House Financial Services Committee Considers Regulatory Framework for Stablecoins

At a hearing before the House Financial Services Committee, witnesses encouraged bipartisan, and federal and state collaboration on a regulatory framework for stablecoins.

Ahead of the hearing, the House Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion, offered a legislative proposal that would establish a regulatory framework for payment stablecoin issuers, including enforcement requirements, interoperability standards and a definition of stablecoin issuer. French Hill (R-AR), the Chair of the Subcommittee, said that the draft legislation establishes strong and much-needed consumer protection by requiring (i) payment stablecoins to be backed one-for-one by liquid assets in reserve and (ii) stablecoin issuers to follow redemption requirements, provide monthly disclosures and comply with risk management standards.

Witness Testimony

Adrienne A. Harris, Superintendent, New York State Department of Financial Services ("NYDFS"). Ms. Harris touted the NYDFS regulatory oversight of virtual currency as the "gold standard" for many domestic and foreign regulators. She said the NYDFS established "additional regulations, guidance, and company-specific supervisory agreements to tailor oversight" regarding new financial products. Ms. Harris emphasized NYDFS’s "strong regulation[s]" over virtual currency and that New York City-based crypto startups have raised more capital than companies in any other region of the United States. Ms. Harris encouraged a systemic approach where both state and federal regulators have supervisory and regulatory authority. Under a dual banking system, Ms. Harris said that federal regulators will be able to address "macroprudential considerations" and implement consumer and market protections, while state regulators can modernize regulations more quickly in response to industry developments and support innovation.

Dante Disparte, Chief Strategy Officer and Head of Global Policy at Circle. Mr. Disparte said that the dual banking system allows state-chartered banks to operate on a "level playing field" while still being subject to certain federal supervisory requirements. He said that federal legislation on payment stablecoins would satisfy the need for congressional action while also providing regulated firms with greater legal clarity.

Austin Campbell, Adjunct Assistant Professor of Business, Columbia Business School. Mr. Campbell underscored that stablecoins can be regulated in a "safe, sane, risk-conservative way." He provided a detailed framework for stablecoins that are limited to "highly liquid, safe, relatively boring assets" that mirror assets under the Basel 3 framework. Within that framework, he said that stablecoins are "highly unlikely" to be a risk to the U.S. financial system. Similar to the previous witnesses, Mr. Campbell also called for state and federal regulation of stablecoins, in addition to encouraging "reinforcement" of banking regulators’ related policies.

Jake Chervinsky, Chief Policy Officer, the Blockchain Association. Mr. Chervinsky said that a central problem within the U.S. financial system is that it is "constrained and dominated by intermediaries" relying on a concentrated number of large financial institutions. He said that while the financial institutions have historically been the "backbone" of the financial system, they have failed to keep up with the pace of developments in digital space. Mr. Chervinsky put forth stablecoins as a solution to the problem, which he said are a "powerful application" of blockchain technology that, unlike other blockchain-based cryptocurrencies, take advantage of all of the benefits of blockchains while maintaining a stable value against the U.S. dollar as a national currency. To "maximize the benefit" of U.S. dollar stablecoins, Mr. Chervinsky urged Congress to implement in its legislative proposal (i) a focus on custodial stablecoins, (ii) guidelines for both banks and non-banks, (iii) direction on the quality of stablecoin reserves, (iv) operation requirements regarding consumer protection and (v) clarity as to federal regulators’ authority.

Delicia Reynolds Hand, Director, Financial Fairness, Consumer Reports. Ms. Hand criticized the Subcommittee's legislative proposal for failing to integrate "key learnings" including the volatility resulting from the collapse of FTX, Signature Bank, and Silicon Valley Bank. She said that the proposed bill lacks, among other things, (i) direction on how payment activities should be carried out by issuers and (ii) neutral technology requirements that would promote interoperability among various financial institutions’ payment systems. Ms. Hand stated that while the bill introduces some prudential standards on the issuance and trading of payment stablecoins, "anything but the most comprehensive regulatory oversight . . . will be insufficient."