition to the Democrats’ fear campaign by proposing that stablecoin issuance not be limited to insured depositories. This point appeared in Toomey’s set of principles published prior to the hearing.

Previously, the Democrat-led PWG had advocated limiting the issuance of stablecoins to insured depositories. 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 view the issuance of stablecoins as a matter of federal charter was stressed by Jai Massari, partner of the international law firm Davis Polk, in his written statement:

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

According to Massari, having stablecoin issuers regulated in the same way as banks insured by the Federal Deposit Insurance Corporation would be “impractical” and “unnecessary.” She added that companies are already able to limit the risk of their stablecoin reserves and “demand that the market value of those reserves not be less than the face value of stablecoin in circulation.”

A quiet reaction

The day after the hearing, the positions of the speakers did not change. Senator Brown shared a piece of his testimony on Twitter, calling the Stablecoins a “mirror of the same broken [banking] system”:

Stablecoins and crypto markets are not really an alternative to our banking system.

They mirror the same failed system – with even less accountability and no rules at all. pic.twitter.com/EvWwuFh886

– Sherrod Brown (@SenSherrodBrown) December 14, 2021

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

Stablecoins are an exciting new technology that creates opportunities for faster payments, expanded access to the payment system, programmability, and more.

I hope my colleagues will join me in working to create a sensible regulatory regime that will allow this innovation to flourish. pic.twitter.com/DRUvKvErgx

– Senator Pat Toomey (@SenToomey) December 14, 2021

Key participants in the more constructive House hearing the previous week eloquently ignored the banking committee meeting on social media. Crypto Twitter has also remained largely silent on the matter.

And after?

While the hard work of crafting new regulatory standards can take years, with stablecoin regulation there are clear signs of rapid progress being made. However, not all developments appear favorable.

The PWG report called for the introduction of full surveillance as soon as possible. In line with the advice of Treasury Secretary Janet Yellen, the group urged Congress to require stablecoin issuers to be insured deposit institutions.

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

Perhaps an even bigger problem is that the approach articulated by the PWG is supported – and probably inspired – by those within the incumbent presidential administration. If Republicans are serious about taking the non-bank side of the stablecoins division and suggesting an alternative regulatory approach for this asset class, they had better consolidate their views in an equally strict fashion.