According to the Biden Administration, in the US technology companies which aren’t licensed like banks should not offer crypto stablecoins, while some Congressional Republicans pushed back Tuesday during a hearing on the future of digital assets.
During four hours of testimony before the Congressional House Financial Service committee, US Treasury undersecretary for domestic finance Nellie Liang defended the administration by expressing concern that stablecoins are insufficiently regulated.
Liang’s appearance came a month after Meta Platforms’ Facebook set aside plans for a stablecoin project over Washington’s fervent objections. Since rumours started three years ago about Facebook’s plans to establish a cryptocurrency available to its billions of users, regulators have expressed concerns.
Liang said Tuesday there is an “urgent” need for Congress to approve legislation on the rapidly expanding cryptocurrency segment.
“This is an urgent issue given the rapid growth of this market,” Liang said, adding the stablecoin market value has jumped to about $175bn today from approximately $5bn at the start of 2020.
Stablecoin is a digital currency often linked to the US dollar and other fiat currencies. It could be offered by the US government. Similar cryptocurrencies, like bitcoin, ethereum and dogecoin are private.
Liang’s testimony came after a 2021 President’s Working Group on Financial Markets suggested stablecoins adhere to regulations, similar to those in place for banks.
The undersecretary said Treasury officials are in continued communication with congressional offices concerning proposed legislation about regulating digital assets. Currently, there are bills pigeonholed in Congressional committees on many aspects of the new currency, from taxation to definitions to mining issues.
Minnesota Republican Tom Emmer attacked the President’s Working Group on Financial Markets during his five minutes of time before the committee. Emmer said the report focusses “solely” on the “perceived risk” of stablecoin and doesn’t provide a definition for it.
“But it doesn’t hesitate to assert that the risks are so broad and across jurisdictional lines that only insured depositors or institutions or banks should be allowed to issue them,” Emmer said.
Republican questions during the hearing focussed mainly on whether the federal government should regulate stablecoins, or whether individual states should set rules and regulations on cryptocurrency.
Ranking member Patrick McHenry (Republican-North Carolina) suggested Congress hand over regulation powers to states, allowing them to create a framework instead of the federal government writing comprehensive laws on stablecoins.
In response, Liang admitted there is no “explicit law governing” stablecoins in particular, or digital assets in general. But she added the federal government has concerns about “various aspects” of possible consumer protection laws.
She said the President’s Working Group on Financial Markets (PWG) did speak with state regulators before issuing the report on “what level of federal oversight, if any, would be required for innovative technology” like stablecoin.
Federal and state banks
The consensus, she testified, was that stablecoins should follow the same standards as insured depository institutions.
“The PWG report believes that a more consistent, less fragmented framework is preferred,” said Liang, adding the group’s proposal could apply to a state-chartered or federal-chartered bank.
“The state regulatory system is fragmented. There is an issuer, and then there are the custodial wallet providers, the other parts of the arrangement, which are subject to different kinds of regulations. There is no plenary oversight of the entire arrangement,” she said.
In pushing back, McHenry said a single approach to regulating stablecoin would most likely be more efficient for both business and investors.
“You consulted with these regulators but there was no mention of an existing state regulatory framework,” said McHenry. “We know that New York is the most active, and they have a very safe but very robust set of regulations and disclosures, but there’s no mention of New York. There are no lessons learned from the states included in this report.”
Anti-crypto weigh in
Brad Sherman (Democrat-California) said he is leery of cryptocurrency in general and urged caution and greater consumer protection in any legislation dealing with the digital assets.
If states regulate stablecoin, Sherman said there would be no uniformity in the rules, which would essentially bypass federal regulations.
“I’ll just point out that, imagine if we didn’t have any federal regulation of state-chartered banks, the FDIC didn’t propose any capital rules, the FDIC didn’t do any audits. It would only be a matter of time before there was a race to the bottom and we would have banks operating in my state chartered by some other small state and those banks would be going bankrupt because they would have found the jurisdiction that had the lowest capital requirements,” Sherman said.